Ethics Concerns At SEC May Undermine Funding Bid

03/11/2011 08:25 am ET | Updated May 25, 2011

As the SEC publicly campaigns for increased funding, chairwoman Mary Schapiro is facing new criticism over the appointment of a key agency official whose family has ties to Bernie Madoff's Ponzi scheme.

Earlier this week, the New York Times reported that attention has turned to the appointment of David M. Becker, who was the SEC's general council from February 2009 until last month. Becker was appointed to the position even though Schapiro and the agency knew that Becker's mother had invested with Bernie Madoff.

Veterans of the SEC, however, are divided on whether or not Schapiro or the agency did anything wrong. For her part, in a Congressional hearing Thursday, Schapiro admitted that the agency mishandled Becker's latest SEC tenure. (Becker previously served as SEC General Counsel from January 2000 to May 2002.)

"While Mr. Becker did solicit and follow advice from the ethics counsel, I realize in light of this incident that as chairman I have to ensure that we go beyond what may be required in any particular situation," Ms. Schapiro said.

At the SEC, Becker's work involved helping to decide how Madoff's victims would be compensated, according to the New York Times. Becker's late mother invested money with Madoff, and Becker and two of his brothers inherited the investment and its earnings. The money was withdrawn well before the Ponzi scheme was discovered.

"How could anyone have missed this?" said Steve Thel, professor of securities regulation at Fordham University, who previously worked as a lawyer in the General Council's office at the SEC. "It almost has to have been that they did this by mistake. Because it's so clear that this would create problems if anyone knew about it. I don't think anything we know about Becker indicates he did this to protect his own pocket. I think that people didn't think enough about ethics violations."

But in former SEC chairman Harvey Pitt's view the matter is, in a sense, "much ado about nothing."

"Before Becker was hired he disclosed this issue," Pitt said. "When issues relating to Madoff arose both he and the chairman did what they should, they went to the ethics councilor to find out what they thought."

"I think that ethical issues are very, very important but this is pretty much a tempest in a teapot if you will," Pitt continued. "And what I'm worried about is that there are those whose agendas involve basically criticizing the SEC and whatever it does or doesn't do. And my fear is that whatever anybody's view on the merits of this [appointment] was, there are real and important issues the SEC is grappling with, and I don't think this deserves to be at the center of another storm."

Schapiro testified before two congressional hearings on Thursday -- one focussed on Becker and the other on the SEC's bid for a large funding increase to meet the new financial regulations set by the Dodd-Frank Act.

Critics, pointing to the failure of the agency to detect the Madoff fraud, are saying Becker's work at the SEC is further proof of the agency's incompetence.

Becker's financial ties were not publicly disclosed until Irving Picard, the court-appointed trustee charged with recovering assets for Madoff's victims, sued the three Becker brothers to recover $1.5 million of the $2 million they had inherited in 2004.

Becker and Schapiro both say that Becker's work at the SEC only went forward on advice from the SEC's ethics counsel.

"Even if they did go through the ethics processes, the ethics processes are then problematic," said Thel. "If someone could come to the conclusion that this is not problematic -- that is problematic."

Bloomberg reports that Becker has said he consulted with the ethics counsel at least twice about work related to Madoff.

One specific matter -- and the biggest apparent conflict of interest -- concerns the amount of money Madoff victims would be compensated. The NYT reports that while the agency had agreed to a deal that would return to investors only the money they had originally put into their accounts with Madoff, Becker said the commission should allow victims to keep some of the gains their investment had generated as well. That change would benefit Becker's family.

In May 2009, Becker went to the ethics counsel again to ensure proper conduct over the Madoff fallout. Bloomberg reports that Becker wrote in a letter to U.S. House Republicans that the counsel "concluded that a reasonable person with knowledge of all of these facts would not question my impartiality."

"That's a strained conclusion," said Steve Thel. "To say that Becker's participation in the decision in the clawback would not have a direct and predictable effect is very problematic." Furthermore, Thel pointed out, it is not merely a matter of hindsight. Everything that is troubling about Becker's appointment was known at the time he was hired.

Becker has said that his departure from the agency last month is not connected with Picard's lawsuit.

"The problem, the horrible black eye," Thel said, "is that now the SEC has given people who are simply critics of regulation and the [Obama] administration a way to criticize the SEC and bring up again the Madoff failings which largely all predate the Schapiro administration."

Rep. Randy Neugebauer (R - Texas) said earlier this week that people from both parties agree there was at least an appearance of a conflict of interest, according to Reuters.

House and Senate Republicans, along with the SEC's top watchdog, are investigating Becker's role at the SEC.