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Wednesday, September 2, 2009

Oversight Breakdown

The Madoff Files: A Chronicle of SEC Failure
Over and Over, Agency Skipped 'Basic' Steps to Find Fraud, Report Says
The Washington Post by Zachary A. Goldfarb - September 3, 2009

Washington's top cop for Wall Street, hamstrung by bureaucracy and inexperienced investigators, failed to thoroughly pursue multiple warnings about Bernard L. Madoff's multibillion-dollar Ponzi scheme, according to a scathing new critique of the Securities and Exchange Commission by its internal watchdog. The report, issued Wednesday by the commission's inspector general, offers the first detailed examination of one of the agency's most public embarrassments. It says the SEC received repeated allegations that Madoff was probably cheating investors, including detailed road maps provided by outside businessmen, only to fail to discover the fraud. The SEC opened inquiries five times in a 16-year period. But in each instance, inexperienced officials, at times ignorant of other agency probes into Madoff, took his explanations at face value and did little to verify them. Madoff himself told the inspector general that he was "astonished" that the SEC did not verify whether he was carrying out the billions of dollars of trades he claimed to be making after he supplied the agency with account details. "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," the inspector general, H. David Kotz, concludes in the report. The extensive number of contacts between the SEC and Madoff raises questions about whether the agency is capable of spotting and stopping other financial frauds. The SEC has said it doesn't have the resources necessary to oversee the exploding number of financial firms and can review many of them only once every few years. It became aware of Madoff's fraud only when he confessed to it in December.

The financial crisis has exposed many breakdowns in regulation, but none has involved such a large fraud by a single person. The inspector general's report "makes clear that the agency missed numerous opportunities to discover the fraud," SEC Chairman Mary L. Schapiro said. "It 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." Federal prosecutors say Madoff may have stolen up to $65 billion from his clients. He claimed that he engaged in a highly specialized trading strategy that persistently beat the market, but in fact, he did little trading and instead used proceeds from some investors to pay others. His fraud left thousands of clients, including charities, retirees and celebrities, devastated. Madoff is serving a 150-year sentence in a federal prison in North Carolina. The inspector general's report concludes that the agency's failings were the result of misjudgments but not improprieties. It says that no SEC officials who worked on the review of Madoff's firm had "any financial or other inappropriate connection with Bernard Madoff or the Madoff family that influenced the conduct of their examination or investigative work." The report, in particular, exonerates Eric Swanson, a former SEC official who worked on a Madoff probe and later married Madoff's niece Shana, who was a compliance officer at his firm. The report issued Wednesday is a 22-page executive summary of a 450-page investigation likely to be released later this week. It contains a number of startling anecdotes recounting how the SEC bungled its Madoff probes since the first review in 1992. The inspector general found that SEC officials received detailed warnings but were generally not equipped to capitalize on them.

In May 2003, for instance, the Office of Compliance Inspections and Examinations in Washington received a letter from a well-known hedge-fund manager identifying red flags at Madoff's firm. An SEC supervisor involved in the review called these "indicia of a Ponzi scheme." But it took seven months to launch the probe. One OCIE staffer said that "there was no training" and that "this was a trial by fire kind of job." Agency officials ignored several of the questions in the hedge-fund manager's letter that went to the heart of the fraud and focused on others, because, according to the associate director in charge of the review, "that was the area of expertise for my crew." The team prepared to ask Madoff for detailed information about trades but decided against it. Officials said such information "can be tremendously voluminous and difficult to deal with" and can take "a ton of time" to review.

The Washington office stopped its probe as it shifted resources while public pressure mounted to review the mutual fund industry. At the same time, however, the SEC's New York office, unaware of the Washington probe, began its own review. It uncovered detailed concerns about Madoff's firm in the internal documents of another financial services company that had come under review. SEC officials arrived at Madoff's firm in Midtown Manhattan and learned that he would be their primary contact. He provided them with contradictory information. But when they sought to confront him about it, he said he had already given the information they wanted to investigators in Washington -- which was news to the SEC officials in New York. Shortly thereafter, they concluded their investigation without answering the questions that had spurred the review. In 2005, fraud analyst and onetime Madoff rival Harry Markopolos wrote a detailed letter to the SEC's Boston office warning, "The world's largest hedge fund is a fraud." The Boston office had worked with Markopolos before and found him credible. Boston sent the letter to the SEC's New York office, where officials viewed Markopolos skeptically and did not understand his reasoning, which was based largely on statistics. The team assigned to look into Madoff had little experience reviewing potential Ponzi schemes.

In May 2006, SEC investigators interviewed Madoff, who didn't bring along a lawyer. When asked how he consistently beat the market, he told the investigators, "Some people feel the market," the report recounts. Madoff told the inspector general that he expected to be exposed when he told the investigators that his trading was processed through the Depository Trust Co., an important financial intermediary. He gave the SEC his DTC account number, which they could have used to verify the trades he claimed to have made. "I thought it was the end, game over. Monday morning they'll call DTC, and this will be over," Madoff told the watchdog earlier this year. "And it never happened." The report calls the agency's decision to never verify Madoff's trading "the most egregious failure in the Enforcement investigation." That investigation was closed in August 2006. It took a single phone call to DTC after the Ponzi scheme was exposed in December 2008 to find out that he had not placed any trades with his investors' funds. Concerns about Madoff's firm continued to arrive. In March 2008, the office of then-SEC Chairman Christopher Cox received an e-mail from a source who had contacted the agency several times, urging investigators to look into secret files Madoff maintained on a computer he carried. Cox's aides sent the e-mail to the enforcement division. An enforcement staffer who had worked on the Madoff case replied: "[W]e will not be pursuing the allegations."


Eliot Bernstein said...

More relations between Proskauer Rose and the Madoff Scheme. According to TPM news , in 2004, an SEC attorney, Genevievette Walker-Lightfoot notified the SEC of the possible Madoff Ponzi Scheme but was forced out of her job at the SEC and later the SEC settled a claim against them filed by Lightfoot. Upon termination from the SEC, Lightfoot turned over her report on Madoff to Jacqueline Wood. Wood then buried the report that could have exposed the Ponzi Scheme years earlier and when she left the SEC, Wood took a partnership at, you guessed it, Defendant Proskauer.

Eliot Bernstein said...

According to Bloomberg on January 14, 2009,

The week after Bernard Madoff was charged with running a $50 billion Ponzi scheme, Proskauer Rose, a New York firm of 750 lawyers, offered a telephone briefing on the scandal for its wealthy clients. With only a day’s notice, 1,300 Madoff investors dialed in. ‘This is a financial 9/11 for our clients’, said Proskauer litigation partner Gregg Mashberg, one of the lawyers on the call. ‘People are dying for information.’

Following the client call investigations began into major clients involved in Madoff’s Ponzi, many who originally claimed to be victims, this while the SEC Inspector General recently delivered a stinging report on Madoff harshly criticizing lax regulators for overlooking the Madoff information from whistleblowers and others inside the SEC for years. See,

Anonymous said...

this is lawyers again, knowing no one will properly investigate them even if they are committing felonies to benefit themselves!
self-gratifying governed bastards!

Bern Ye and Made Off!

Anonymous said...

Do the lawyers go to law school just to learn how to stay out of jail themselves, how to scheme scam and cover it all up!

Anonymous said...

Hi suckers. Sorry, the people. It was just a bureaucratic mix-up. there were no high placed politicians pressuring the agency. It certainly wasn't Bush or Schumer. Don't follow the money because neither Schumer or Bush would ever be corrupt. Madoff only gave money to Schumer because of religious affinity. Please you must trust elected officials.

Anonymous said...

Bush or Cheney, the guy who birdshot a lawyer for 15 bucks,
and who got a comp injury moving those boxes..........
most of our elected officials are lawyers.............

Anonymous said...

all it cost to shoot a lawyer is 15 bucks!

Anonymous said...

why does it seem everytime a Democrat takes office, the schemes that had been going on for years while Republicans were in office are exposed.........
does anyone remember the S&L bailout and who was involved....
why does it seem that gas prices went up and we can not produce efficient vehicles while the Republicans hold much of the oil stock..........

Anonymous said...

This is too funny. We now have the SEC's 'top watchdog', the Inspector General issuing a report as to how and why this happened in their agency. HELLO !!!! What was the Inspector General doing while all this was going on? Isn't that one of the main reasons large organizations have Inspector Generals - to make sure everyone is doing their jobs?


Anonymous said...

The acronym "OIG" is the latest government agencies' very important, critical sounding investigatory group...that is in place only to make sure that government corruption is never exposed naked... as it just addresses a little of all government's corruption.... revealing just the crack of their butts of same ...pulling the pants of the evil they thrive within.... just below the view all line.

Whoever thought up that elitist term? Shoot his dictionary!

Anonymous said...

This article on the Report itself is so toned down apparently like the Report itself that it is pure and unadulterated insult to all Americans and more.

Look at Pam Martens article which came out before the Report was released questioning whether the SEC IG would Whitewash the Role of Whiteshoe Law Firms in the SEC problems etc.

Maybe Pam Martens should be the new IG or the People's IG on the SEC. Stop insulting Americans and stop hiding the Truth!

from the Hudson Valley region

Anonymous said...

The Post two items back is a classic. I thoroughly enjoyed it.

Did you happen to read the late SIC's report on consolodating the three 'investigative' agencies, the Integrity Commission and The Inspector General putting them under the control of the SIC? I think that was one of their last reports after being terminated on 3/31/09 by Governor Paterson.

That was after the SIC issued their 'investigative' report on the Tankleff matter that all but exonerated the Suffolk DA, the police, and the courts of any wrongdoing in this case.

That was after they quashed about 10 other complaints made to them about the SCDA, SCPD, and SC Courts, or after Spitzer resigned.

That was after the SIC quashed my complaints against the SCDA and SCPD for wrongdoing and then sent the letter sent to me to the SCDA so that he could post it on his website with my name and address included.

Investigative agencies in NYS are a joke. The Waterfront commission. Wow, the IG suddenly discovered that the WC is an effective tool becuase the ILA runs the agency, not the two states of NJ and NY.

The DDC and CJC are another laugh a minute, that is if you aren't the butt of their jokes.

Anonymous said...

Sometime ago I went to the SEC about what I believed to be documented criminal things involving a bank that is on the stock exchange. The SEC blew me away and it was clear they didn't want to hear anything. They even sent all my original documents back to me so they would have nothing in the record. The SEC is blind in one eye and can't see out of the other and that's the was the powers that be like it.

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