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THE SECURITIES AND EXCHANGE COMMISSION’S 

$500 MILLION FLEECING OF AMERICA: PART TWO 

(112–43) 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

ECONOMIC DEVELOPMENT, PUBLIC BUILDINGS, AND 

EMERGENCY MANAGEMENT 

OF THE

COMMITTEE ON 

TRANSPORTATION AND 

INFRASTRUCTURE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

JULY 6, 2011 

Printed for the use of the 

Committee on Transportation and Infrastructure 

( 

Available online at: http://www.gpo.gov/fdsys/browse/ 

committee.action?chamber=house&committee=transportation 

COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE 

JOHN L. MICA, Florida, Chairman 

DON YOUNG, Alaska 

THOMAS E. PETRI, Wisconsin 

HOWARD COBLE, North Carolina 

JOHN J. DUNCAN, JR., Tennessee 

FRANK A. LOBIONDO, New Jersey 

GARY G. MILLER, California 

TIMOTHY V. JOHNSON, Illinois 

SAM GRAVES, Missouri 

BILL SHUSTER, Pennsylvania 

SHELLEY MOORE CAPITO, West Virginia 

JEAN SCHMIDT, Ohio 

CANDICE S. MILLER, Michigan 

DUNCAN HUNTER, California 

ANDY HARRIS, Maryland 

ERIC A. ‘‘RICK’’ CRAWFORD, Arkansas 

JAIME HERRERA BEUTLER, Washington 

FRANK C. GUINTA, New Hampshire 

RANDY HULTGREN, Illinois 

LOU BARLETTA, Pennsylvania 

CHIP CRAVAACK, Minnesota 

BLAKE FARENTHOLD, Texas 

LARRY BUCSHON, Indiana 

BILLY LONG, Missouri 

BOB GIBBS, Ohio 

PATRICK MEEHAN, Pennsylvania 

RICHARD L. HANNA, New York 

JEFFREY M. LANDRY, Louisiana 

STEVE SOUTHERLAND II, Florida 

JEFF DENHAM, California 

JAMES LANKFORD, Oklahoma 

REID J. RIBBLE, Wisconsin 

CHARLES J. ‘‘CHUCK’’ FLEISCHMANN, 

Tennessee 

NICK J. RAHALL II, West Virginia 

PETER A. DEFAZIO, Oregon 

JERRY F. COSTELLO, Illinois 

ELEANOR HOLMES NORTON, District of 

Columbia 

JERROLD NADLER, New York 

CORRINE BROWN, Florida 

BOB FILNER, California 

EDDIE BERNICE JOHNSON, Texas 

ELIJAH E. CUMMINGS, Maryland 

LEONARD L. BOSWELL, Iowa 

TIM HOLDEN, Pennsylvania 

RICK LARSEN, Washington 

MICHAEL E. CAPUANO, Massachusetts 

TIMOTHY H. BISHOP, New York 

MICHAEL H. MICHAUD, Maine 

RUSS CARNAHAN, Missouri 

GRACE F. NAPOLITANO, California 

DANIEL LIPINSKI, Illinois 

MAZIE K. HIRONO, Hawaii 

JASON ALTMIRE, Pennsylvania 

TIMOTHY J. WALZ, Minnesota 

HEATH SHULER, North Carolina 

STEVE COHEN, Tennessee 

LAURA RICHARDSON, California 

ALBIO SIRES, New Jersey 

DONNA F. EDWARDS, Maryland 

SUBCOMMITTEE ON ECONOMIC DEVELOPMENT, PUBLIC BUILDINGS, AND EMERGENCY

MANAGEMENT

JEFF DENHAM, California, Chairman 

TIMOTHY V. JOHNSON, Illinois 

ERIC A. ‘‘RICK’’ CRAWFORD, Arkansas, 

Vice Chair 

RANDY HULTGREN, Illinois 

LOU BARLETTA, Pennsylvania 

BOB GIBBS, Ohio 

PATRICK MEEHAN, Pennsylvania 

RICHARD L. HANNA, New York 

CHARLES J. ‘‘CHUCK’’ FLEISCHMANN, 

Tennessee 

JOHN L. MICA, Florida (Ex Officio) 

ELEANOR HOLMES NORTON, District of 

Columbia 

HEATH SHULER, North Carolina 

MICHAEL H. MICHAUD, Maine 

RUSS CARNAHAN, Missouri 

TIMOTHY J. WALZ, Minnesota 

DONNA F. EDWARDS, Maryland 

BOB FILNER, California 

NICK J. RAHALL II, West Virginia 

(Ex Officio) 

(II) 

(III) 

CONTENTS Page 

Summary of Subject Matter .................................................................................... iv 

TESTIMONY 

Kotz, Hon. H. David, Inspector General, U.S. Securities and Exchange Commission .................................................................................................................. 4 

Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange Commission ........................................................................................................................ 4 

PREPARED STATEMENTS SUBMITTED BY WITNESSES 

Kotz, Hon. H. David ................................................................................................ 30 

Schapiro, Hon. Mary L. ........................................................................................... 38 

SUBMISSION FOR THE RECORD 

Letter from Hon. Mary L. Schapiro, Chairman, U.S. Securities and Exchange 

Commission, to Hon. Jeff Denham, a Representative in Congress from 

the State of California, clarifying information on p. 10, paragraphs 15– 

17 of this hearing, which has been reformatted from the original transcript 

for publication and attached for reference. The passage appeared in the 

original transcript on page 25, lines 556 to 566, as indicated in Hon. 

Schapiro’s letter. ................................................................................................... 47 

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(1) 

THE SECURITIES AND EXCHANGE 

COMMISSION’S $500 MILLION 

FLEECING OF AMERICA: PART TWO 

WEDNESDAY, JULY 6, 2011 

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON ECONOMIC DEVELOPMENT, PUBLIC

BUILDINGS, AND EMERGENCY MANAGEMENT, 

COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE, 

Washington, DC. 

The subcommittee met, pursuant to call, at 3:17 p.m., in room 

2167, Rayburn House Office Building, Hon. Jeff Denham (chairman 

of the subcommittee) presiding. 

Mr. DENHAM. The subcommittee will come to order. 

First, let me thank Chairman Schapiro of the SEC for being here 

today to testify on this important subject; and I would like to welcome back Mr. Kotz, the SEC inspector general, and thank him 

again for all the work his office has done in investigating the SEC’s 

use of leasing authority. 

On June 16th, the subcommittee held a hearing regarding the 

SEC’s leasing of over 900,000 square feet of space at Constitution 

Center in DC. We expected to get answers to some basic questions 

as to how and why the SEC managed to bind the taxpayer to more 

than $500 million in lease payments for space the SEC did not 

even need. Sadly, we didn’t get very many answers last hearing, 

despite having the SEC’s chief operating officer and general counsel both testify. Few of our questions were answered. 

In the private sector, if an employee bound their company to a contract costing over $500 million it did not need, that company 

would want to know the facts to determine who all should be held 

accountable and how to prevent it from happening again. 

Federal agencies should be held to an even higher standard as, 

ultimately, it’s the American people who pay for their costly mistakes. While the IG who is here to testify today did a thorough job 

in his investigation on this lease, our subcommittee expected to be 

able to get answers directly from Agency leadership at our last 

hearing. 

Some of the basic questions that were raised included: 

How and why did the SEC in the course of just 1 month more 

than triple the size of its space requirement? 

Why did the SEC believe it was appropriate to base a procurement of a new lease on an estimated number of new employees for 

which there was no approved funding? 

2 

Why did the SEC assume all of the new employees would be in 

DC, when Chairman Schapiro had previously indicated nearly half 

would be assigned to the regional offices? 

Why didn’t the COO or other officials at the SEC ask questions 

regarding the increase in projected lease payments? 

What facts substantiated the SEC’s decision to sole-source contract? 

Why was a sole-source contract worth more than $500 million negotiated over the course of just a couple of days? 

Why didn’t the lease contract include any clauses to protect the 

taxpayer, such as a cancellation clause? 

And why is there nothing in writing that would show a formal 

internal approval of such a massive lease? 

These are some of the basic questions that still have not been answered. 

I would like to say for the record that since the June hearing 

Chairman Schapiro has taken steps to try and ensure that as many 

of these questions as possible were answered before this hearing 

today. However, information that would help to shed more light on 

how this particular lease was signed remains illusive; and it still 

remains unclear how or why, Chairman Schapiro, as head of the 

Agency, you verbally approved a $500 million lease based on a 10- 

minute unscheduled meeting. 

As I mentioned at the June hearing, the IG report is breathtaking. It is inconceivable that the SEC bound the taxpayer to 

more than a half billion dollars based on back-of-the-envelope calculations that were inflated and just simply wrong. And it is more 

disturbing that such a lease was signed without any informal internal written approval, no OMB approval, and no congressional approval. And, on top of that, the SEC proceeded with a sole-source 

contract negotiated over the course of just a few days based on a 

justification document that was backdated and altered. 

As the IG noted in the last hearing, it appears someone at the 

SEC saw Constitution Center and decided that that’s where they 

wanted the SEC to move, regardless of the cost to the taxpayer. 

And sadly, as pointed out in June, we know this is not the first 

time SEC has mismanaged its leasing authority. Previous IG and 

GAO reports have shown that the SEC has a history of making bad 

decisions when it comes to leasing. 

Our subcommittee has been working on a bipartisan basis to cut 

waste when it comes to our Federal buildings, even clamping down 

on waste and excess building in the Federal courthouse program. 

The Civilian Property Realignment Act that I introduced earlier 

this year is intended to decrease the Federal space footprint, putting more people in less space. This legislation would also revoke 

the SEC’s ability to make this mistake again. And the current administration, just over a month before the SEC signed this lease, 

issued a directive to Federal agencies to reduce space. 

Reducing waste and Federal real property has been and remains 

a priority, and it is unclear why the SEC didn’t get it. So I hope 

today we get the answers. 

I would now like to recognize Ranking Member Norton from the 

District of Columbia for 5 minutes to make any opening statements 

she may have. 

3 

Ms. NORTON. Thank you, Mr. Chairman. 

We welcome today’s witnesses to a second hearing on the May 

16, 2011, report of the Securities and Exchange Commission Office 

of Inspector General on a lease by the Agency of a large office 

building in Washington, DC. 

Last month’s hearing and the IG report painted a picture of an 

agency that was ill-equipped to engage in real estate transactions 

and consequently developed a culture that allowed bureaucrats to 

make major unsupported financial commitments; and, as a result, 

serious abuses occurred that could result in subsequent action 

against the employees involved, according to the IG’s May 16th report. 

To directly address this problem, I’ve introduced H.R. 2390, a bill 

that would remove leasing authority from the SEC. 

Today’s hearing will allow SEC Chair Mary Schapiro and SEC 

IG David Kotz to testify on the status of the IG report and to learn 

what actions have been taken to mitigate the damages caused by 

the unauthorized leasing. We also will hear what progress has been 

made on holding accountable any employees for their roles in the 

lease. 

The SEC chair has indicated that she agrees that the SEC 

should not be engaged in leasing activity. Real estate is outside of 

SEC’s core mission of regulating America’s security systems, protecting investors, and particularly as challenged to issue and implement the rules and regulations of Dodd-Frank. 

Apart from the lease that sparked the IG report, the SEC has 

shown over the years that leasing is a function well outside of the 

Agency’s expertise. H.R. 2390 reflects the SEC’s chair’s own counsel that the SEC should remain exclusively focused on its core mission. 

It is my understanding that the SEC chair has met with the 

General Services Administrator to ask the GSA to assume the 

SEC’s real estate functions, as GSA does for most Federal agencies. 

The first subcommittee hearing on this lease was thorough, covering the background and facts that lead to the IG report. Neither 

the SEC nor any party has disputed the underlying facts in the report. The SEC’s corrective action plan in response to that report 

concurred with all of the IG’s recommendations that indicated a 

commitment to executing the necessary remedial actions. Mainly 

missing from last hearing were details of the corrective action 

taken by the SEC. I look forward to hearing those details today, 

and I thank our witnesses for testifying. 

Thank you, Mr. Chairman. 

Mr. DENHAM. Thank you. 

I now call on chairman of the full committee, Mr. Mica. 

Mr. MICA. Well, thank you, Chairman Denham and Ranking 

Member Norton, for, first of all, your diligence in pursuing this 

matter and conducting these hearings at a time when we’re facing 

some of the worst deficits in the Nation’s history and struggling financially. 

It’s almost incredible to learn of an agency that spun out of control, and it is almost incredible—half a billion dollars in space for 

committing the Federal Government for 10 years to pay for space 

based on what appears to be inflated staff numbers, a space need 

4 

probably violating not only the rules of acquisition, procurement, or 

leasing but in violation of competitive contracting rules, ignoring, 

not consulting properly the Office of Management and Budget, violating antideficiency regulations of entering into leases. Again, very 

least, a questionable basis, but, again, it is astounding. 

I hope that this hearing highlights what’s taken place. We don’t 

need this to ever happen again. 

We also are stuck with an obligation. Now we’re finding spaces 

are being filled—attempted to be filled. We find an obligation of 

maybe $93 million in some deficiencies with the landlord. Again, I 

just don’t think you could paint a worse scenario for obligating, 

again, taxpayer funds to any venture I have seen. 

When Mr. Denham, myself, and Ms. Norton struggle to locate 

space for agencies and to relocate or acquire a space, to consolidate, 

we run into all obstacles. Maybe we should figure out how we could 

maybe enlist the SEC in handling some of these things. Unfortunately, while they are able to do it quickly and obligate substantially, it takes us years to even get small projects under way. 

So I find this, again, just an outrageous misuse of public resources at a very difficult economic time. I am pleased you are pursuing this. We need to make certain a law is crafted and a regulation so that it doesn’t happen again. And then, if we are obligated 

to this space, certainly I have some ideas on how it could be properly utilized; and I will work with the subcommittee and the committee in that regard. 

I yield back the balance of my time. 

Mr. DENHAM. Thank you. 

Today, we’ll ask that our witnesses provide testimony under 

oath. I would ask the witness to please stand and raise their right 

hand to be sworn in under oath. 

Do you swear that the testimony you are about to provide to the 

subcommittee is the truth, the whole truth, and nothing but the 

truth, so help you God? 

Thank you. 

Our first and only panel will be the Honorable Mary Schapiro, 

chairman, U.S. Securities and Exchange Commission, and the Honorable David Kotz, inspector general, U.S. Securities and Exchange 

Commission. 

I ask unanimous consent that our witnesses’ full statements be 

included in the record. 

Without objection, so ordered. 

Since your testimony has been made part of the record, the subcommittee would request that you limit your oral testimony to 5 

minutes. 

Chairman Schapiro, you may begin. 

TESTIMONY OF THE HONORABLE MARY L. SCHAPIRO, CHAIRMAN, U.S. SECURITIES AND EXCHANGE COMMISSION; AND 

THE HONORABLE H. DAVID KOTZ, INSPECTOR GENERAL, 

U.S. SECURITIES AND EXCHANGE COMMISSION 

Ms. SCHAPIRO. Chairman Denham, Ranking Member Norton, 

members of the subcommittee, thank you for the opportunity to testify today regarding the SEC’s lease of office space at Constitution 

Center and the steps we are taking going forward. 

5 

Like the report of the Commission’s Office of Inspector General, 

the subcommittee’s previous hearing identified significant flaws in 

the SEC’s leasing processes. I’m extremely disappointed by those 

failures and regret that they have taken us all away from our primary mission of protecting investors, facilitating capital formation, 

and insuring stability in the financial markets. 

The fact that the SEC has not paid any rent to date for this 

property and that the bulk of the space has been leased to other 

tenants does not adequately address a situation that should never 

have occurred. The only appropriate response by the SEC is to resolve the remaining space issues, to correct the deficiencies in our 

leasing processes by working with GSA and OMB with respect to 

future space needs, and to ensure accountability for the events surrounding this lease. 

By way of background, in the spring of 2010, the SEC correctly 

anticipated it would receive significant new responsibilities under 

the Dodd-Frank for derivatives, hedge fund advisors, creating credit rating agencies, and much more. This was, of course, on top of 

our longstanding core responsibilities. As a result, we believed and 

continue to believe that the SEC needed additional staff to fulfill 

its mission and to help further restore investor confidence in our 

markets. 

At the time the Agency was considering the leasing decisions, I 

indicated my preference for hiring new staff in the regions, rather 

than at headquarters. And, I indicated to staff my preference that 

any new space in Washington be within walking distance of our 

Station Place buildings to eliminate the need for expensive shuttle 

services. 

With respect to Commission matters in which I’m not an expert, 

I provide overall policy goals and instructions and leave it to the 

professional staff to execute them consistent with my instructions. 

Throughout my time, I have found the professional staff across the 

Agency to be extremely dedicated to their mission and knowledgeable in their areas of expertise. 

In July of 2010, staff informed me that all of our other leasing 

options no longer existed, that the space at Constitution Center 

was our only option, that the pricing was advantageous, and that 

we had to move quickly, as there was competition for the space. 

Given my previous discussions with staff, I assumed the proposal 

was consistent, both with our budget projections for future employee growth and my preference for staff to be housed where possible in the regions. When it subsequently became clear that the 

SEC would not receive the funding necessary to implement its new 

responsibilities, we took immediate steps to release the space to 

others and reduce the SEC’s exposure. 

As chairman of the SEC, I am ultimately responsible for the actions of the Agency. My written testimony details how we have 

learned from the problems in our leasing process and how we intend to address these issues. I would like to emphasize a few of 

those items. 

First, we are promptly implementing the inspector general’s recommendations and already have submitted a written corrective action plan to the OIG. 

6 

Second, in light of the failures identified and questions raised by 

OIG and the subcommittee, the SEC recognizes the benefits of having GSA manage the Commission’s future lease acquisitions. Leasing is not part of the Commission’s core mission and as an agency 

we cannot allow it to impede that mission. GSA, by contrast, has 

long experience and expertise in leasing. 

I recently met with the administrator of GSA and, in addition to 

discussing the Constitution Center space, we discussed ways in 

which GSA could assist the Commission on our leasing efforts 

going forward. GSA has indicated it was open to playing a significant role in those efforts, and our staffs are working on it now. 

After discussions with GSA, we have provided them with a draft 

memorandum of understanding that would provide for GSA to undertake all leasing activities on behalf of the SEC. 

Third, the OIG report recommended that the SEC initiate disciplinary proceedings for three individuals involved in the Constitution Center leasing process, and we have begun that process. The 

Office of General Counsel is actively reviewing the record from the 

OIG investigation and, where necessary, supplementing that investigation. 

I’ve instructed my staff to move as quickly as the laws and regulations permit, consistent with fundamental fairness. 

I expect the disciplinary recommendations with regard to employees identified by the IG will be made very soon. In the meantime, the individuals identified in the IG report have been reassigned. Their current duties do not involve leasing or any other authority that could bind the Commission, nor do they involve duties 

that relate to the expenditure of appropriated funds. 

As I said previously, the true test of an organization is not 

whether things go wrong but how an organization responds to 

problems and whether its leaders take such opportunities to make 

necessary improvements. We are committed to doing that. I am, of 

course, happy to answer any questions that you have. 

Mr. DENHAM. Thank you, Chairman Schapiro. 

Mr. Kotz, you may—— 

Mr. KOTZ. Thank you for the opportunity to testify before this 

subcommittee. I appreciate the interest of the chairman, the ranking member, and the other members of the subcommittee in the 

SEC and the Office of Inspector General. 

On June 16, 2011, I testified before this subcommittee about a 

May 16, 2011, report of investigation we issued into the circumstances surrounding the SEC’s decision to lease approximately 

900,000 square feet of office space at a newly renovated office 

building known as Constitution Center. 

As I described in my previous testimony, we opened our investigation on November 16, 2010, as a result of receiving numerous 

written complaints concerning the SEC’s decisions and actions relating to Constitution Center. 

My previous testimony described in detail our investigative efforts, including the review of over 1.5 million emails during the 

course of the investigation and the testimony or interviews of 29 

individuals with knowledge of facts or circumstances surrounding 

the SEC’s leasing activities. 

7 

I also testified concerning the results of our investigation, which 

found that the circumstances surrounding the SEC’s entering into 

a lease for 900,000 square feet of space at the Constitution Center 

facility in July 2010, were part of a long history of missteps and 

misguided leasing decisions by the SEC since it was granted independent leasing authority in 1990. 

We further found that, based on estimates of increased funding, 

primarily to meet the anticipated requirements of the Dodd-Frank 

Act, between June and July 2010, the SEC Office of Administrative 

Services, OAS, 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 the expenditure of approximately $557 million over 10 

years. 

In my earlier testimony, I described how we found that OAS prepared a faulty justification and approval document to support entering into the lease for the Constitution Center facility without 

full and open competition. We determined that this justification 

and approval document was prepared after the SEC had already 

signed the contract to lease the facility. Further, we found that 

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, when in actuality it was not finalized until a month later. 

Our report of investigation made numerous recommendations designed to ensure that the requisite improvements to policies and 

procedures are made and that appropriate disciplinary action is 

taken. Specifically, we recommended that the SEC’s chief operating 

officer conduct a through and comprehensive review and assessment of all matters currently under the purview of OAS. 

We further recommended that the chief operating officer determine the appropriate disciplinary and/or performance-based actions 

to be taken for matters related to findings. We specified that such 

disciplinary actions should include, at a minimum, action up to and 

including dismissal against two senior individuals and disciplinary 

action against a third individual. 

Finally, we recommended that the Office of Financial Management, in consultation with the Office of General Counsel, request 

a formal opinion from the Comptroller General as to whether the 

Commission violated the Antideficiency Act by failing to obligate 

funds for the lease. 

My office is committed to following up with respect to all the recommendations we made in our report to ensure that appropriate 

changes and improvements are made in the SEC’s leasing operations as a result of our findings. 

Subsequent to the issuance of our report of investigation, my office requested and received a corrective action plan with regard to 

the substantive recommendations we made. We will monitor the 

planned activities carefully to ensure that the improvements are 

made. We also intend to monitor the disciplinary process to ensure 

the individuals we identified as being responsible for the failures 

8 

and improprieties described in our report are held fully accountable 

for their actions. 

In addition to these efforts, we have met with the newly installed 

acting head of OAS to provide additional information concerning 

the failings and deficiencies we identified in that office. As a result 

of this briefing, a large renovation project that had been initiated 

by the previous head of OAS has now been discontinued. 

We understand that the chief operating officer, under Chairman 

Schapiro’s direction, has already begun to implement the improvements needed in the SEC’s leasing functions. We are confident 

that, under Chairman Schapiro leadership, the SEC will continue 

to review our report and take appropriate steps to implement our 

recommendations and ensure that fundamental changes are made 

in the SEC’s leasing operations so that the errors and failings we 

found in our investigation are remedied and not repeated in the future. 

Thank you, and I will be happy to answer any questions. 

Mr. DENHAM. Thank you, Mr. Kotz. 

First of all, Chairman Schapiro, could you just take this committee through your responsibilities as chairman of the SEC? 

Ms. SCHAPIRO. Certainly. 

As chairman of the SEC, I have responsibility for setting the policy direction in coordination with my four commissioners, who are 

also Presidential appointees confirmed by the Senate, for implementing the requirements of the law through rulemaking, for administration of a large enforcement program for dealing with violations of the Federal securities laws by regulated entities and by 

others, and I have general responsibility for the administrative 

functions of the Agency. 

Mr. DENHAM. How large is the Agency? 

Ms. SCHAPIRO. We have about 3,900 employees and a budget of 

about $1.2 billion. 

Mr. DENHAM. And can you walk us through the timeline on the 

lease in question? 

Ms. SCHAPIRO. Yes, I would be happy to. 

In mid-2010 our former executive director communicated a need 

for us to secure additional space in the District of Columbia. Under 

our 2010 appropriation, we were working to hire about 550 employees; and our fiscal year 2011 request would have supported several 

hundred additional employees. The day after the lease was signed, 

in fact—and I will go back—the appropriations committees actually 

approved a higher fiscal year 2011 appropriation than we had 

sought or than the President had sought that would have supported about 500 more employees. 

The Dodd-Frank bill, which became law on July 21st, gave the 

SEC huge additional responsibilities for not only part of the $600 

trillion over-the-counter derivatives market but also for hedge fund 

registration and oversight as well as additional responsibilities 

with respect to credit rating agencies and municipal advisors. 

Mr. DENHAM. What date did you say Dodd-Frank passed? 

Ms. SCHAPIRO. Dodd-Frank became law on July 21st. So I just 

use that as part of the background about how we were thinking 

about leasing. It was clear in June that we would be given signifiVerDate Aug 31 2005 10:36 Jan 17, 2012 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 P:\HEARINGS\112\ED\7-6-11~1\67285.TXT JEAN
9 

cant additional—likely be given significant additional responsibilities if Dodd-Frank passed. 

Mr. DENHAM. So June you started having discussions, meetings 

on the 2010 budget to hire 500 employees and you were looking for 

space for those 500? 

Ms. SCHAPIRO. Under our 2010 appropriation we were already 

working to hire those employees. 

Mr. DENHAM. And the fiscal year 2011 budget passed and there 

was an additional 500? 

Ms. SCHAPIRO. The budget didn’t pass, obviously, until much, 

much later. It would have supported—the request would have supported about 380 more employees. And Dodd-Frank also authorized 

a doubling of the Agency’s budget between then and 2015. So it’s 

part of what was going into the thinking of the Agency about what 

our resource needs would likely be. 

In any event, in June, we discussed the options for taking additional space in Washington. I was told that there was no additional 

space available in our existing headquarters building. I made it 

very clear that I wanted to move as many additional head count 

as we were able to out to the regional offices where the people we 

regulate work and where the people that we serve, investors, live. 

And that to the extent we needed to take additional space in Washington, DC, that it should be within walking distance of our headquarters so we would not have to pay for an expensive shuttle system. 

I understood that our need for space would be based on our budget estimates, which were much more modest than what was ultimately projected according to the inspector general’s report—and 

that was in June. And I was not told in July, when a decision was 

made to go forward with Constitution Center, that the numbers 

had been dramatically increased. I was not walked through how 

those numbers in fact grew. It was presented to me as an emergency situation that we take the space at Constitution Center because all the other options we had been looking at, I was told, had 

disappeared, that on a rentable-square-foot basis, Constitution 

Center was a very good deal, that we had reserved the option in 

taking that space to sublease or assign that space if we were not 

able to use it. 

And of course I assumed that the decision was fully consistent 

with the wishes that I had expressed and that it was fully consistent with our budget projections that had been generated our Office of Financial Management. Obviously, as we know from the inspector general’s report, those numbers became greatly inflated between the June timeframe and the July timeframe. 

Mr. DENHAM. I just want to establish for this committee the actual timeline of how the lease went down and what happened subsequently after that. 

June—you said mid-2010. I’m assuming that’s June you started 

having meetings? 

Ms. SCHAPIRO. Probably late spring in 2010. But in June was the 

first meeting where we sat down to talk about what our budget 

projections were and what our options would be within the District 

of Columbia and in terms of moving employees out to the regions 

10 

where we locate most of our examination and enforcement staff, 

which are the two largest parts of the SEC. 

Mr. DENHAM. The 2010 budget you established a need for how 

many employees? 

Ms. SCHAPIRO. In the 2010 budget—let me give you the exact 

number—550. 

Mr. DENHAM. Out of those 550, how many were you looking at 

having walking distance from the current SEC building and how 

many were you looking at having in the region? 

Ms. SCHAPIRO. To the extent possible, we were going to put the 

550 in our existing headquarters space and utilize all of that space 

and then some number—I’m sorry, I have to get you an exact number—to go out to the regional offices. 

Mr. DENHAM. I’m just trying to get a ball park and better understand the timeline. How much space do you currently have at your 

current location? 

Ms. SCHAPIRO. About 380 in DC and 170 out to the regions. 

Mr. DENHAM. And how much space do you have currently? 

Ms. SCHAPIRO. I’m told that currently we have space, I believe, 

for about 500 in Station Place in our existing headquarters building. 

Mr. DENHAM. So you could have accommodated the entire 380 

that you wanted to keep in DC at your current location. 

Ms. SCHAPIRO. Yes, but I was told in June of last year that we 

had no space left in Station Place at all. 

Mr. DENHAM. Is that where your office is? 

Ms. SCHAPIRO. Yes. 

Mr. DENHAM. And when did it become apparent you were going 

to need additional space beyond what you had originally estimated 

under the 2010 budget, the 550 new personnel? 

Ms. SCHAPIRO. Well, as we—based on our fiscal year 2011 request—and I understand that’s a request, not an appropriation— 

as well as the new work that was being assigned to the Agency 

under Dodd-Frank, it became clear in the late spring that we 

would need—and into the summer and certainly by the middle of 

the summer after Dodd-Frank passed—that we would need significant additional resources to fulfill our responsibilities under DoddFrank. 

Mr. DENHAM. OK. Let me see if I can walk through this timeline 

as I understand it. 

Spring, you decided you were going to need new space under the 

2010 budget. June, you started having meetings. And then you saw 

the Dodd-Frank bill starting to get rolled out in committee—I’m 

paraphrasing that a little bit—saw the Dodd-Frank bill being rolled 

out in committee. You had your fiscal year 2011 request in at the 

time and then expanded that request based on the Dodd-Frank legislation which was going to pass a month later. 

Ms. SCHAPIRO. Yes. 

Mr. DENHAM. And based on what you thought the Dodd-Frank 

bill that was going to get passed on July 21st, based on that bill, 

how many additional employees did you feel you were going to need 

on top of the 550 that you already had budgeted? 

11 

Ms. SCHAPIRO. We had originally said that we would need for 

Dodd-Frank implementation over fiscal year 2011 and fiscal year 

2012 800 additional positions. 

Mr. DENHAM. That’s 800 on top of the 550? 

Ms. SCHAPIRO. Yes. 

Mr. DENHAM. On what date was the lease signed? 

Ms. SCHAPIRO. July 28th, I believe. 

Mr. DENHAM. So you had your initial meeting in June. How 

many meetings did you have between that initial meeting and 

when the lease was signed on July 28th? How many meetings did 

you have in there with staff on the staffing requirements as well 

as the lease space needed for those staff? 

Ms. SCHAPIRO. We had, I believe, several meetings before the 

June meeting. The June meeting was the one where we had the detailed discussion about the different options that we have. We were 

looking at 300,000 square feet at that time to accommodate what 

we thought under our budget projections would be about 1,000 in 

new staff over the next 2 years or so, between 1,000 and 1,100. 

And then July was when the staff came to me. The executive director came to me with an emergency request to go forward with 

Constitution Center without walking me through how the numbers 

had grown and how they had in fact, according to the inspector 

general’s report, and I have no reason to doubt it, been inflated 

rather dramatically between June and July. 

Mr. DENHAM. So of the 550 new employees you thought you were 

going to have, 380 would be in DC, which you found out after the 

fact you have existing space. At the time, you didn’t think you had 

it, so you had your staff go out and look for 300,000 square feet 

for those 380 employees? 

Ms. SCHAPIRO. No, Mr. Chairman. With—550 employees were 

under the fiscal year 2010 appropriation. 

Mr. DENHAM. Uh-huh. 

Ms. SCHAPIRO. The additional staff that we projected that we 

needed—we projected that we needed—were between 1,000 and 

1,100, were based on the fiscal year 2011 request and 2012 to continue to bolster our core mission responsibilities, as well as to fulfill 

our Dodd-Frank implementation requirements, operationalization 

requirements. 

Mr. DENHAM. That was the additional 800 people that were needed? 

Ms. SCHAPIRO. That’s right. 

Mr. DENHAM. You had said initially 550 were needed, before 

Dodd-Frank. 

Ms. SCHAPIRO. Yes, 550. 

Mr. DENHAM. And at the time you didn’t know that you had vacant space at your current facility. So I am assuming that—— 

Ms. SCHAPIRO. I was told that in order to accommodate any 

growth for fiscal year 2011 and 2012 that we would need to take 

additional space, that there was no more space available in Station 

Place. 

Mr. DENHAM. So when did your staff start looking for space? 

Ms. SCHAPIRO. In the spring of 2010. 

Mr. DENHAM. And when did you start having meetings with your 

staff on their discovery of the space? 

12 

Ms. SCHAPIRO. In the spring of 2010, with the pivotal meeting 

being the one in June. 

Mr. DENHAM. And was Constitution Center one of those spaces 

they had come back with in June? 

Ms. SCHAPIRO. It was one of several places. I believe there were 

four or so options at that time. 

Mr. DENHAM. Several options at 300,000 square feet, but as you 

go to 900,000 square feet you become limited. 

Ms. SCHAPIRO. I think that’s right. 

And the other options, I would say, were, as the inspector general determined, within walking distance and still available to the 

Agency at the point of the July decision. 

Mr. DENHAM. OK. Just one final question that plays back into 

this timeline issue. You were also a commissioner from 1988 to 

1994 when the SEC originally got its leasing authority? 

Ms. SCHAPIRO. That’s correct. 

Mr. DENHAM. And during that time when you were commissioner, how often did you see sole-source contracts? 

Ms. SCHAPIRO. I don’t recall having any involvement at all in any 

of the leasing obligations of the Agency. I was not the chairman. 

So the chairman would have had the operational responsibility. I 

can’t say I didn’t have any involvement at all, but I don’t recall any 

involvement whatsoever in the leasing process. 

Mr. DENHAM. And between June and July 28th when the lease 

was finalized, at what point in there did you discuss sole-source 

contracts with your staff? 

Ms. SCHAPIRO. I recall the staff telling me that, because we 

would qualify for using the provisions that allow for going sole 

source or limited competition or whatever they described it as, because of an urgent and justifiable need for the space. 

Mr. DENHAM. Thank you. 

I will now recognize Ranking Member Norton for 5 minutes. 

Ms. NORTON. Thank you very much, Mr. Chairman. 

Mr. Chairman, the problems with the SEC leasing, both in this 

lease and in prior leases, has been made clear, but I am concerned 

that there may be smoking guns with some other agencies. There 

are some agencies that are experienced and that should have leasing authority, like the DOD and the Veterans Administration. 

They’ve long had it, probably as long as the GSA. 

Mr. Chairman, I have asked for a list of agencies that have leasing authority. I recognize in our BRAC bill—a bill that, as you 

know, I do support—that we would pull back all these leases, but 

we don’t have any idea whether there is a smoking gun out there. 

And I’m not sure about getting bills through the House and the 

Senate. 

I do believe bill—based on this experience as a kind of optic lesson that a bill to pull back authority from agencies like the SEC 

could quickly get through the House and the Senate, and I would 

hope that you and I could work together on such a bill. 

Could I ask you how much space is there in the building that 

would still be charged to the SEC? 

Ms. SCHAPIRO. Currently—as you know, it was originally 900,000 

square feet. Two-thirds of that have been taken by two other FedVerDate Aug 31 2005 10:36 Jan 17, 2012 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 P:\HEARINGS\112\ED\7-6-11~1\67285.TXT JEAN
13 

eral agencies, the OCC and FHFA; and they are committed for that 

space. So the SEC has no responsibility for that space. 

There is 300,000 square feet left, and we are working very closely 

with GSA. They have expressed real interest in taking that space 

over from us. We have provided them with a draft lease. We are 

working to definitize that so that the transfer or assignment of the 

surplusing to GSA can be made as quickly as possible. And they 

have tenants who have indicated interest in that space for whom 

that space aligns well with their needs. So we are we are working 

very hard to make sure—— 

Ms. NORTON. Would that be the full space? 

Ms. SCHAPIRO. That would be the remainder of the space for 

which the SEC is currently obligated, 300,000 square feet or so. 

Ms. NORTON. Has SEC been charged for any of the space now 

under its lease? 

Ms. SCHAPIRO. Congresswoman, we have not paid any rent on 

that space and even the space that’s remaining for which we may 

be obligated, the 300,000 square feet, we don’t believe any rent 

payments would be due until the first quarter of 2013. There are 

costs that have been incurred in the process of taking this space 

for, I’m told, circuitry, telecom, some architectural and construction 

consulting, that totals about $415,000. But, other than that, there 

have been no rent payments incurred, nor do we believe there 

would be any until—— 

Ms. NORTON. Those are the only outlays by—— 

Ms. SCHAPIRO. I’m sorry? 

Ms. NORTON. That’s the only outlay of money by the SEC? 

Ms. SCHAPIRO. Yes, my understanding is $415,000. There is another $127,000 for IT equipment, but that can be redeployed elsewhere in the Agency. 

Ms. NORTON. Now, with GSA taking over the leasing, assuming 

that MOU goes through and is approved by all concerned, who 

would pay for GSA to do the work for SEC? 

Ms. SCHAPIRO. My understanding is that GSA charges a fee to 

the agencies for whom—for which it administers leasing services, 

and so the SEC would pay that and need to account for it obviously 

in its budget. My understanding is it is typically 7 percent of the 

annual lease payments. 

Ms. NORTON. Uh-huh. The so-called corrective action plan recommends a senior review of all the leasing deals. Would that be 

carried out by the GSA now? 

Ms. SCHAPIRO. Yes, we submitted a corrective action plan to address the IG’s recommendations, and we are moving ahead on that. 

But on a parallel track, obviously, we are trying to negotiate this 

agreement with the GSA to which, as I say, they are quite amenable to taking over all of this responsibility for the SEC. 

We’ll have to amend our corrective action plan to account for 

GSA taking over responsibility for a wide range of activities under 

the MOU, beginning with helping decide the requirements for the 

Agency through running competition, doing surveys, reviewing offers, negotiating offers, establishing the competitive range, arranging for the move, any tenant improvements that are necessary, and 

in fact actually awarding the lease under GSA’s—— 

Ms. NORTON. My time has expired, Mr. Chairman. 

14 

Could I ask if legal counsel—if either Ms. Schapiro or Mr. Kotz 

can tell us whether legal counsel was ever consulted at any time 

during this SEC lease process or, for that matter, were they consulted generally? 

Mr. KOTZ. Yes, actually, they were. The folks from the Office of 

General Counsel were consulted and were involved in the process. 

Ms. NORTON. Well, how do you account—is it that they, too, have 

no expertise in real estate law? Did they look at the regulations, 

for example, on how much space a Federal employee is allowed to 

occupy? Did they look at what the law says about competitive bidding? What kind of counsel—are you saying counsel approved what 

the Agency did? 

Mr. KOTZ. Yes, yes, general counsel’s office was involved. Reviewed the justification and approval, did not have any specific 

issues. They did make—— 

Ms. NORTON. Did you question counsel about its—— 

Mr. KOTZ. Yes. 

Ms. NORTON. And also about its malpractice insurance? 

Mr. KOTZ. We definitely have concerns about how folks in the 

general counsel’s office dealt with this situation. Without a doubt, 

it is set forth at some detail in the report. We have concerns about 

their interpretation of the Antideficiency Act, concerns about their 

interpretation of OMB notification, concerns that in fact the Office 

of General Counsel were involved in the editing and revising of the 

report subsequent to when it was signed. In other words, it was at 

the end dated for August 2nd, but for that month between the beginning of August and the beginning of September the Office of 

General Counsel was editing and revising the report. 

Ms. NORTON. I think it puts the Agency in a general position 

when its own counsel can approve details of the kind that any real 

estate agent could have read the rules and regulations and have 

advised the Agency that you’re going to have a lot of problems with 

this lease. 

Mr. Chairman, I must say if the testimony is that even legal 

counsel not only approved but was involved in this matter, that 

raises very serious concerns about—I say as a member of the DC 

bar—about whoever is—his confidence. 

But it does say to me that the notion of any agency, unless approved by this committee, having this responsibility should now be 

altogether clear. Because there is no check even in the Agency of 

the kind that I must tell you the run-of-the-mill lawyer in DC 

could, without ever having picked up anything but the regulations, 

could have spotted violations here. So it is very disconcerting. 

Mr. DENHAM. Just to clarify, Mr. Kotz, are you saying that legal 

counsel was not only aware of the sole-source contracts but also 

aware that there were two different contracts out there that had 

been altered? 

Mr. KOTZ. We didn’t determine that legal counsel were aware of 

the altering. They were certainly aware of the justification and approval, the language in the justification approval, edited it, and 

eventually consented to it going forward. But we were not aware 

specifically that they knew about the fact that it was backdated. 

I would say that one of the benefits of Chairman Schapiro’s approach to hand everything over to GSA is—I would assume GSA 

15 

has its own lawyers, and so GSA lawyers would be involved in a 

continuing process of advising on leases, rather than the same lawyers who were involved in this case. 

Mr. DENHAM. Sure. We’re trying to both understand not only the 

future corrective action but what happened here that went so 

wrong. And if they didn’t look at both contracts, which contract did 

they look at? 

Mr. KOTZ. What happened was there was a version being sent 

around that was circulated for comment. None of the Office of General Counsel folks actually had to sign the document. So the signature page was sort of dealt which separately. They were dealing 

with the actual document, the language in the document. 

Mr. DENHAM. Is that customary, that you have legal counsel look 

at a partial document? 

Mr. KOTZ. Well, I don’t know that legal counsel at that point was 

aware the document had already been signed. I think they assumed that the document had not been officially formally signed. 

Now they should have looked at it certainly afterwards to see 

that the signature date was August 2nd, and they certainly knew 

that they were revising it, making comments on it way past August 

2nd. So in that case they certainly should have been aware. 

Mr. DENHAM. So did legal counsel have final sign-off on the contract? 

Mr. KOTZ. Yes. 

Mr. DENHAM. And they had an opportunity to look at the contract earlier but not a complete document? 

Mr. KOTZ. What we are talking about here is the justification 

and approval, just to be clear. The letter contracts they also were 

involved in, but the document that was backdated was the justification and approval. But, yes, they had legal clearance over that document as well as the actual contract. 

Mr. DENHAM. So are you saying then they saw the sole-source 

contract—which the sole-source contract is only determined by the 

date of the signature page. They saw the sole-source contract without the signature page? How is it a sole-source contract if it doesn’t 

have a signature page? That’s my question. 

Mr. KOTZ. Right. It was a sole-source justification. It had a signature page. The document was sent around to various people 

through email requesting comments on the actual document. But 

the email version that was sent around didn’t have the signatures 

on it. They were revising the substance of the document. But they 

should have seen at the end that, once the document was finalized, 

it was dated a month before they had made comments. 

Mr. DENHAM. In a sole-source contract, the date is probably the 

most critical part, is it not? 

Mr. KOTZ. It is certainly a very important part, yes. 

Mr. DENHAM. OK. So they did have an opportunity to look at 

that contract, but the date was not on there. 

Mr. KOTZ. Right. 

Mr. DENHAM. So you can’t justify a sole-source contract without 

that date. 

Mr. KOTZ. Right. 

Ms. NORTON. Mr. Chairman, I would say the justification—the 

date is very troubling, particularly for counsel when you underVerDate Aug 31 2005 10:36 Jan 17, 2012 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 P:\HEARINGS\112\ED\7-6-11~1\67285.TXT JEAN
16 

stand his responsibility. But even more troubling are explicit Government regulations on when a sole-source contract can be entered 

into. 

I’ve been on this committee ever since I’ve been in Congress. I 

have never seen a sole-source contract. When people come to us for 

sole source, the only thing I have seen possible to do is, if someone 

wants to do a win-win, we build something for the Federal Government; in return, the Federal Government gets something. 

You can call that a sole source if you want to, but there is not 

even discussion when there is a sole-source contract. So you would 

have to have such justification for it. And if the justification was 

we can’t find any more space, that would not be enough justification. That would not—we can’t find any other space, that would— 

then they would say, you better look in the region. They would say, 

you better look outside of the Washington. But you cannot tell us 

there is not one other building. You better divide them up. Because 

the Government does not do sole-source contracts. 

Yes, the backdating, the date raises very serious problems. My 

problems start with the moment you know you are doing a lease, 

you get out your little book; and the little book tells you what the 

rules of the Federal Government are in doing a lease. Once you get 

to sole source, then of course you have got the biggest, reddest flag 

of all. 

So while I see that there were multiple people involved, I am 

more shocked that counsel would have had anything to do with this 

matter; and it only tells me that there’s nobody in the Agency—in 

an agency which does not have this as its mission to check, to see 

whether or not the mission is being carried out according to law. 

Ms. Schapiro, did you have something to say? 

Mr. DENHAM. Before you respond, we’re going to move to Mr. 

Hanna and come back. 

Mr. Hanna. 

Mr. HANNA. Chairman Schapiro, I have a question that—the 

space is rented out, is about to be rented out fully. The 10-year period, $500 million—are the current tenants and the anticipated 

tenant, how much of that will they cover? And, also, what do you 

expect your organization and the American public to have to pay 

into this that is associated with this mistake? 

Ms. SCHAPIRO. Thank you, Congressman. 

My understanding is that the two agencies that have taken the 

two-thirds of space, that has already been released by the SEC, 

and the SEC is now held harmless for that. We received a release 

from the landlord for that space. They are paying, actually, I think 

a little bit more in rent than the SEC was going to pay. So that 

is covered for two-thirds of the space. 

The final one-third of the space is that which we’re working with 

GSA to find other tenants for; and my understanding is that GSA 

is optimistic that we will be able to do that before rent is due on 

that space, which is not until the first quarter of 2013. So we’re not 

across the finish line on this yet, but we are working extremely 

hard and extremely well with GSA and their tremendous expertise 

and capability to get this space entirely into the hands of tenants 

who can use it and use it in the timeframe in which it is available. 

Mr. HANNA. So do you have a number of dollars in your mind? 

17 

Ms. SCHAPIRO. I don’t believe—and, of course, these things play 

out over time. I don’t believe the SEC will ultimately be responsible 

for any costs, other than those that have already—the $415,000 I 

referenced earlier in response to Congresswoman Norton, other 

than that. 

As I said, we were released on the two-thirds space that have already been relet to other tenants and at a higher rate and for a 

longer term. So we believe, again, that we will not be responsible 

for additional costs. But I certainly could not guarantee that. It will 

be my goal to achieve that as best we can, but we’ll have to see 

over time. But our best guess is we should be OK on that. 

Mr. HANNA. Thank you. I yield back. 

Mr. DENHAM. Thank you. 

Chairman Schapiro, the 900,000 square feet that was under 

lease, you have that broken up how now of different tenants that 

are willing to take that space? 

Ms. SCHAPIRO. Two-thirds—and I can get for you the exact 

amount for each of those two agencies—went to the Office of the 

Comptroller of the Currency and the Federal Housing Finance 

Agency. They are two self-funded agencies. And they took twothirds of that space directly as a result of the SEC having the ability to assign or sublet that space. We gave a release to the landlord, and the landlord in turn released us so that he could deal directly with those two agencies on that space. Those terms of those 

leases are, I believe, 15 years and up to 25 years—15 for both, I’m 

sorry, for both of those. 

Mr. DENHAM. And both of those two agencies have their own 

leasing authority? 

Ms. SCHAPIRO. Yes. 

Mr. DENHAM. Were those two agencies in competition with the 

SEC in the initial bid? 

Ms. SCHAPIRO. No, I don’t believe so. 

Mr. DENHAM. What other Government agencies were? You talked 

about this increased competition that forced you to go out and—— 

Ms. SCHAPIRO. I believe NASA was one, Mr. Chairman. I’m not 

sure about the other. Again, I would be more than happy to get 

that information. 

Mr. DENHAM. How many, approximately, different agencies were 

in competition for such a large space? 

Ms. SCHAPIRO. Two, I believe. Again, I would be happy to confirm 

that for you. 

Mr. DENHAM. So these two, the Comptroller and the Federal Finance Agency, took 600,000 square feet, approximately? 

Ms. SCHAPIRO. Yes. 

Mr. DENHAM. The other 300,000 square feet the SEC is still on 

the hook for, but you—— 

Ms. SCHAPIRO. We are working with the GSA in order to surplus 

that or assign that space to them for them to then use as part of 

their portfolio. And we are told that they have potential tenants 

who have expressed an interest in the space and for whom the timing of that space becoming available works. 

Mr. DENHAM. Another or several Federal agencies that would be 

going through GSA. 

Ms. SCHAPIRO. Yes, and I don’t know who those are. 

18 

Mr. Chairman, I want to make sure I was clear on the budget 

questions you asked me at the beginning. For our request, our authorization request for fiscal year 2011 and 2012 would have supported 380 additional positions in fiscal year 2011 and 800 positions in fiscal year 2012. And I’m not sure if I got you there the 

way I went through it before, but I wanted to make sure that was 

clear. 

After we were on the continuing resolution or it became clear we 

would be on a continuing resolution, in an anomaly request that we 

filed with OMB at the very end of September of last year we reduced—we looked at 523 positions for fiscal year 2011 and reduced 

the fiscal year 2012 number to 525. The reason the fiscal year 2011 

number went up from 380 to 523 was that, in the interim, the 

House and Senate Appropriations Committees had in fact approved 

a higher appropriation for the SEC for fiscal year 2011 that would 

have supported that 523 positions—I’m sorry. It was the OMB request in September. 

The reason I think it is important is that my assumption was 

that the executive director’s office was basing leasing needs and decisions upon those numbers which total around 1,000 additional positions, not the 2,500 or more that they ultimately used to justify 

the larger space. 

Mr. DENHAM. The executive director Diego Ruiz. 

Ms. SCHAPIRO. Yes. 

Mr. DENHAM. Who is no longer with the Agency? 

Ms. SCHAPIRO. He is on terminal leave, but he has been gone 

from the Agency for the last couple of months. 

Mr. DENHAM. I want to get back to the timeline issue, because 

I think that it’s really important, especially as we’re assessing accountability in this matter. You went—your thought process was 

April-May expanding under just normal circumstances by 550 new 

employees. 

Ms. SCHAPIRO. Under our 2010 appropriation. 

Mr. DENHAM. And you felt you needed 300,000 square feet for a 

percentage of those employees because a percentage of them was 

going to go out to the regions? 

Ms. SCHAPIRO. A large percentage was going to go out to the region, but to be clear, the 300,000 was not just predicated on needing those additional people. That would not by any means justify 

an additional 300,000 square feet. The 300,000 square feet was 

predicated, or should have been predicated, on an expectation of 

achieving the additional employees that were sought under the FY 

2011 and 2012 request, the 1,000 or so additional employees. 

Mr. DENHAM. Something grossly went wrong in June. In June 

you had your meeting to discuss the square footage for those new 

employees under the 2010 budget, and without having a 2011 

budget, just a request, because the 2011 budget didn’t get addressed until after the election; the 2012 budget, which we had 

CRs on, went beyond that; and Dodd-Frank didn’t pass until July 

21st. So at some point without a budget and without a Dodd-Frank 

bill, we were out there negotiating a lease on behalf of the American taxpayers for 900,000 square feet. 

I’m trying to understand the timeline. How did things go so 

wrong in a 1-month period when Dodd-Frank hadn’t even passed? 

19 

I would understand if Dodd-Frank had passed and you said, ‘‘Oh, 

no, we’re going to need a lot of new employees because the President has signed this new bill into place, and we have a new budget 

to pay for that, I’ve got to go out there and ramp up.’’ But this is 

prior to legislation, and this is prior to a budget. I don’t understand 

how in 1 month we could not only go out and secure the space, but 

do it over a weekend and do a sole-source contract. 

Ms. SCHAPIRO. Mr. Chairman, I don’t disagree that this was done 

in an anticipatory way that—and should not have been done that 

way. I think part of what was going on is that we did try to protect 

ourselves to some extent with the right to assign or sublet the 

space that was built in. 

I also—I also believe that we were—— 

Mr. DENHAM. Was there a cancellation clause? 

Ms. SCHAPIRO. No, there was not a cancellation clause, just—— 

Mr. DENHAM. Because that’s normally what we put into a contract to protect the taxpayers. 

Ms. SCHAPIRO. And I think it would be a great idea, frankly. I’m 

not sure that it’s possible. I’ve been told that such clauses are incompatible with a long-term lease such as this, and that GSA, in 

fact, doesn’t typically include them is what I understand from GSA. 

But I will agree with you that it would have been a very good thing 

to have in this lease; that if there were not an appropriation, the 

SEC would not be obligated under the contract. 

Mr. DENHAM. Mr. Kotz, is it customary to have a—such a clause? 

Mr. KOTZ. Yeah, I don’t know how customary it is. I mean, I 

think what happened in this instance was they didn’t specifically 

even request the cancellation clause. We were told that they didn’t 

because the landlord would never agree to it. We also asked that 

they would have a clause in there that would have the payment dependent upon appropriations. So if the appropriation came through, 

they would have to pay. If the appropriation didn’t come through, 

they wouldn’t have to pay. But they never even raised that with 

the landlord. Part of the problem was they—it wasn’t a very serious negotiation. They felt that they had no leverage because they 

wanted that space so much. 

So I don’t know that I can say that it’s customary, but I do think 

that the process they went forward in that case was such that they 

didn’t really negotiate hard on behalf of the SEC. They allowed 

whatever terms the landlord could dictate, and the landlord certainly would have been happy not to agree to a cancellation charge, 

cancellation clause because that wouldn’t have been in his interest. 

Ms. SCHAPIRO. Mr. Chairman, just—I’m sorry. 

Mr. DENHAM. My time has expired. 

Mr. Fleischmann. 

Mr. FLEISCHMANN. Thank you, Mr. Chairman. I’ve got a few 

questions. This is very concerning to me, of course. A few issues. 

It appears to me that the Agency is attempting to mitigate the 

damages after the fact. Is the same Office of General Counsel that 

was allegedly responsible for reviewing these documents overseeing 

this mitigation process, Mr. Kotz? 

Mr. KOTZ. I believe the—I don’t know how involved the Office of 

General Counsel is in the mitigation process, but I—it’s the same. 

20 

There is only one Office of General Counsel. I don’t know whether 

it’s the same individual lawyers or not, but it’s the same office. 

Mr. FLEISCHMANN. OK. 

Ms. SCHAPIRO. Congressman, if I could just add to that. If he— 

in terms of the mitigation process, you mean releasing the space 

to GSA and working on the memorandum of understanding to offload all of our leasing responsibilities to them. I personally have 

met with the GSA Administrator. There are staff from the Office 

of the General Counsel, but also from our new Chief Operating Officer’s office deeply involved in this, and I am personally involved 

in it. So we are very—and obviously GSA is deeply committed to 

the process as well, so there are a number of people who are involved in pushing these initiatives forward. 

Mr. FLEISCHMANN. Then is it fair, Chairman, to assume then 

that this lease has a sublease provision so that you can, in fact, go 

ahead and sublease legally binding to other Government agencies? 

Ms. SCHAPIRO. Yes. My understanding is that we have the right 

to assign or to sublease the space, and, in fact, two-thirds of it 

have, in fact, been leased to other agencies. 

Mr. FLEISCHMANN. OK. In terms of the contract, we talked— 

chairman talked about a cancellation clause. Was there any form 

of a liquidated damage clause? And what I mean by a liquidated 

damage clause is a prearranged penalty in the contract. 

Ms. SCHAPIRO. I understand that there wasn’t. 

Mr. FLEISCHMANN. OK. Going forward, so that this problem 

hopefully would never occur again, what—Mr. Kotz, what has been 

put in place to ensure that the next time the Agency has a contract, a lease or something, that counsel is sat down at the table 

without just perhaps just sending it out across emails, to sit down 

and make sure that counsel actually sits down and approves and 

advises the Agency? Has that been put in place now? 

Mr. KOTZ. Well, I mean, I believe with respect to leasing, the 

plan is to have all the leasing functions go to GSA. So with respect 

to leasing, the Office of General Counsel wouldn’t be involved anymore, it would be GSA and their Office of General Counsel. 

Mr. FLEISCHMANN. OK. What, then, specifically safeguards have 

you sought to put in place to avoid a situation like this happening 

again? 

Ms. SCHAPIRO. If I may, there are a number of things we have 

done immediately in response. One is to provide the GSA with a 

memorandum of understanding that would shift responsibility for 

all aspects, from requirements to awarding of leases, to the GSA 

on behalf of the SEC. We will not enter into any lease without the 

GSA having taken care of the entire process for us. 

I have revoked the delegations of authority that existed to the 

Executive Director and from the Executive Director to other employees for the ability to enter into any leases, so those would not 

be possible to go forward. We have engaged Booz Allen and Hamilton to come in and do a complete assessment of our entire Office 

of Administrative Services, including its structure, its decisionmaking processes, its quality controls, the level of staffing, the 

skills of the staff, what are our cost-reduction opportunities, what 

are our process-improvement opportunities, are we in compliance 

with the regulations, and that work is ongoing as well. 

21 

As I mentioned earlier, the disciplinary process with respect to 

the specific employees who are named by the IG is well under way, 

and we are creating at our chief operating officer level an executive 

steering committee on facilities management oversight, so the decisionmaking cannot be made by one person. 

But, again, most importantly—and we’re implementing new policies and procedures around leasing, but most importantly, authority has been revoked from staff to enter into any real property 

leases. 

Mr. FLEISCHMANN. Thank you, Mr. Chairman. I yield back. 

Mr. DENHAM. Thank you, and I would also announce that Ranking Member Norton had to go to the floor. We’re going to continue 

on, going back and forth through a couple of more rounds of questioning. 

I wanted to get back to the issue of typical clauses, because it’s 

my understanding that a cancellation clause and a clause that’s 

subject to appropriation are both normal and customary, both from 

GSA as well as other agencies. It’s also my understanding that 

your staff did approach the landlord or the building owner with 

these two requests, and he denied them. Are you aware of that? 

Ms. SCHAPIRO. I am not aware of that. And, Mr. Chairman, you 

are far more expert in this than I am, so if those clauses are, in 

fact, typical, I would defer to your judgment on that. 

My understanding had been that they weren’t typical in longterm real property leases, but they ought to be. It seems like a reasonable way to protect the taxpayer, and, again, it’s another reason 

I think why the SEC and the taxpayer will be well served by the 

GSA having this responsibility for this Agency and not keeping it 

in house. 

Mr. DENHAM. And you’ve recognized the fact that, as chairman, 

you’re going to oversee the core function of the SEC, and that leasing authority should be something that goes back to the GSA. My 

concern is you may not always be chairman. future chairmen, future Presidents who appoint future chairmen, you may have a 

chairman that wants to have the leasing authority back again. 

In our bill, the Civilian Realignment Properties Act, we actually 

pull the leasing authority not only from the SEC, but several other 

agencies. For the future, do you foresee the SEC ever needing leasing authority back again beyond your chairmanship? 

Ms. SCHAPIRO. Mr. Chairman, from my perspective, I don’t see 

a reason for the SEC to have that authority. There may be reasons 

for other agencies that I wouldn’t begin to be able to speak to, but 

I don’t see the need for the SEC. And frankly, I do see a benefit 

for the GSA to have a larger, broader, more flexible portfolio that 

they’re able to obtain by having more agencies underneath their responsibility, and it gives them the flexibility with the space that 

they have to allocate it among multiple agencies, which I think perhaps provides us, them also, with more market power when they’re 

negotiating leases. So from my perspective, and from the perspective of the SEC, at this time, as I’m chairing it, I don’t see the need 

for the SEC to maintain this authority. 

Mr. DENHAM. Thank you. 

We will be requesting further information on the lease itself. We 

will be working with GSA on that as well. We want to make sure 

22 

that the taxpayer, indeed, does not have to pay for the cost of this 

lease, but I also want to follow up on the disciplinary action. 

Diego Ruiz, you said, the Executive Director, is on terminal 

leave? 

Ms. SCHAPIRO. Yes, that’s right. 

Mr. DENHAM. How do you define ‘‘terminal leave’’? 

Ms. SCHAPIRO. He resigned from the Agency and, I believe, is 

using up accrued annual leave, as is permitted under the Government rules, but he is not in the office. He’s not in our facility. He 

has no responsibility. In fact, I immediately reassigned all of his 

direct reports to the new Chief Operating Officer, and we’re in the 

process of eliminating the Executive Director position and combining it all under the Chief Operating Officer. 

Mr. DENHAM. And your Chief of Staff, I assume, sat in on a number of these meetings. Is there any responsibility of your Chief of 

Staff on this matter? 

Ms. SCHAPIRO. No, I don’t believe so. I mean, my Chief of Staff 

and Deputy Chief of Staff both were in some of the meetings. They 

were not provided with more accurate information than I was, unfortunately, or they would have noticed, I think, what was going 

on, but I don’t believe they bear any responsibility. 

Mr. DENHAM. And both your Chief of Staff and your Deputy 

Chief of Staff are both still with you? 

Ms. SCHAPIRO. The Deputy Chief of Staff left a month or so ago, 

and the Chief of Staff is still there. And let me just add, she left 

completely unrelated to this issue or any other issue. 

Mr. DENHAM. And the five signers on the document themselves? 

Ms. SCHAPIRO. I’m—I don’t know off the top of my head who the 

signers were. I mean, I focused more on the employees in terms of 

those identified by the inspector general in his report to be considered for disciplinary action, and to the extent, as you and I have 

discussed, those people are still there, the review is ongoing to follow up on the IG’s report. And in the meantime the three critical 

people have been reassigned and are no longer responsible for any 

leasing activity, but also are not in positions to commit or bind the 

Agency in any way on any contract. 

Mr. DENHAM. And who are the three individuals? 

Ms. SCHAPIRO. Sharon Sheehan, who is the Associate Executive 

Director and the head of the Office of Administrative Services; Mr. 

Branch, who is the Support Services Manager; and Miss Sudhoff, 

who was the competition specialist. I believe those were the three 

who were particularly highlighted by the IG. 

Mr. DENHAM. And, Mr. Kotz, you identified these three people? 

Were these the only three people that you identified? 

Mr. KOTZ. Those are the three people we specifically identified 

for disciplinary action in the report, yes. 

Ms. SCHAPIRO. I believe, Mr. Chairman, as you and I discussed 

briefly yesterday, we will not turn a blind eye. If there are other 

issues with respect to other employee conduct that comes up in the 

course of this review, obviously we’ll take appropriate action. 

Mr. DENHAM. Mr. Ruiz, was he identified as well for disciplinary 

action? 

Mr. KOTZ. By that point he had resigned from the Agency. 

Mr. DENHAM. He had resigned, OK. 

23 

And how about Wendy Liebl? Liebl? 

Mr. KOTZ. Right. She was gone also by that point. 

Mr. DENHAM. Would you have named those two? 

Mr. KOTZ. Yes. 

Mr. DENHAM. What about Kayla Gillian? 

Mr. KOTZ. No, we wouldn’t have named her. 

Mr. DENHAM. OK. So just those five? 

Mr. KOTZ. Right. 

Mr. DENHAM. And of those five, how many more signers on the 

contract? 

Mr. KOTZ. I believe the three people signed the contract: 

Sheehan, Sudhoff, and Liebl. 

Mr. DENHAM. And what was that? 

Ms. SCHAPIRO. Branch and Liebl as well. 

Mr. KOTZ. Yeah, Branch and Liebl. So those were—— 

Mr. DENHAM. So everybody you’ve named all signed the contract? 

Mr. KOTZ. Yes. It was—just to be clear, it was a justification and 

approval, not specifically a contract per se. But, yes, it was the document that demonstrated the sole-source nature. 

Mr. DENHAM. Do we know when any of these or when each of 

these had actually signed the contract? 

Mr. KOTZ. Yes. The justification and approval was—they were all 

dated August 2nd. There were several that were signed early in 

August. Then there was that one that Linda Sudhoff signed on August 31st, although initially it was dated August 27th, and then 

the 7 was whited out so made to look like it was August 2nd, but 

it was actually signed on August 31st. 

Mr. DENHAM. Thank you. 

Mr. Hanna? 

Mr. HANNA. What would your—either person—what would your 

expectation be in terms of the nature of disciplinary action, and in 

your own words, what would you describe their malfeasance or misconduct to be? 

Ms. SCHAPIRO. Congressman, I think it’s really important that 

we let the disciplinary process go through without commenting or 

prejudging the information. And as I said, I’m very committed to 

us getting this completed very quickly so that the Agency can move 

on with their—with the transition to the GSA and the reorganization that will be necessary in the Office of Administrative Services. 

And I just—I guess I hate to prejudge any individual’s conduct. 

Mr. HANNA. Thank you. I yield back. 

Mr. DENHAM. Thank you. 

I’m having a hard time understanding who else should be held 

accountable on this issue, and I’m trying to understand your 

thought process on this. You went from 550 people, of which you 

expected a large percentage of those to be in the regional areas. It 

was also—in your statement you said you also wanted them, the 

ones that were going to be located in DC, to be within walking distance of the current SEC building. Now, this 900,000 square feet 

is neither in the region, nor is it within walking distance. 

How do we get to the point where we’re going out to lease this 

building; and, secondly, if you’re in charge, and it was your wish 

to have regional or within walking distance, how did we end up 

with a building that was neither of those and went from 300,000 

24 

square feet to 900,000 square feet? I mean, ultimately if you’re not 

the person to be held accountable, and neither is your Chief of 

Staff, you were both in meetings and both aware of these changes, 

and if your directive was something else than what actually happened, I’m having a hard time understanding—— 

Ms. SCHAPIRO. Well, Mr. Chairman, I am accountable, clearly. I 

will say that I was not fully aware of—I was not aware of these 

changes. I was not aware and nor was I walked through that we’d 

gone from 300,000 to 900,000 square feet. I’ve never even seen the 

Constitution Center space. I did not know that they had selected 

a building that was not within walking distance of the Agency, and 

I certainly didn’t know that my express wish that we move as 

many employees as possible to the regions was not being honored. 

I assumed that the projected space needs—and I didn’t question 

the underlying assumptions—I assumed that they would be routine 

assumptions about the number of square feet per employee that 

are used throughout the Government and so forth. I didn’t question 

those underlying assumptions, but I assumed that they would be 

in line with both our budget assumptions, which had us somewhere 

between 1,000 and 1,100 people over FY 2011 and FY 2012, and 

that the work that was being done was consistent with that. But 

I—at the end of the day, the staff went forward and signed a contract for far more space than was appropriate for the Agency in a 

location that was not ideal for the Agency, and it’s why we’ve 

worked so hard now very quickly, frankly, after this was done to 

undo it. 

Mr. DENHAM. As chair of the SEC, what is your ability to appropriate dollars? 

Ms. SCHAPIRO. I have no ability to appropriate dollars. Congress 

obviously appropriates the funds for us in accordance with the 

budget that we provide to Congress, so that even when we seek to 

move money—— 

Mr. DENHAM. So then what is your spending authority? 

Ms. SCHAPIRO. It is as it is outlined in the budget. So if I could 

give you an example, under Dodd-Frank we’re required to create 

five new offices within the SEC. Four of those require change in 

reporting structure, and in order for us to create those four offices, 

even within the existing budget of the Agency, we have to go to the 

appropriators with a reprogramming request to ask for money to 

be reallocated to create those offices that Congress told us to create. So I’m guided by the budget. 

Mr. DENHAM. So your spending authority ends with the appropriation of Congress, based on what the current fiscal year budget 

is? 

Ms. SCHAPIRO. That’s right. 

Mr. DENHAM. So you went from a 2010 budget, you began negotiating the lease for the 2011 budget, which hadn’t been passed yet, 

and the 2012 budget, which we just passed earlier this year, and— 

I mean—— 

Ms. SCHAPIRO. Congressman—— 

Mr. DENHAM. You can see that this doesn’t make any sense. You 

committed the taxpayers to over half a billion dollars without 

Dodd-Frank passing, without the 2011 budget, without the 2012 

budget. So if you’re not held accountable to any disciplinary action, 

25 

nor is your Chief of Staff, I’m having a hard time understanding 

why the taxpayers are on the hook for half a billion dollars under 

this scenario when the spending authority was not granted. 

Do you have some other type of spending authority outside of the 

budgetary process? 

Ms. SCHAPIRO. No. 

Mr. DENHAM. Does your staff have any other type of spending 

authority? 

Ms. SCHAPIRO. No. The cost for the leases were included in our 

budgets for 2011, $7.2 million, and for 2012 $12.7 million for the 

rental payments. 

Mr. DENHAM. How big is your current—was your 2010 budget? 

Ms. SCHAPIRO. I believe it was $1.1 billion. 

Mr. DENHAM. $1.1 billion. And under that $1.1 billion, the lease 

payment on an annual basis would have been—— 

Ms. SCHAPIRO. Well, in 2011—no rent, in fact, was due until the 

first quarter of 2012, but there was an opportunity because we 

have no year money to prepay, so I believe the budgeted amounts 

for 2011 was $7.2 million. Now, even though that space is gone and 

taken over by the other agencies, we’re still budgeting for rental 

costs for the last 300,000 square feet, although, again, we hope that 

that space will be gone as well. We have not paid any rent to date. 

Mr. DENHAM. I’m getting to the point where I was with your 

CEO—COO last week. I just—I don’t understand—I don’t understand how you can obligate a future Congress on a large expenditure that was not passed. We haven’t passed a budget in how many 

months now? How long has it been since we had a budget? Over 

2 years. 

Ms. SCHAPIRO. But I guess we—I mean, we have lots of space 

now around the country that we pay rent on every year, so we have 

multiyear leasing authority. We have the ability, obviously, to 

enter into long-term leases. That’s generally the most cost-effective 

way for the Government and for the taxpayer, and although we 

don’t—you’re right, we don’t have a budget all the time, we operate 

under continuing resolutions, we do include in our budgeting what 

our lease payments and lease obligations will be for the coming 

year. I’m not sure how else we can go forward and lease space for 

our employees. 

I will say that the question that was raised by the inspector general came up very briefly here about whether we properly exercised 

our independent, multiyear leasing authority and, by doing so, only 

obligate the current-year obligations is in any way a violation of 

the Antideficiency Act, and we have asked GAO for an opinion on 

that. 

Mr. DENHAM. I understand the need for multiyear lease. Obviously we want to utilize multiyear lease to save taxpayers money 

over a long-term period of time. But what you have done and what 

your department has done, what your Agency has done, is take a 

$1.1 billion budget and increase that by 20 percent on an annual 

basis based on a budget that was never passed. That’s something 

that’s very different. When you’re basing your budget—when you’re 

going to do a long-term lease, you base it on what your current 

budget analysis is. And I understand that there are several people 

on here that are facing disciplinary action that may have bumped 

26 

up the numbers or guesstimated what the numbers would be, but 

the ultimate sign-off authority on such a huge number, increasing 

your budget by 20 percent, how could you have known, especially 

when Dodd-Frank hadn’t even passed Congress yet? 

Ms. SCHAPIRO. Well, Congressman, it wasn’t presented that way. 

It was—the authority resided with the Executive Director to sign 

the lease and to enter into the lease negotiations, and it was presented in quite a different way, as a very good value for—per rentable square foot, as something we needed to do based on—it turned 

out not to have been based on reasonable budget assumptions, but 

it was represented to me as based on reasonable budget assumptions, and that we reserved the right to assign or sublet the space 

if it was not necessary for the SEC. 

I hear your frustration, and I understand it, and frankly I share 

it, and it’s one reason I believe this Agency, which has not handled 

this authority particularly well over a very long period of time, 

shouldn’t be in this business. 

Mr. DENHAM. I wanted to go back to something you said earlier. 

We were discussing the cancellation clause and appropriation 

clause. I’ve got before me a piece of the testimony that is included 

into Mr. Kotz’s IG report. 

The question was, OK, and did you make a recommendation, 

that meeting with Chairman Schapiro, that the SEC enter into this 

lease for the Constitution Center for 900,000 square feet? 

Yes. 

And so Mary Schapiro verbally approved that recommendation at 

that meeting? 

Answer: Yes. 

OK. Did she ask any questions that you can recall or her staff 

ask any questions that you can recall? 

No, not at that—not that I can recall. 

You’ve seen the transcripts from—— 

Ms. SCHAPIRO. Yes. And, Congressman—— 

Mr. DENHAM. This is from the Executive Director, who’s been reassigned or who has resigned. 

Ms. SCHAPIRO. Right. 

I understood that what we were doing in July was consistent 

with what we had talked about in June. That clearly wasn’t the 

case. He did not walk me through how he got from 300,000 to 

900,000. We did not talk about this being $500 million over 10 

years. We talked about—it was presented to me as an immediate 

emergency and the criticality of going forward. 

Do I wish that I had stopped? 

Mr. DENHAM. Let me stop you there. It was an immediate emergency. Why was it an immediate emergency? 

Ms. SCHAPIRO. Because, as he explained it to me, we had no 

other space options within DC, and if we were going to have any 

growth at all, and based upon our expectations at that time, we 

thought we would have growth, that we had to take this space, or 

we would not—— 

Mr. DENHAM. Why did you expect it? 

Ms. SCHAPIRO. Because Dodd-Frank had passed. We had had lots 

of favorable comments from the appropriators and others with respect to the continued growth in our budget, we had a lot of supVerDate Aug 31 2005 10:36 Jan 17, 2012 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 P:\HEARINGS\112\ED\7-6-11~1\67285.TXT JEAN
27 

port for a reinvigorated and renewed SEC going forward, and our 

budget requests for FY 2011 and FY 2012 suggested to us that we 

would need this space. 

I understand that we made a terrible mistake not waiting for an 

appropriation. I understand that. I think what was also weighing 

heavily on people’s minds at that time was that when an appropriation does come, it takes a long time to get space and to build 

it out and to have it available to house people, and that the Agency 

had been criticized sometimes in the past for not hiring people fast 

enough and bringing them on board. 

Mr. DENHAM. This much criticism? 

Ms. SCHAPIRO. No. This is more than I’ve certainly been used to, 

but I appreciate that it’s constructive and important criticism for 

us to hear. 

Mr. DENHAM. We’ve seen the largest collapse of the real estate 

industry during this time period. No 2011 budget, no 2012 budget. 

I’m having a hard time understanding why it was such an emergency to go out and lease space without a budget, going through 

the type of real estate collapse that we were seeing at the time. I 

just don’t see the emergency. 

Ms. SCHAPIRO. In retrospect, I don’t either, and at the time I relied on the expertise of others that I perhaps should not have relied 

on. 

Mr. DENHAM. I assume that you were following Dodd-Frank very 

closely? 

Ms. SCHAPIRO. Oh, yes. We have responsibility for over 100 new 

rulemakings, 20 studies, and large new areas of responsibility for 

over-the-counter derivatives, hedge funds, credit-rating agencies, 

municipal advisors. We will have thousands of new regulatees and 

trillions of dollars of assets under management for which we will 

have responsibility. 

Mr. DENHAM. When did Dodd-Frank pass out of the House? 

Ms. SCHAPIRO. July—oh, out of the House? It passed—it was 

signed by the President on July 21st. I’m going to guess a couple 

of weeks before that. I don’t remember the exact date. 

Mr. DENHAM. Mr. Hanna? 

Mr. HANNA. Thank you, Chairman. 

With all due respect, ma’am, what do you regard your own culpability to be in this matter? 

Ms. SCHAPIRO. I am ultimately responsible for the operations of 

the Agency, and the Agency made a terrible mistake here and entered into a lease that was not fully justified, on a sole-source basis 

that was not fully justified, and indeed was based upon inflated 

numbers. And I view myself as being ultimately responsible and 

also responsible for mitigating the consequences of that to the 

greatest extent possible. And those are the steps that we’ve taken 

are to mitigate it, to turn over this responsibility to the GSA, and 

to offload, as we have, two-thirds of that space and the last third 

in partnership with GSA as quickly as we can. My goal is to make 

sure the taxpayers are not on the hook for this. 

Mr. HANNA. Thank you for that. And I think you’ve taken considerable steps in that direction. 

Ms. SCHAPIRO. Thank you. 

Mr. HANNA. Yes, ma’am. 

28 

I yield back. 

Mr. DENHAM. Mr. Kotz, is there any further testimony that you 

would like to add to this as far as the IG? 

Mr. KOTZ. The only thing I would mention is there’s been a lot 

of discussion about justifications and approvals for no competition, 

and our office is planning to conduct an audit of additional justifications and approvals that the Agency has entered into where 

there’s been no competition to determine that that was done appropriately, given the justifications that we found—— 

Mr. DENHAM. Specifically within the SEC? 

Mr. KOTZ. Right. 

Mr. DENHAM. And, Mr. Kotz, in your opinion, the five individuals 

that signed the contract, that changed the dates, or the one date 

that was changed and the other four that were backdated, is that 

of criminal nature? 

Mr. KOTZ. Yes. We have actually referred that matter to the Department of Justice Public Integrity Section. We’ve had conversations with them about that matter, and we will follow up with the 

Department of Justice as they see fit with respect to any criminal 

liability. 

Mr. DENHAM. And where are they in that process; do you know? 

Mr. KOTZ. They’ve asked for the relevant documents. We’ve provided them to them, and they are making determinations. 

Mr. DENHAM. How long does that normally take? 

Mr. KOTZ. They told us that they would get back to us relatively 

shortly. We haven’t heard back from them yet, but it shouldn’t take 

very long. Obviously if they decide to take the matter and bring a 

prosecution, that would take a significant amount of time, but it 

shouldn’t take very long for them to determine whether to undertake an action. 

Mr. DENHAM. When did you take it to the DOJ? 

Mr. KOTZ. In the last few weeks. 

Mr. DENHAM. Few weeks. Is that shortly in Government terms? 

Mr. KOTZ. No, no, we previously sent it to DOJ in the last few 

weeks. 

Mr. DENHAM. But you said you expect to hear back from them 

shortly. 

Mr. KOTZ. Oh, yes, yes, yes. Certainly in the next couple weeks 

I would think we would hear back from them. They have indicated 

to us that we would have already heard back. We haven’t heard 

back yet, but it should be, I would think, in the next couple weeks, 

yes. 

Mr. DENHAM. So is DOJ conducting an investigation? 

Mr. KOTZ. Yeah. They’re looking at the information we have, and 

they’re going to make a determination whether they want to then 

bring a criminal action or at least initiate an investigation to bring 

a criminal action. We would then cooperate with them, and then 

the action would go forward. 

Mr. DENHAM. Thank you. 

Chairman Schapiro, do you have anything else to add to the testimony today? 

Ms. SCHAPIRO. No. 

29 

Mr. DENHAM. I would like to follow up one more time on the leasing authority itself. Do you think the leasing authority should go 

where? 

Ms. SCHAPIRO. To the GSA. 

Mr. DENHAM. And in the future should the leasing authority ever 

come back to the SEC? 

Ms. SCHAPIRO. I don’t believe so. 

Mr. DENHAM. I will take that as an endorsement of our current 

legislation. 

Any further questions? 

Thank you. Again, I would like to thank you for your testimony 

today. We’re going to be following up with questions for the record, 

and I would ask that you provide your responses in a timely manner to the subcommittee. 

I would ask unanimous consent that the record of today’s hearing 

remain open until such time as our witnesses have provided answers to any questions that may be submitted to them in writing, 

and unanimous consent that the record remain open for 15 days for 

any additional comments and information submitted by Members 

or witnesses to be included in the record of today’s hearing. Without objection, so ordered. 

Mr. DENHAM. This concludes today’s hearing on the SEC. Thank 

you. 

[Whereupon, at 3:52 p.m., the subcommittee was adjourned.] 

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