Holding the Government Accountable

Sex, Lies, and Impunity: SEC Watchdog Mishandled Probe

“Removal” Officially Recommended for Coercive or Retaliatory Conduct, Improperly Contacting a Protected Witness, Conflicts of Interest, Lack of Candor…
(Photos: Securities and Exchange Commission; Andriy Blokhin / Shutterstock; Mark Van Scyoc / Shutterstock; Illustration: Leslie Garvey / POGO)

A blistering government report on the inspector general of the Securities and Exchange Commission, Carl Hoecker, concludes that the veteran watchdog “abused his authority in the exercise of his official duties and engaged in conduct that undermines the independence and integrity reasonably expected of an IG, including a lack of candor.”

The report goes on to excoriate Hoecker for a litany of offenses and recommend “appropriate disciplinary action for this serious misconduct, including removal.”

Hoecker himself, who did not respond to requests for comment from POGO, gave various explanations for his errant conduct to professional investigators looking into the matter. At one point, for example, he told them that he had tried to oversee an investigation that was both “objective and thorough” and did so in “good faith.”

But the investigators apparently were not convinced by what he said, calling his replies “unpersuasive and lacking in credibility,” and citing his evident “conflicts of interest.” Reuters, which also reported on the matter, said Hoecker offered no comments in reply to their questions, either.

The Project On Government Oversight recently obtained the previously non-public, 48-page “Report of Investigation,” as well as a nine-page executive summary and accompanying cover letter addressed to then-SEC Chairman Jay Clayton. The report dates from April 2019, the cover letter and executive summary from October of that year.

The investigation of Hoecker describes his gross mishandling of an internal probe conducted under his direct supervision at the SEC inspector general’s office, which he has headed since 2013. Hoecker assembled a team of SEC Office of Inspector General investigators who examined multiple witness accounts alleging that a special agent in charge, one of the agency’s top supervisors in its investigative unit, committed numerous offenses, including having a sexual relationship with a woman who was his direct subordinate and addressing explicit, unsolicited sexual remarks to one or more other women.

The executive summary also says the SEC inspector general’s investigation neglected “allegations that [the special agent] had engaged in sexual harassment, which were reported prior to and during the internal investigation. In fact, the misconduct was reported to ... IG Hoecker; however, the complaining witness was never interviewed, and no one followed up on the allegations.”

The report describes how Hoecker systematically protected the two employees as he effectively micromanaged the inquiry.

Although evidence showed that Hoecker had a longstanding professional relationship with the special agent in charge and had personally hired him, along with the woman with whom the special agent was accused of having a sexual relationship, Hoecker did not recuse himself. The report describes how he systematically protected the two employees as he effectively micromanaged the inquiry. At one point, the report says, he improperly contacted a key witness in an intimidating manner (the witness was deputy inspector general for audits, investigations, and special projects at the agency, a source told POGO). He also refused to allow investigators to pursue obvious lines of inquiry, and offered multiple, self-serving accounts of his own conduct when later challenged by those looking into the matter.

The report notes, and sources also told POGO, of an allegation that colleagues discovered the couple in flagrante in a secure evidence room at the SEC Office of Inspector General headquarters. Not mincing words, the report says the pair “were found in the evidence room and the door was blocked, where one witness observed [redacted] zipping his pants and both seemed shocked and flustered.”

Roughly as often, though, the couple allegedly spent significant periods of time together outside the office during business hours, an allegation which, if proven, could constitute time and attendance fraud, a federal crime.

After close to a year, Hoecker’s internal probe of this alleged activity found that while the couple may have appeared to be having an affair, there was insufficient proof. They were never charged with time or attendance fraud or any other offense. She has since left the SEC Office of Inspector General, but the special agent in charge remains on staff.

Complaints Against Hoecker

Soon after the SEC inspector general’s staff found out about the inconclusive findings, internal complaints surfaced that Hoecker’s investigation had been incompetent, deficient, and involved numerous and serious improprieties by Hoecker himself.

Those complaints, made in 2017 and lodged with multiple federal agencies and the SEC itself, were eventually taken up by the Integrity Committee of the Council of the Inspectors General for Integrity and Efficiency, a little-known body referred to as CIGIE that sets guidelines and monitors misconduct across some 70 inspectors general offices in the federal government.

Underfunded, and with a relatively small staff of its own, CIGIE brings in personnel from other inspectors general to conduct its inquiries. In Hoecker’s case, a team of professional investigators from the Department of Education Office of Inspector General examined his handling of the internal probe. They completed their findings on April 5, 2019, the date that appears on a copy of the report obtained by POGO.

It was not until December 2020 that CIGIE made the first and until now the only public mention of the serious findings against Hoecker.

According to other records, also obtained by POGO, it was not until October 2019 that SEC Chairman Clayton and key members of Congress were told by CIGIE in writing of the matter. But they made no (apparent) public response. After that, it was not until December 2020 that CIGIE made the first and until now the only public mention of the serious findings against Hoecker. That mention appeared in an oblique reference at the end of an annual report published by CIGIE’s Integrity Committee, and the reference omitted Hoecker’s name. But then-President Donald Trump received a copy, with a cover letter signed by then CIGIE chairperson Michael E. Horowitz, and so did several key members of Congress.

Deterrence for Professional and Ethical Misconduct?

The issuance of CIGIE’s April 2019 investigation into Hoecker in virtual secrecy, the anonymous reference to him in the Integrity Committee’s 2020 published overview, and the apparent impunity for Hoecker that followed raise a variety of troubling questions.

Impunity in the aftermath of such serious official findings suggests that no behavior, regardless of how egregious it might be, could or should ever lead to the dismissal of an inspector general.

In fact, Hoecker does appear to have been disciplined, but the duration and severity of the penalties imposed have never been specified, and they remain unclear. The concealment of official conclusions about what he had done, and a lack of clarity as to his punishment helped protect Hoecker from reputational damage, and there has been no public notice, meaning that few beyond a small number of insiders and select members of Congress are aware of the report’s findings or any resulting penalties.

Impunity in the aftermath of such serious official findings suggests that no behavior, regardless of how egregious it might be, could or should ever lead to the dismissal of an inspector general — or other serious consequences.

An important and related concern is why the report did not engender a more vigorous and public response from Clayton or other SEC commissioners or, apparently, anyone else. And why were the findings so closely held, only to emerge recently, as Hoecker continues to serve more than two years later, as if nothing has happened, with American taxpayers none the wiser?

Many inspectors general, including those at the Defense Department, the State Department, and other key agencies, are appointed directly by the president and confirmed by the Senate. The procedure is designed to safeguard their statutory independence.

Why were the findings so closely held, as Hoecker continues to serve more than two years later, with American taxpayers none the wiser?

But the SEC is classified as a designated federal entity, governed by different rules than other agencies. As such, the SEC’s inspector general is handpicked not by the White House, but by its own five presidentially appointed commissioners, including its chairperson. The chosen candidate does not face Senate confirmation. This puts the SEC’s commissioners on the front line, and the public must depend on them alone to take action, notably when confronted with charges of serious misconduct by their inspector general. The Inspector General Act requires that to approve the removal or transfer of the inspector general, there must be a two-thirds vote, meaning at least three of the five commissioners would need to support such a change.

The appointment of the inspector general by the agency’s own commissioners, without Senate confirmation, also risks breeding a cozy relationship between them that can impair accountability. And this relationship cuts both ways. Just as Hoecker was found to have protected one of his senior supervisors, the commissioners who control Hoecker’s fate appear to have imposed little in the way of discipline in response to CIGIE’s report about him. They certainly did not heed the recommendation for his “removal.”

A 2017 story in the Wall Street Journal focused on multiple initial complaints about Hoecker’s misconduct in the internal probe and also underscored his apparently deferential attitude toward the SEC commissioners. Despite the fact Hoecker holds a position that is, by law, independent of the SEC, the newspaper quoted complainants as asserting that he, “regularly refers to the [SEC] commissioners who run the agency as his ‘bosses.’”

The newspaper also quoted Raphael Kozolchyk, an SEC Office of Inspector General spokesman, stating that “a number of the claims [against Hoecker] contain significant factual inaccuracies, while others are grossly misleading.” The surfacing of CIGIE’s official findings would now appear to refute Kozolchyk’s assertion. At the time, Hoecker offered no comment to the Wall Street Journal.

Today, Hoecker remains very much on the job (sources told POGO last week that his schedule seems as busy as ever). No public statements from the SEC, CIGIE or members of Congress notified of the findings about him have apparently ever linked his name directly to the grave misconduct he was found to have committed.

Instead, more than a year after CIGIE conveyed its findings to SEC Chairman Clayton and others, the council issued an Integrity Committee annual report of its own on December 8, 2020, an overview which mentioned the Hoecker investigation, but without mentioning him by name or title.

Buried in the final sentence of the last paragraph, on the concluding page of CIGIE’s nine-page 2020 overview, the agency said that following a review of the council’s “findings and recommendations, the appointing official suspended the respondent from duty and pay status for an unstated period of time.”

The so-called “appointing official” is an apparent reference to the SEC commissioners, who are responsible for appointing the IG and imposing any discipline.

The CIGIE Integrity Committee 2020 overview also recommends that the unnamed official (Hoecker) should face “appropriate disciplinary action for this serious misconduct, including removal.”

CIGIE’s omission of Hoecker’s name is somewhat surprising at an agency where leadership has for years touted “transparency” as an important institutional goal. Moreover, in cases where the misconduct of senior officials, like Hoecker, has been officially established, it is standard practice to name them in public reports.

Despite CIGIE’s omission of Hoecker’s name, there is no doubt that the agency’s anonymized account does, in fact, refer to him.

This is most clearly demonstrated by the fact that copies of CIGIE’s investigation into Hoecker obtained by POGO include not only his name but two case numbers pertaining to CIGIE’s probe of his activity (890 and 909). Those case numbers exactly match a notation included in CIGIE’s account of his behavior that appears in the Integrity Committee’s otherwise anonymized 2020 annual overview.

CIGIE’s apparent wish to conceal, or reluctance to call any attention to their own findings on this matter is representative of a broader trend that limits the impact of the IG community. In a 2009 report, POGO outlined several recommendations for inspectors general to drive greater accountability, including “Roar, Don’t Squeak”:

It should go without saying: an OIG must have impact to be successful. Its reports and actions must make a difference in its agency's programs and activities. We would frankly like to see IGs shouting their findings from the rooftops. Instead we all too often find OIGs hiding behind such protestations as, ‘we don't leak’ or ‘IGs don't talk to the press.’

Hoecker gave no reply when asked for comment, and neither did an SEC OIG spokesperson when afforded the opportunity to speak on his behalf.

The SEC also offered no comment.

Former SEC Chairman Jay Clayton, who received the reports of CIGIE’s findings, did not respond to requests for comment.

Alan Boehm, the Executive Director of CIGIE, told POGO:

CIGIE and its Integrity Committee (IC) take allegations of misconduct by Federal Inspectors General and their senior staff very seriously. As required by law, when the IC investigates and finds wrongdoing by an Inspector General, it provides its report to the President or the head of the Federal agency, to a senior official in the Office of Management and Budget, and to multiple Congressional committees in the House and Senate. Separately, subject to applicable privacy and public disclosure laws, the IC publishes a summary of its investigative findings and recommendations in its Annual Report to Congress and the President, which is publicly available on CIGIE’s website. The IC also releases additional information about its investigations in response to FOIA requests, including the identities of individuals when permitted.

A Veteran Watchdog

Another reason CIGIE’s findings merit attention pertains to the experience and background of Hoecker himself. Far from being an inexperienced public servant who somehow, perhaps inadvertently, made a few mistakes, the watchdog has been a longtime and respected leader in the IG community.

As the executive summary obtained by POGO puts it:

IG Hoecker has been employed as an investigator in the Federal government for over 40 years and has over a decade of experience as an IG. He has opened and closed over 150 investigations at SEC and at the time of the internal investigation [at the SEC], IG Hoecker served as Chairperson of CIGIE’s Investigations Committee and was responsible for advising the IG community on issues involving investigations and establishing investigative guidelines.

How could such an experienced leader systematically violate many of the norms and guidelines he urged others to follow?

According to CIGIE’s October 2019 executive summary, Hoecker’s “wrongdoing” involved “improperly contacting” a witness in the course of overseeing the internal investigation. The executive summary said that constitutes behavior which “can be reasonably construed as coercive or retaliatory in nature” and “may even constitute obstruction.” These actions produced an investigation, overseen by Hoecker, that the executive summary found “biased and substandard … orchestrated to contain the facts and limit professional harm to favored employees.” It also found Hoecker’s attempt to explain his errant conduct to professional investigators looking into the matter “unpersuasive and lacking in credibility,” citing his evident “conflicts of interest.”

It is clear from the record that IG Hoecker changes his story depending on what is most advantageous to him at the time.

Council of the Inspectors General on Integrity and Efficiency, in a letter to Jay Clayton, then-chairman of the Securities and Exchange Commission

Piling condemnation upon condemnation, the executive summary also noted that “It is clear from the record that IG Hoecker changes his story depending on what is most advantageous to him at the time.”

Like every SEC inspector general, it is Hoecker’s sworn duty to ferret out improprieties that may exist at the agency he independently serves. His staff must delve into the purported misdeeds of SEC officials as they monitor and protect America’s multi-trillion-dollar financial markets, one of the largest wealth-creation machines in the world and key pillars of global financial stability.

Hoecker’s staff must ensure that SEC officials are not engaging in any of the same conduct they are required to identify in the securities business: insider trading, fraud, and other pernicious practices. The SEC inspector general’s own website underscores that SEC staff who report evidence of waste, fraud or abuse will be protected. Given the official findings against Hoecker, can he continue to fulfill this vital mission?

One answer could come from Gary Gensler, current chairman of the SEC. On November 4, 2021, in remarks to the annual Securities Enforcement Forum, he said, “Accountability — whether individual or institutional — is an important part of the SEC’s enforcement agenda.”