Schapiro was taken to task by Rep. Jeff Denham, R-Calif., chairman of the House Transportation and Infrastructure Subcommittee on Economic Development, Public Buildings and Emergency Management, for her role in an agency embarrassment laid bare by an SEC inspector general's report in May that may lead to criminal prosecutions.
SEC Inspector General David Kotz had 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."
Denham called the hearing to find previously "elusive" answers on how the misstep occurred, as part of his pursuit of a bill to streamline federal property management and "reduce the federal footprint and put more people in less space." The bungled lease would have committed SEC to spending $500 million over 10 years for more office space than it needed.
His unanswered questions included why SEC's request tripled its space requirement, why the plan was pursued without written authorization from the Office of Management and Budget or Congress, why the proposed sole-source contract was approved "in a 10-minute meeting," and how the contract was illegally backdated.
Schapiro said there were "significant flaws in the process" and that she was "extremely disappointed in the failures." But she added that SEC successfully pulled out of the agreement, paid no rent, and helped arrange for two of the three portions of the space to be leased to other agencies. The only expense incurred, she said, was $415,000 for telecom circuitry and consulting help. But none of that "absolves the SEC for what should never have occurred," she said.
The context for the leasing effort in spring 2010 was impending passage of the Dodd-Frank financial reform law, which, she noted, would require SEC to issue 100 new rule-makings, conduct 20 studies, and create four offices to regulate such instruments as hedge funds and derivatives. Planners expected to hire 1,000 to 1,100 new employees over two years and double the agency's budget by 2015.
Schapiro said she was told by her professional staff that a move to the Constitution Center was "a good deal" made urgent by the potential for competition from other agencies. "But when it subsequently became clear SEC wouldn't receive the funds, we took steps to relieve the agency of exposure," she said.
Since the IG's report, she has met personally with the GSA administrator, and staff from the two agencies have drafted a memorandum of understanding for future turnover of authority for SEC leasing to GSA. Of five individuals named in the IG report for possible misconduct, one, Diego Ruiz, left SEC and is on "terminal leave," she said. Disciplinary action for the others is under way, but they have been reassigned to nonleasing-related jobs. She said the consulting firm Booz Allen Hamilton has been brought in to examine her agency's office space management.
Kotz testified that his team is reviewing SEC's corrective action, will monitor the discipline process, and has referred five individuals to the Justice Department for possible prosecution. He said Wednesday he is "confident that SEC leadership has remedied the situation and that it will not be repeated in the future."
Ranking member Del. Eleanor Holmes Norton, D-D.C., said she will nonetheless push her bill (H.R. 2390) to remove SEC's leasing authority because the agency "has shown over the years that leasing is a function outside its area of expertise." She said she found it disconcerting that SEC's general counsel signed off on the problematic contract language.
Denham pressed Schapiro on why her agency committed taxpayers to $500 million "at a time when there was no budget and no Dodd-Frank bill."
Schapiro replied, "I don't disagree that it was done in an anticipatory way and should not have been done that way." But, she said, the agency had been criticized in the past for not hiring quickly enough.