A Securities and Exchange Commission employee is accusing the agency of illegally destroying thousands of files pertaining to formal SEC inquiries into possible wrongdoing on Wall Street.

SEC enforcement lawyer Darcy Flynn alleges the SEC routinely destroyed the files as a matter of internal policy in violation of federal rules, according to a letter last month from Darcy's lawyer to Sen. Charles Grassley (R-Iowa).

Flynn, through his lawyer, says the SEC has trashed 9,000 files since 1993 on so-called "matters under inquiry," including inquiries into possible securities law violations at Goldman Sachs Group Inc. (GS), Lehman Brothers and hedge fund SAC Capital.

All the destroyed files relate to inquiries that were closed after SEC staff decided not to open a formal investigation.

Grassley sent a letter to SEC Chairman Mary Schapiro Wednesday asking her to respond to several questions about Flynn's claims.

"From what I've seen, it looks as if the SEC might have sanctioned some level of case-related document destruction," the senator said in a statement. "It doesn't make sense that an agency responsible for investigations would want to get rid of potential evidence."

SEC Inspector General David Kotz said his office is investigating the matter and will issue a report by the end of September.

Federal agencies are required by law to establish policies for managing their records with the National Archives and Records Administration. The SEC for years directed its employees to destroy all documents connected to matters under inquiry that never progressed to formal investigations. Last year, Flynn raised concerns with the archives office about the SEC's policy. The SEC subsequently backed off from instructing staff to dispose all documents collected during inquiries.

"Not every document that comes into an agency's possession in the course of its work meets the definition of a record covered by the retention requirements," SEC spokesman John Nester said. He added the SEC keeps track of all its inquiries, including what staff looked at, the reason why the inquiry was closed and a description of any documents collected.

A spokeswoman from the archives office didn't respond to a request for comment.

Formal SEC inquiries into potential securities law violations typically are either closed or ramped up into full investigations within days or weeks, according to people familiar with them. Files on such inquiries, therefore, don't usually contain a lot of important information, the people said.

Flynn, a 13-year SEC veteran, alleges that one of the destroyed files related to an inquiry into possible financial fraud at Lehman Brothers in 2002 and insider trading at the now-defunct bank in 2005. Other destroyed files concerned possible insider trading of credit default swaps at Goldman Sachs in 2009 and possible insider trading and currency manipulation at SAC Capital in 2006 and 2010, respectively.

Spokesmen for Goldman and SAC Capital declined to comment. A spokesman from Lehman didn't respond to a request for comment.

-By Liz Moyer and Jessica Holzer, Dow Jones Newswires; 212-416-2512; liz.moyer@dowjones.com

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