Review finds ex-SEC watchdog may have had conflicts of interest

WASHINGTON, Oct 5 (Reuters) - A former U.S. Securities andExchange Commission inspector general who left amid months ofturmoil at his office may have had conflicts of interestsurrounding several key investigations under his watch,according to a watchdog report.

Ex-Inspector General David Kotz was friends with peopleclose to his investigations related to two high-profile Ponzischemes, and he had a flirtatious relationship with an SECemployee who was involved in another project involving Kotz'soffice, according to the report.

The report was written by the U.S. Postal Service Office ofInspector General at the request of the SEC. It did not identifyspecific instances where information in an SEC inspector generalreport was compromised.

"The report reveals poor judgment by several top employees,including the former inspector general himself," said U.S.Senator Chuck Grassley, a Republican who has been following thesituation at the SEC. He also said the integrity of theinvestigations did not appear to be impacted.

Kotz did not have an immediate comment on the report.

The chief investigator in the SEC's inspector generaloffice, David Weber, made the allegations of misconduct againstKotz. The SEC asked the postal inspector general to look intothose claims, as well as separate allegations that Weber createda hostile work environment with behavior that made employeesfeel threatened.

The investigation did not substantiate allegations thatWeber created a hostile work environment. Weber could not bereached for comment.

The SEC inspector general's office is charged with rootingout waste, fraud and abuse at the agency. It has investigatedthe SEC's failure to catch convicted Ponzi schemer BernardMadoff, the agency's oversight of Wall Street during thefinancial crisis, and other high-profile issues.

But the recent drama has left the office in disarray. Kotz,who started as inspector general in 2007, developed a reputationas a tough watchdog, but his tactics led some staff to claim hecreated a culture of fear at the agency.

After Kotz left the agency, Weber went to SEC officials anda government council that monitors inspectors general withallegations that Kotz had engaged in inappropriate conduct.

SEC spokesman John Nester said the agency had believed theallegations merited an independent review and it appreciated thePostal Service OIG report.

The report, which was obtained by Reuters through a Freedomof Information Act request, said that during Kotz'sinvestigation of issues related to the SEC-appointed receiverresponsible for recovering funds from a Ponzi scheme run byAllen Stanford, Kotz had a personal relationship with GaytriKachroo, an attorney for Stanford's victims who were unhappywith the receiver's work.

Kachroo said in a statement on Friday that she understoodthat the Stanford receivership investigation was prompted bynumerous complaints by others. She also said her firm sent aformal letter on behalf of hundreds of victims who have norelationship with Kotz.

Kotz, the report said, also was a "very good friend" ofHarry Markopolos, the financial investigator who tried to alertthe SEC about Madoff's Ponzi scheme. The report said if thefriendship began before or during the OIG's Madoff review, thatwould have been inappropriate, but it could not establish whenit began.

Markopolos could not immediately be reached for comment.

The report also said Kotz exchanged flirtatious emails withan SEC employee, whose name was redacted, while his officereviewed an SEC program the employee worked on. Investigatorsfound no evidence that Kotz interfered in that review as aresult of the relationship.

"However, Kotz should have recused himself to assure thatconflicts of interest did not manifest themselves," the reportsaid.

Weber, who raised the concerns about Kotz, was placed onleave in May after he reportedly talked about wanting to carry aconcealed firearm and brought a bullet-proof vest to work.

Employees said they felt physically threatened by him andaccused him of creating a hostile work environment, according tothe USPS inspector general's report.

Weber said at the time that the complaints were retaliationagainst him for reporting concerns about Kotz. The investigationdid not assess Weber's suitability to return to work, the reportsaid.

(Reporting By Emily Stephenson; Additional reporting by ArunaViswanatha; Editing by Tim Dobbyn)

((Emily.Stephenson@thomsonreuters.com)(202 354 5823))