THE SEC IG EXPANDS ITS INQUIRY ON GOLDMAN: TOO MUCH OF A GOOD THING?

When the SEC filed its enforcement action against Goldman Sachs, it sparked a wave of criticism. Politicians on Capitol Hill argued there were news leaks and the suit was timed to suit the Administration which was seeking to pass what is now Dodd-Frank Act. The SEC’s Inspector General opened an investigation focused on the claims in response to a letter from Republican congressman Darrell E. Issa. Now the IG is expanding his inquiry to include more allegations from Capitol Hill. Now the question is whether the settlement was politically timed. While there is no doubt that Inspector Generals serve a laudable purpose, can there be too much of a good thing?

The SEC’s Office of Inspector General, like those at other agencies, is an independent office. Its purpose is to audit the programs and operations of the Commission to ensure proper operations. According to the Inspector General’s posting on the SEC’s website, the “mission of OIG is to detect fraud, waste and abuse and promote integrity, economy, efficiency and effectiveness in the Commission’s programs and operations.” These are commendable goals which in many ways mirror the SEC’s mission to bring a new ethics to the marketplace.

When the SEC’s Inspector General conducts an inquiry, it is essential that the investigation be focused to achieve the goals of its office. In part, this means that, while seeking to promote the integrity and effectiveness of the SEC, the IG should avoid impeding or otherwise interfering with the Commission’s essential law enforcement functions. It is also means that the IG should not become a political tool of Capitol Hill, something which would inject politics into the SEC’s processes rather that serve as a safeguard against such an occurrence.

The inquiry being conducted by the SEC’s IG raises critical questions about compliance with its mission. The investigation began immediately after the Commission filed what is undoubtedly its most high profile enforcement action in years. As with many high profile cases, it generated controversy. Yet, in response to Capitol Hill, the IG almost immediately stepped into the spotlight, announcing the opening of an investigation into the filing of Goldman.

Investigating an open enforcement action has, at a minimum, the prospect of interfering with a critical SEC function. There can be little doubt that the IG’s inquiry has been a distraction for the Commission staff tasked with litigating a very difficult case against a significant opponent. Equally clear is the fact that the IG inquiry undercut the Commission’s credibility in the marketplace thereby detracting from the merits of the Goldman case. Since the questions being investigated by the IG had nothing to do with the merits of the action, there is no reason the inquiry could not have been conducted later. At a minimum, it should have remained non-public and confidential.

Perhaps more importantly the IG’s inquiry has the potential to undermine the Commission’s processes and of its office. The inquiry is supposed to focus on whether the case against Goldman is tinged with partisan politics. Yet, it was opened and expanded as a direct result of clamor from Capitol Hill and thus risks injecting partisan politics into the process in the name of ensuring against such a prospect. Such needless risk does not promote the integrity of the SEC’s processes and it is inconsistent with the goals of the IG’s office. While there is no doubt that the IG does a commendable job, timing is often crucial and sometimes there can be too much of a good thing. This is one of those times.