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SEC Inspector General Expands Probe Into BofA Settlement

Securities and Exchange Commission Inspector General H. David Kotz is expanding his investigation into the agency's controversial settlement with Bank of America over the firm's 2008 acquisition of Merrill Lynch.

Bank of America branch, New York City.
Oliver Quillia for cnbc.com
Bank of America branch, New York City.

The settlement was initially rejected by U.S. District Judge Jed Rakoff, prompting Kotz's initial investigation, which is still ongoing. Now, Kotz says he is expanding his investigation to include the settlement Rakoff finally approved on February 22.

The disclosure comes in Kotz's semi-annual report to Congress, released today.

The SEC had sought to settle with Bank of America in September, 2009, for $33 million, but Rakoff rejected the proposed deal as inadequate. Kotz says he then received a request by Rep. Elijah Cummings, D-Maryland, to investigate.

Cummings has called the taxpayer-funded Bank of America takeover of Merrill Lynch "an old-fashioned stick-up" of the taxpayers. Rakoff ultimately approved a $150-million payment by Bank of America to settle the SEC case. Now, Kotz says he is expanding his investigation to include the revised settlement.

Kotz says that so far this year, his office has reviewed more than 500,000 e-mails from 15 current and former SEC employees in five different offices and divisions. In addition, he says his office has "conducted sworn, on-the-record testimony of an important whistleblower in this matter."

Kotz says he hopes to conclude the investigation this year.

Separately, Kotz says his office recommended possible disciplinary action against two regional SEC Enforcement attorneys who allegedly disclosed confidential information about SEC investigations to an FBI agent who, it turned out, was working with a short-seller to manipulate stocks.

The short-seller, Amr Ibrahim "Anthony" Elgindy, was convicted in 2005 of fraud, racketeering conspiracy and extortion for his activities, which were the subject of a 2000 CNBC investigation and a 2010 episode of the CNBC Originals series "American Greed." Also convicted was former FBI agent Jeffrey Royer, who supplied inside information to Elgindy.

It turns out, according to Kotz, that some of that information came from the two attorneys in the SEC's Division of Enforcement. While Kotz does not allege that the attorneys were part of the conspiracy, he has concluded that they violated SEC policies by disclosing the information to Royer. Kotz says the attorneys should have been suspicious of Royer, who even told one of them that he was trading in the companies' stock.

Kotz says he referred his findings to SEC management in January for possible disciplinary action against the attorneys, but was told that as of March 31, both attorneys had been issued "counseling memoranda" and were required to attend training. The SEC has refused to identify the attorneys or to release the full report of the investigation to CNBC, citing privacy concerns.

Elgindy, 42, is currently serving an 11-year prison sentence at a federal correctional institution in California. Royer, also 42, is serving a six-year sentence at a federal prison in Louisiana.

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