VOL. 124 | NO. 179 | Friday, September 11, 2009
Congress Probing SEC's Madoff Failure
MARCY GORDON | AP Business Writer
WASHINGTON (AP) - Congress is reopening its inquiry into the U.S. Securities and Exchange Commission's failure to detect the multibillion-dollar fraud conducted for more than a decade by Bernard Madoff, this time seeking answers from the agency watchdog and potential lessons for lawmakers in crafting new financial rules.
The Senate Banking Committee is scheduled to hear testimony Thursday from David Kotz, the SEC inspector general, who revealed in a detailed report last week how the agency bungled five investigations of Madoff's business between June 1992 and last December, when the disgraced financier confessed.
During that time span, the SEC received six "substantive complaints that raised significant red flags" regarding Madoff's operations, according to Kotz's report. But "a thorough and competent investigation or examination was never performed."
The report cited no evidence of improper ties between agency officials and Madoff, nor of senior SEC officials trying to influence the agency's probes of Madoff, who was a prominent Wall Street figure.
But it does paint a grim picture of an agency hobbled by incompetence. Its failure to pursue the most obvious leads, disputes among inspection staffers and lack of communication among SEC offices cleared the way for Madoff to continue for 16 years what could be the biggest Ponzi scheme in U.S. history.
Providing further embarrassment for the SEC, Massachusetts Secretary of State William Galvin on Wednesday released a transcript of a 2005 telephone call during which Madoff coached a potential witness about fooling federal regulators, saying "you don't have to be too brilliant" to get away with it.
Galvin's office reached an $8 million settlement this week with New York-based Fairfield Greenwich Advisors, a Madoff feeder fund, to fully refund state investors burned by Madoff.
According to the transcript, Madoff dismissed an SEC investigation as a "fishing expedition" and highlighted how investigators develop cozy relationships with firms they are supposed to regulate.
"The guys ... ask a zillion different questions and we look at them sometimes and we laugh, and we say are you guys writing a book?" Madoff said. "These guys they work for five years at the commission then they become a compliance manager at a hedge fund now."
Madoff, who pleaded guilty in March, is serving a 150-year sentence in federal prison in North Carolina for a pyramid scheme that destroyed thousands of people's life savings, wrecked charities and gave the financial system another big jolt. The legions of investors who lost money included Hollywood celebrities, ordinary people and famous names in business and sports – as well as big hedge funds, international banks and charitable foundations worldwide.
Banking Committee Chairman Christopher Dodd, D-Conn., who affirmed Wednesday that he will remain chairman of the panel rather than assume the gavel of the Health, Education, Labor and Pensions Committee following the death of Sen. Edward Kennedy, said last week that Kotz's testimony will "guide us as we continue our work on a bill to modernize financial regulations."
Also scheduled to testify is Harry Markopolos, the fraud investigator and former securities industry official who brought his allegations to the SEC about improprieties in Madoff's business starting in 2000 after determining there was no way Madoff could have been making the consistent returns he claimed. Markopolos repeatedly and specifically raised warnings to SEC staff members in Boston, New York and Washington regarding Madoff's operations.
Two SEC officials are also slated to appear: Enforcement Director Robert Khuzami and John Walsh, the acting director of the agency's Office of Compliance Inspections and Examinations.
SEC Chairman Mary Schapiro, appointed by President Barack Obama, has brought changes to the agency and revamped enforcement efforts. Last week, she said the Madoff scandal "is a failure that we continue to regret, and one that has led us to reform in many ways how we regulate markets and protect investors."
Kotz plans to issue separate audits that will include recommendations for changes in the SEC's enforcement and inspection operations.
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