SEC works to get rid of “The Lease to Nowhere”…

July 7, 2011

The temperature may have officially reached the high 80s yesterday afternoon in Washington, D.C., but we bet it was significantly hotter in room 2167 of the Rayburn House Office Building.

That’s where the SEC’s Chairman, Mary Schapiro, and its Inspector General, H. David Kotz, were in the hot seat to answer questions for the Congressional Sub-Committee on Economic Development, Public Buildings, and Emergency Management (which falls under the auspices of the Committee on Transportation and Infrastructure) about the $556 million, 10-year lease that the SEC signed last summer for 900,000 square feet of space in D.C.’s Constitution Center. (A video of the hearing is available here.)

The tone of the hearing was clear from the title of the Briefing Memo: “Oversight Hearing on ‘The Securities and Exchange Commission’s Fleecing of America: Part Two.'” But while the title strikes us as political hyperbole (do people really suppose that SEC employees really intended to “fleece” Americans?), the facts related to the lease itself are a black eye on the agency charged with protecting investors. Moreover, given the current budget deficit woes and focus on government waste, it’s easy to understand why this was red meat for both Democrats and Republicans.

Opening the hearing, Chairman Rep. Jeff Denham (R – Calif.) took Schapiro to task for verbally approving the massive lease “based on a 10-minute, unscheduled meeting.” He continued, “It is inconceivable that the SEC bound the taxpayers to more than a half billion dollars based on back-of-the-envelope calculations that were inflated and just simply wrong.”

Last summer, the passage of the Dodd-Frank Act led the SEC to predict that it would need to hire as many as 800 new staffers to handle all the extra work that the legislation would mandate. But when Congress finally hammered out its appropriations, it didn’t give the SEC the money it needed for a big staff expansion. And in between those two points in time, the SEC signed the Constitution Center lease.

The evidence suggests that Schapiro herself didn’t personally push for the space at Constitution Center (according to both a witness and Schapiro’s written testimony). But she did set certain parameters including that the new space be within walking distance of the SEC’s existing headquarters near Union Station, which is primo real estate in D.C.

Yesterday, Schapiro said she got some really bad advice and recommendations from employees in positions of authority, who gave her an “urgent recommendation” that led her to believe that the Constitution Center space was the only suitable space that was still available, and that the SEC was at risk of losing the space because competing parties were poised to swoop in and lease it first.

Inspector General Kotz’s written testimony, rooted in conclusions formed after his staff read more than 1.5 million emails (and we thought that we read a lot of stuff) and interviewed 29 people, puts the blame primarily on the SEC’s Office of Administrative Services (OAS), which

“…conducted a deeply flawed and unsound analysis to justify the need for the SEC to lease 900,000 square feet of space at the Constitution Center facility. Specifically, we found that OAS grossly overestimated (by more than 300 percent) the amount of space needed for the SEC’s projected expansion and used these groundless and unsupportable figures to justify the SEC’s commitment to an expenditure of approximately $557 million over 10 years.”

And that’s not all the SEC did wrong. Other flaws included negotiating a “single source” contract over the course of just a few days, back-dating an important document (the “Justification and Approval” form), and signing that form after the lease had already been signed.

Unlike other notable examples of bureaucratic waste, heads may (metaphorically) roll over this one. Kotz testified that steps are underway to discipline “two senior individuals” and possibly a third individual, and that may include firing them. The matter has also been referred to the Department of Justice, which will determine whether criminal charges are appropriate.

Nothing lets Schapiro off the hook, nor is she trying to escape blame. After testifying that she was “extremely disappointed” by the flaws in the SEC’s leasing processes, she added:

“As Chairman of the SEC, I am ultimately responsible for the actions of the agency. I can assure you that the SEC will address the issues identified by the IG aggressively and transparently. As I have said previously, the true test of an organization is not whether things go wrong, but how the organization responds to problems and whether its leaders take such opportunities to make necessary improvements.”

So far, two-thirds of the Constitution Center space has been leased to other tenants, and the General Services Administration (GSA) has identified “prospective tenants with leasing needs that may align with the available Constitution Center space.” Schapiro has also asked the GSA to assume future leasing responsibility for the SEC, which makes sense, since it handles that task for other agencies.

Even if tenants are found for the entire space, the whole incident raises serious questions about an agency charged with monitoring these sorts of things for publicly traded companies. Anything that makes the SEC look weak and impotent (or, perhaps weaker and more impotent) is bad for investors and needs to be resolved quickly.

Image source: The Securities and Exchange Commission

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