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Watchdog finds SEC did not properly vet contractors

By Sarah N. Lynch

WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission failed to properly investigate the possible criminal backgrounds of up to 70 contractors, including one who later assaulted his girlfriend, the agency's watchdog found in a previously unreleased investigative report.

In his semi-annual report to Congress last fall, the SEC's then-interim inspector general, Jon Rymer, noted the assault that took place at the agency's headquarters, and hinted that there were other contractors with possible criminal records on page 30 of his 54-page summary.

A redacted copy of Rymer's investigative report was obtained by Reuters last week through a Freedom of Information Act request, and revealed more about the scope of the SEC's contractor-vetting problems.

The report faulted the SEC for providing a preclearance waiver to the unnamed enforcement division contractor who assaulted his girlfriend. The preclearance waiver granted him full access to the building and information technology systems for several years.

Preclearance waivers are sometimes issued to contractors to allow them to start working before a full background check is completed. The report did not include details about the contractor's prior criminal record.

It also found that 40 to 70 other contractors at the SEC may also have had criminal pasts, and that the SEC did not take the proper steps to weigh all of the facts about their backgrounds to make sure they could work for the agency and did not pose a security threat.

It was unclear from the report whether any of those contractors had criminal backgrounds, and whether they committed minor offenses and misdemeanors or felonies.

Contractor vetting is critical at the SEC, which handles reams of sensitive proprietary information from publicly traded companies and other financial firms.

The issue of contractors in general has recently gained attention in Washington after Edward Snowden, a Booz Allen Hamilton employee who served as a contractor at a National Security Agency facility, leaked highly classified intelligence details.

SEC spokesman John Nester said the agency has implemented numerous changes since the report was completed, from installing additional physical security barriers to putting the SEC's security staff in charge of criminal background checks instead of human resources.

A criminal background does not automatically disqualify someone from federal service. Federal guidelines call for several factors to be weighed, including the seriousness of the act, how long ago it occurred, and the age of the person at the time the conduct occurred.

The other contractors with potential criminal pasts have since gone through a more vigorous review and met the proper guidelines, Nester said.

"The issues have been resolved to the (Office of the Inspector General's) satisfaction," Nester said.

The inspector general said the contractor highlighted in the report was removed from federal service.

Republican Senator Charles Grassley of Iowa said the watchdog report sheds light on an area of the SEC that Congress should oversee more closely.

"The SEC controls sensitive information that it has to secure from convicted criminals and non-employees walking in off the street," Grassley said.

INTERNAL COMPLAINT

The allegations about the enforcement contractor came to light last year, after David Weber, a former top investigator in the inspector general's office, began a probe into whether the SEC's security personnel had mishandled the matter and failed to report it to law enforcement.

The SEC suspended and later fired Weber after employees complained he wanted to arm himself and other staff in the inspector general's office.

He filed a lawsuit alleging he had been fired for blowing the whistle on misconduct he had uncovered. Weber reached a $580,000 settlement with the SEC in June.

In his lawsuit, he discusses the issues with the contractor and the flaws in the SEC's hiring and vetting process.

"Despite this criminal background, the contractor had been permitted to work with the SEC's most sensitive enforcement data as an enforcement forensic IT contractor for years," Weber said.

The watchdog's report redacts the name of the contractor and the details of his criminal record, though Weber's lawsuit says he was on an early parole release from a 10-year prison sentence for drug distribution.

The report says that on January 11, 2012, at 8:41 p.m., the contractor gave his girlfriend improper access to the building by swiping his card to let her inside without registering her.

A few hours later, a security camera caught the contractor and his girlfriend engaging in a pushing fight until she broke away and ducked under a turnstile, setting off an alarm, the report said.

(Reporting by Sarah N. Lynch; Editing by Karey Van Hall, Richard Chang and Leslie Gevirtz)

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