Louise Story and Gretchen Morgenson report that the SEC’s inspector general is referring the David M. Becker case to the Justice Department for possible criminal investigation. That’s a very big deal.

Back in February, Madoff victims’ trustee Irving Picard sued Becker, who was then the SEC’s top lawyer, for $1.5 million in “ill-gotten gains” Becker’s mother bequeathed his family from Madoff investments. Two weeks later Story and Morgenson broke the news that Becker had been intimately involved in critical SEC decisions on the Madoff case, including one where he succesfully argued the commission should reverse a decision. Oddly enough, that reversal benefited Becker and his family.

It looks like Wall Street’s former house “regulator” Mary Schapiro, Obama’s revealing pick as the nation’s top financial cop, has got herself in some trouble:

Ms. Schapiro is mentioned in several parts of the report. In one incident in 2009, Mr. Becker was preparing to testify before a House subcommittee that was holding a hearing on compensation of Madoff victims. After he told an S.E.C. staff member that he would want to disclose his mother’s Madoff investment if he testified, the staff member met with Ms. Schapiro and the pair decided that someone other than Mr. Becker should speak at the hearing.

The report concluded: “The decision that Becker would not serve as a witness was made in large part because he would have disclosed the fact that his mother had held a Madoff account.”

Back when the Times broke its big Becker/Madoff story, I flagged an awfully interesting 2010 exchange between spurned Madoff whistleblower Harry Markopolos and New York Times Magazine’s Deborah Solomon:

(Deborah Solomon) You met last year with Mary Schapiro, the current head of the S.E.C. How did that go?

(Markopolos:) I would say she was coldly polite. Her general counsel, David Becker, did most of the talking. He and I did not get along at all. He was getting ready to come across the coffee table and strangle me.

Becker was the top lawyer at the SEC back in 2000-02 when Markopolos first warned about Madoff’s fraud and came back in 2009 in that role.

Another interesting thing here smacks of what Matt Taibbi exposed in his big Rolling Stone investigation into the SEC destroying preliminary investigation records. The NYT:

One person was William Lenox, the ethics official who reported to Mr. Becker and determined that his work on Madoff-related issues at the commission posed no conflict. Mr. Lenox indicated to Mr. Kotz that he did not keep records of his rulings on employees’ ethics questions because of the sensitive nature of the information that was disclosed to him.

Is that standard practice for ethics officers or is this part of the SEC culture?

At a minimum, what’s clear from this report is that the Becker situation was a stunning ethical lapse, and the SEC’s IG thinks it may be a criminal conflict of interest. Even if it doesn’t rise to the criminal level, the head of the SEC knew about the conflict and tried to keep it from becoming public.

Mary Schapiro has some big problems.

— Further Reading:

The SEC, Tangled Up in Madoff


The Times Ups the Ante on the SEC’s Madoff Mess

Matt Taibbi vs. the SEC. Rolling Stone gets no credit from most of the press for a huge scoop.

Obama’s SEC Pick Under the WSJ Microscope