SEC Faulted on Madoff by Inspector General

From Reuters:

Blistering report faults SEC for Madoff misses
Wed Sep 2, 2009 4:44pm EDT
By Ross Kerber and Rachelle Younglai

BOSTON/WASHINGTON (Reuters) U.S. securities regulators missed "numerous" red flags that may have led to Bernard Madoff's $65 billion Ponzi scheme and never did a "thorough and competent" probe despite complaints dating to 1992, a federal watchdog has concluded.

The U.S. Securities and Exchange Commission's inspector general said in a blistering report that despite five probes into Madoff's activities and catching him in "lies and misrepresentations," the SEC failed to follow up on inconsistencies.

"Despite numerous credible and detailed complaints, the SEC never properly examined or investigated Madoff's trading and never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme." Inspector General David Kotz wrote. The SEC also resisted whistle-blowers' efforts to help, he said.

A summary of the report was released on Wednesday and posted on the SEC's website, here. The full 450-page report is due on Friday.

Kotz said his investigation had not found evidence of improper ties between the SEC and Madoff that interfered with the SEC's examination or investigatory work.

He said he had not found that former SEC Assistant Director Eric Swanson's romantic relationship with Madoff's niece, Shana Madoff, had influenced the SEC's conduct.

Kotz said the SEC's "most egregious" lapse was its failure not to verify Madoff's purported trading with any independent third parties, even after it took testimony from Madoff himself in May 2006.

Madoff later admitted that he thought it was "game over" after testifying to having cleared his trades through the Depository Trust Co, part of the U.S. Federal Reserve, and provided his account number. He said he was "astonished" that the SEC did not follow up.

Kotz quoted one senior-level SEC examiner as saying, "Clearly, if someone ... has a Ponzi and they're stealing money, they're not going to hesitate to lie to create records," and thus "some independent third-party verification" such as through the DTC would be essential.

He also said the SEC made a "surprising discovery" earlier this decade that Madoff's hedge fund business was making far more money than his better known market-making business, but that no one thought this was a "cause for concern."


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