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Washington white collar defense lawyers are buzzing about an investigation launched by the Securities and Exchange Commission’s internal watchdog into whether the large number of ex-SEC attorneys at a “prominent law firm” made the agency back down in a matter involving the firm.

Which law firm is it? The SEC Inspector General, David Kotz, isn’t saying and his office didn’t return a call to the Center for Public Integrity. But sources outside the agency say the most obvious candidate is WilmerHale, a firm mentioned in an IG report about the SEC’s settlement with Allied Capital, a now-defunct private equity firm accused of overvaluing its investment portfolio.

That January report says that a “former [SEC] enforcement director” at WilmerHale — since identified as William McLucas — came to a meeting on behalf of Allied to help broker a deal with the SEC, a development that changed the tone of the negotiations. McLucas, according to the IG report, played a role in convincing the SEC to drop fraud charges even though an SEC accountant found problems with Allied’s books.

The 76-page report by Inspector General David Kotz doesn’t accuse McLucas of behaving improperly, nor does Kotz say whether the law firm itself is the subject of an investigation.

The new probe by the SEC IG came to light when Sen. Charles Grassley, the top Republican on the Senate Finance Committee, asked Kotz to review the recent departure of Elizabeth King, an associate director in the SEC’s markets division, who left for the high-frequency trading firm Getco LLC. The SEC has paid special notice to high-frequency trading firms since the “flash crash” on May 6, when the Dow Jones Industrial Average fell nearly 1,000 points.

Grassley asked Kotz to investigate King’s departure so Congress “can more accurately assess the integrity of the SEC’s operations.” In a June 15 letter to Grassley, Kotz revealed that he was also investigating the SEC’s revolving door policy, according to the Wall Street Journal, which first reported the story. “[W]e are currently conducting an investigation of allegations very recently brought to our attention that a prominent law firm’s significant ties with the SEC, specifically, the prevalence of SEC attorneys leaving the agency to join this particular law firm, led to the SEC’s failure to take appropriate actions in a matter involving the law firm,” Kotz wrote.

The staffing relationship between the SEC and the community of white collar defense firms is no secret in Washington. Senior SEC officials, particularly those who worked in the enforcement division, can expect to find a home at a private firm and a hefty raise after a few years of government service. Lawyers like George Curtis, who was deputy director of enforcement until he left for Gibson, Dunn & Crutcher, are welcomed with open arms by firms that understand how valuable an insider’s view can be to clients facing an SEC investigation or enforcement action.

WilmerHale, though, is in a class by itself. Some 23 ex-SEC lawyers work there, according to the firm’s web site. McLucas, who chairs the securities group, is the star. He joined in 1998, after holding the agency’s high-profile job of enforcement director for eight years, an eternity by SEC standards. He remains a respected figure at the agency, and, apparently, an intimidating one.

SEC lawyers described Allied Capital as “heavily, heavily armed” at the settlement meeting, according to the IG report. They told the IG that McLucas “gets brought down from on high for certain events. And this was one of them.”

McLucas declined to comment, and a WilmerHale spokesman was not immediately available for comment. An SEC spokesman also declined to comment.

A former SEC lawyer, who asked not to be identified because he has cases before the commission, described McLucas as “highly principled,” and criticized the inspector general for making public an investigation without any evidence of improper conduct.

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