David Kotz, the top watchdog of the Securities and Exchange Commission, is facing mounting criticism over some of the investigative techniques that have won him plaudits on Capitol Hill.

This year, two SEC employees filed formal complaints against Kotz, alleging the 45-year-old inspector general bullied witnesses and twisted facts to build a case against them.

The two employees say Kotz sometimes smears reputations, according to copies of the complaints filed with a government council that monitors the work of 73 federal inspectors general.

One of those employees, Nancy McGinley, an enforcement attorney accused by Kotz in 2009 of possibly using confidential information before trading in shares of Citigroup and Schlumberger, says the Office of the Inspector General engaged in abusive investigative practices. Reuters has confirmed federal prosecutors declined to act on a criminal referral Kotz sent them about McGinley's trading.

In her complaint, a copy of which was reviewed by Reuters, McGinley says Kotz's tactics have caused SEC employees to fear the OIG's false allegations and retaliations.

Current and former SEC employees and outside lawyers say Kotz's quest to uncover waste, fraud and abuse at the nation's top securities agency has gone overboard. They say Kotz's over-zealousness has led some talented lawyers to leave the agency and others to worry about being second-guessed in making decisions about enforcement actions.

Some SEC lawyers have said they are fearful of putting their thoughts into government email, knowing that Kotz's office has made great use of old emails in his investigations.

I believe in an affirmative and aggressive IG, said former SEC Chairman Harvey Pitt, who has defended several SEC employees investigated by Kotz. The process that I am seeing is one that is designed to bully, intimidate and basically make people very fearful.

Kotz dismisses the criticisms as the kind of carping that comes from people working for an organization that is getting looked at closely for the first time in years. He says the allegations in the complaints are false, and he denies doing anything to instill fear in SEC employees.

He noted that the number of formal complaints lodged against him is small given his nearly four-year tenure at the SEC.

In fiscal 2010, 44 complaints were filed against the inspector generals working for the federal government, according to the committee that monitors their work.

I think employees who have dealt with my staff or me personally realize that we are just doing our job, Kotz said. I would say to employees that if you have not done anything wrong, you have no reason to be concerned.

Both of the current SEC employees who filed the recent formal complaints against Kotz declined to comment.

Kotz, a former inspector general at the Peace Corps, came to the agency in late 2007, with little expertise in securities law. But in the wake of the financial crisis, he was quickly thrust into the spotlight, as he was called on to investigate several major enforcement lapses at the agency.

In particular, he and his staff worked to uncover why Bernard Madoff's $65 billion Ponzi scheme went undetected for decades despite numerous red flags and whistleblowers.

Since then he has investigated everything from instances of SEC lawyers watching porn on government computers to allegations of regulators mishandling investigations and abuses of federal contracting rules. In all, Kotz and his team have conducted 144 investigations and 52 audits. Kotz's predecessor completed roughly half the number of investigations over a similar four year period.

To be sure, Kotz's aggressiveness has produced results and he has some fans within the SEC.

His exhaustive 477-page report on Madoff prodded the SEC to be more aggressive in implementing a new database to help track tips from informants. His reports have also led to numerous changes surrounding ethical practices at the agency.

Julie Preuitt, an assistant regional director in the SEC's Fort Worth office, says Kotz is trying to shine a light on an agency that previously had not received intense scrutiny.

But some in the legal community say they believe Kotz has been motivated by a desire to raise his profile so he can get a job with a high-powered law firm. A little over a year ago, a headhunter was circulating his resume to top firms in New York, but there was little interest, legal sources say.

Kotz, a Canadian native who graduated from Cornell Law School in 1990, worked at three different law firms in New York and Washington before moving into a government service job with the U.S. Agency for International Development. He worked for the Peace Corp for nearly five years as an attorney and then an inspector general.

Kotz denies he is a publicity seeker or has interest in moving on to a job with a major law firm.

I enjoy my current position, says the married father of three, whose wife Deborah is a health reporter with the Boston Globe.

TRUMPED UP RETALIATION

Linda Baier, acting branch chief of acquisition policy, is one of Kotz's critics within the agency.

In August, she filed a wide-ranging complaint against Kotz with the Council of Inspectors General on Integrity and Efficiency, or CIGIE, alleging improprieties with audits and investigations into the leasing, contracting and acquisition functions of the agency.

Some of the allegations in her complaint involve other SEC colleagues who she says unfairly became targets of Kotz. She also contends that she too unwittingly became a target of an investigation after she criticized Kotz for not aggressively pursuing allegations against another SEC employee.

According to the complaint, Baier and another staffer told Kotz they felt one of his reports did not go far enough in investigating potential misconduct by an employee in her division. The pair decided to investigate further and their findings ultimately led the agency's human resources department to discipline the employee.

Shortly after that, Baier says Kotz was investigating her activities.

I was told by people who had experienced it firsthand that he does not like anyone disagreeing in any way with his reports. He considers it an insult, Baier wrote. But I didn't heed their warning.

Baier claims that Kotz honed in on a grammatical error she made in an e-mail where she was discussing the kinds of contractors that could be selected for a potential job. She said the error made it appear she had already settled on hiring a certain contractor when in fact she hadn't. She says Kotz tried to get her disciplined, but that her managers decided to take no action.

I made a common mistake, she wrote in her complaint. But I did nothing improper and felt like this was solely trumped up retaliation.

She also alleges that Kotz, on at least two occasions, may have tried to circumvent competitive bidding rules so he could hire certain former colleagues to work in his office .

Kotz in an interview vigorously denied all of Baier's allegations.

The findings of our review were based on substantial evidence showing that competition was limited in order for a particular individual to be selected, he said.

REPUTATION-DAMNING REFERRALS?

In April, enforcement attorney veteran McGinley filed a complaint with CIGIE against Kotz and two other SEC offices after she and another colleague were accused of possible insider-trading in a 2009 investigative report.

When the report became public, their names were redacted, but many juicy details remained, making it easy for their names to get leaked to the press. The matter was widely publicized.

But the Justice Department decided not to prosecute McGinley or her colleague, according to McGinley's lawyer and people familiar with the matter. No one at the SEC, including Kotz, has publicly acknowledged that the entire matter was dropped.

McGinley's complaint details how the SEC's ethics office had assured her there were no problems with her stock trades. The complaint also alleges that Kotz tried to get prosecutors to pursue obstruction of justice charges against her - another referral that her complaint says went nowhere.

In the complaint, she says that Kotz's investigation was a mock process undertaken at taxpayer expense to justify a predetermined finding.

Kotz wouldn't comment on the Justice Department decision, but said his office played no part in leaking McGinley's name to the media. He says his office in general is not responsible for deciding which information from his investigative reports becomes public.

If there has been a criminal referral, I would certainly prefer that the names of the individuals who have been referred not be publicly released, he said.

This is not the first time employees have filed complaints about Kotz. In 2009, Craig Phillips, an auditor who once worked with Kotz, tried to raise concerns about some of the inspector general's audits. But an outside committee that looked into Phillips' allegations rejected them, say two people familiar with the matter.

Mary Schapiro, the SEC's chairman, declined to discuss the controversy surrounding Kotz. Some say Schapiro is in a tough position because any criticism of Kotz might look self-serving, especially with the agency still coming under fire for not being tough enough on Wall Street banks.

With the intense crisis-era debate over financial services regulation, anything that happens at the SEC quickly becomes political, said Stephen J. Crimmins, a former deputy chief litigation counsel in the SEC's enforcement division who now works as a partner at K&L Gates.

(Reporting by Sarah N. Lynch; Editing by Matthew Goldstein, Michael Williams and Chris Kaufman)