Misconduct could cost SEC its building leasing authority

House panel pursues reports of waste and criminal acts in abandoned bid to make Constitution Center the agency’s headquarters.

Officials at the Securities and Exchange Commission seeking to lease a new and larger headquarters last July committed the agency to too much space at too high a price while illegally backdating documents and possibly violating the Anti-Deficiency Act, according to an SEC inspector general's report that was the subject of a passionate House hearing June 16.

SEC IG David Kotz, testifying Thursday on his report dated May 16, said the circumstances surrounding SEC's entering into a lease for 900,000 square feet of space at the Constitution Center in Southwest Washington, formerly the headquarters of the Transportation Department, "were part of a long history of missteps and misguided leasing decisions made by the SEC since it was granted independent leasing authority by Congress in 1990."

After reviewing 1.5 million emails from 27 current and former SEC employees and interviewing 29, Kotz's auditors concluded that agency's Office of Administrative Services "conducted a deeply flawed and unsound analysis to justify the need for the SEC to lease" the property. "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 $557million over 10 years," the report said.

It stated that the rapidly consummated leasing decision went against the views of SEC Chairwoman Mary Schapiro, who wanted the commission's projected new hires to be housed at regional offices. "Further, OAS backdated the justification and approval, thereby creating the false impression that it had been prepared only a few days after the SEC entered into the lease," the report said. The arrangement violated procedures for coordinating major leasing moves with the Office of Management and Budget, the report added, and may have violated the Anti-Deficiency Act by committing the agency to spend funds Congress hadn't approved. At the hearing, Kotz added that he thought the true motive for the lease was to obtain "a beautiful space with fancy views."

Rep. Jeff Denham, R-Calif., chairman of the House Transportation and Infrastructure panel that has been focusing on waste in federal building management, told the hearing he found it "hard to comprehend how easily the SEC can just commit to spending $500 million of the American people's money in just a few days." He said, "The SEC has committed the taxpayer to an excessively expensive lease for space based on little more than a back-of-the-envelope guess as to the agency's actual needs . . . It is as though the SEC did not get the memo that Congress and this administration have both been talking about cutting the waste in our federal buildings," he said. He promised "accountability and consequences."

Ranking committee member Eleanor Holmes Norton, D-D.C., called the report "shocking," saying it "paints an outrageous picture of agency incompetence and possible criminal violations by federal employees." She said the square footage SEC had requested was inflated and nearly double the standard set by the General Services Administration, enough for 12,000 employees rather than SEC's 3,000. "And this comes right at the time when the agency is expected to zero in on what it should be doing to implement the Dodd-Frank financial reform law," she complained.

SEC officials responded that the lease was part of the agency's effort to accommodate new staff required by its obligations under Dodd-Frank. But, said Jeffery Heslop, SEC's chief operating officer, it became clear in the fall of 2010 that Congress' fiscal 2011 continuing resolution would not include funds to hire additional staff, and so the commission withdrew from the lease and found substitute federal tenants that don't depend on congressional appropriations for their leases, namely the Office of the Comptroller of the Currency and the Federal Housing Finance Agency.

"I can assure you that the SEC is committed to taking all necessary and appropriate actions to ensure that the SEC makes efficient and economical use of its office space, produces accurate and reliable data to support leasing decisions, and holds agency staff -- from senior executives on down -- accountable," Heslop said. "We have taken -- and are continuing to take -- steps to minimize the future impact of this leasing decision."

Those steps include requiring leasing staff to report directly to Heslop and revamping the agency's larger leasing policies.

In response to a Government Executive request for an update, an SEC spokesman reiterated Heslop's statement to the committee that SEC had paid no rent under the terminated leasing deal.

Under committee questioning, SEC General Counsel Mark Cahn reported that his office had sent a request to the Government Accountability Office for a ruling on possible violations of the Anti-Deficiency Act.

Also testifying was Elaine Clancy, GSA' s director of leasing for the National Capital Region, who emphasized that "these large leases require review and clearance by both GSA's Central Office and OMB prior to submission to Congress." She said GSA is responding to an SEC request for help in filling the remaining vacant space at the Constitution Center.

Norton said the situation requires "an immediate response," which is why she is drafting a bill revoke SEC's leasing authority.

Denham promised to examine whether SEC should keep such authority and vowed to pursue two commission employees, Diego Ruiz and Sharon Sheehan, who ignored his requests for their testimony. "At some point," he said, "the waste has to end."