By Sarah N. Lynch
WASHINGTON (Reuters) - David Kotz, the tough internal watchdog at the Securities and Exchange Commission, is leaving the agency at the end of January to join a private investigative service.
Kotz, 45, probed everything from the agency's failure to catch convicted Ponzi swindler Bernard Madoff to bungled SEC contracts and even pornography-watching by agency employees.
But the hard-hitting lawyer has also drawn criticism from SEC staff who have complained his tactics have led to a culture of fear at the agency.
In December, Reuters reported that at least two SEC employees had filed formal complaints against Kotz, alleging he bullied witnesses and twisted facts to build a case against them.
Kotz plans to join Gryphon Strategies, a private investigative services firm where he will serve as a managing director in its Washington office. He will focus on conducting corporate fraud investigations and helping whistleblowers seeking to expose fraud, the SEC said.
"I am tremendously proud of the accomplishments of my office and the agency over the past four years," Kotz said in a statement. "The reports we have issued have not only been significant to the agency, Congress and the investing public, but they have also directly resulted in a transformation of many of the divisions and offices of the commission."
Kotz joined the SEC in December 2007 after previously working as the inspector general of the Peace Corps.
His aggressiveness has won him some fans, particularly in Congress. His exhaustive 477-page report on the agency's failure to snare Madoff prodded the SEC to be more assertive in implementing a new database to help track tips from informants.
Most recently, one of Kotz's past investigations helped lead the Justice Department to reach a civil settlement with a former SEC attorney over claims he improperly represented alleged Ponzi schemer Allen Stanford after departing the SEC. [ID:nL1E8CD9DB]
"David Kotz produced strong, conclusive reports, even as critics claimed he was too aggressive," said Republican Senator Charles Grassley, who has been a big supporter of Kotz's work. "An aggressive, independent inspector general is best for the agency in the long run, even if that's uncomfortable for management."
Kotz's successes have recently been shaded by growing concerns about his tactics.
Harvey Pitt, a former SEC chairman, was one of the first people to publicly lash out against Kotz during congressional testimony last year. He said on Tuesday that Kotz was a "rogue IG" who brought a "reign of terror" to the agency.
"While his departure did not come soon enough to spare many employees from the sting of his improper and harsh criticism, his departure is good news for an agency and its staff that have deserved better since Mr. Kotz's tenure began," said Pitt, who has represented some staffers pro bono in Kotz probes.
Kotz did not immediately respond to a request for comment.
COMPLAINTS PILE UP
Kotz's announcement about his departure took many at the SEC by surprise on Tuesday.
In an interview with Reuters in the fall, Kotz had denied having any interest in moving on, saying "I enjoy my current position."
However, a little over a year ago, a headhunter was circulating his resume to top law firms in New York, but there was little interest, legal sources told Reuters late last year.
Criticism of Kotz has grown in the past 12 months.
Two SEC employees filed complaints against Kotz in 2011 with a government council that monitors the work of 73 inspectors general known as the Council of Inspectors General on Integrity and Efficiency, or CIGIE.
The two staffers had previously been targets of Kotz's probes and later cleared of any wrongdoing.
One of those employees, SEC veteran enforcement attorney Nancy McGinley, was accused by Kotz of possible insider-trading in shares of companies such as Citigroup and Schlumberger.
The matter was referred for potential prosecution to the U.S. Justice Department and her name appeared in some media reports. The DOJ declined to prosecute, and McGinley said Kotz's aggressive investigation unfairly took a toll on her reputation.
In another complaint, the SEC's acting branch chief of acquisition policy, Linda Baier, made wide-ranging accusations about how she and her colleagues were treated in Kotz's various audits and investigations.
In her own case, she said Kotz retaliated against her after she told him she felt one of his reports did not go far enough in investigating potential misconduct by an employee in her division.
Shortly afterward, she said, he began investigating her behavior and accused her of pre-selecting a certain contractor for a job.
She also alleged that on at least two occasions, Kotz himself may have tried to circumvent competitive bidding rules so he could hire certain candidates to work in his office, including one former Peace Corps employee.
Kotz in prior interviews with Reuters denied all of the allegations made against him by Baier and McGinley.
In addition to the story by Reuters, several recent articles by Bloomberg have also raised concerns about potential conflicts of interest after Kotz did a sit-down interview with a financial adviser who markets a "crash-proof retirement plan" through the Internet and a paid radio show.
The adviser later sold Kotz three tickets to a sold-out football game.
According to Bloomberg, CIGIE was also looking into both of those matters after Kotz self-reported them to the organization.
A spokesman for the independent unit of CIGIE that examines complaints against inspectors general could not immediately be reached for comment about the status of the employees' complaints or the concerns raised by the interview and football tickets.
(Reporting By Sarah N. Lynch; Editing by John Wallace and Tim Dobbyn)