WASHINGTON – On the sixth floor of the Securities and Exchange Commission, his office and staff sectioned off beyond an additional layer of security at the already fortress-like D.C. headquarters, David Kotz is the watchdog with in the watchdog.
H. David Kotz (Max Frumes/MEDILL)
Kotz is the inspector general at the SEC, an independent office charged with investigating and auditing SEC activities. He reports to SEC chairwoman Mary Schapiro as well as Congress. Launching comprehensive inquiries into matters including the SEC’s failure to detect the Madoff and Stanford scandals, Kotz has often had to relay some harsh conclusions about government workers who appear to be failing in their job to protect the nation’s financial markets.
“You have to have a certain type of personality to be in this position,” the Toronto-born Kotz believes. “You have be somebody who is willing to push if necessary to get the information that’s needed.” Kotz is a father of three and has been married 19 years to U.S. News and World Report writer Deborah Kotz. His father was well-regarded statistician Samuel Kotz.
Kotz is only the second inspector general at the SEC since its creation in 1934. The first left on terms that were less than ideal. Kotz’s predecessor, Walter Stachnik, resigned after a Senate report criticized his performance as not thorough enough in looking into the SEC’s controversial battle with former SEC investigator Gary Aguirre.
So when Kotz came into the job, one of his major priorities was to develop a good relationship with Capitol Hill. Immediately, he launched a re-investigation into the Aguirre case. The SEC had fired Aguirre due to Aguirre’s impertinence about the discontinuation of his investigation into insider trading involving powerful businessmen, including former Morgan Stanley CEO John Mack and Pequot Capital founder Arthur Samberg. The Senate report largely vindicated Aguirre, and criticized the SEC. Though Kotz found fault with the way some SEC enforcement officers handled the case, no disciplinary action was taken.
However, Pequot later shut down in light of the several investigations and negative publicity. What’s more, Kotz thinks that the investigation did gain credibility.
“I feel like to the extent there was a potential credibility gap when I first came to the SEC, that I have sort of fixed that,” he said.
Madoff investigation
Procedures at the SEC as well as regulations considered by Congress have been influenced by Kotz’s investigations. In light of Kotz’s recommendations, one of the major areas the SEC is now reviewing is third-party investigations, which were not done in the Bernard Madoff Ponzi scheme matter. They are aimed at checking on whether an independent third party has evidence of trades. In the enforcement division the SEC is instituting a new tip and complaint system. The House has used one of Kotz’s audit report about why Bear Stearns collapsed notwithstanding SEC oversight of the investment bank. The House committees looking at issues of financial fraud has looked at that report for guidance, as has the Financial Crisis Inquiry Commission in their review. There are aspects of that that may have been factored into language in the legislation currently before Congress.
Kotz led a very long investigation into the SEC’s lack of oversight of Bernard Madoff. He conducted more than 100 interviews and reviewed more than 3 million e-mails, eventually writing a 477-page report with more than 550 exhibits that tracked back to 1992 all the SEC examinations of Madoff and gave the answer as to why the SEC wasn’t able to uncover it.
The conclusions were generally that the SEC had ample opportunities to spot the Madoff Ponzi scheme. Because of lack of experience and a failure to scrutinize Madoff as closely as the agency should have, it was unable to uncover the Ponzi scheme.
Prior to joining the SEC, Kotz was inspector general at the Peace Corps, a position he assumed in February 2006. Kotz oversaw internal operations of Peace Corps programs in Washington, 11 regional offices and nearly 70 countries around the world. Before that he was an associate general counsel for the Peace Corps from 2002 to 2006. He traveled extensively overseas to protect volunteers, but also to engage in prosecutions or assist prosecutions of criminal acts against volunteers.
The office of the inspector general has two major components, the office of investigations and the office of audits. The office of investigations looks into complaints against or alleged misconduct of an SEC employee. The office of audits reviews certain procedures of the SEC and make specific recommendations to improve them.
Kotz’s reports have raised concerns about how other SEC investigations were conducted or opportunities to catch fraud were missed, including about Allied Capital.
Kotz holds a bachelor’s in government and politics from the University of Maryland at College Park and a law degree from Cornell University Law School.