The SEC issued a statement on Tuesday night, saying that it had missed repeated opportunities to discover the Madoff fraud that has resulted in the disappearance of many billions of dollars.
The SEC went on to say that it had received "credible" allegations of wrong-doing at the firm many years ago, but that they had failed to properly act. The Securities and Exchange Commission said that they will be opening up an internal investigation to figure out why the agency hadn't investigated Madoff and his firm more "aggressively".
Christopher Cox, chairman of the SEC, said that "our initial findings have been deeply troubling" and that he is "gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point seek formal authority to pursue them".
Cox also went on to say that the commission will be investigating SEC staff to see if there were any improper relationships or contacts with the Madoff firm that may have prevented a full-fledged investigation from taking place.
This is obviously a huge black-eye for the SEC and undermines their already shaky credibility. Former SEC Chairman Arthur Levitt said that the monitoring system is "broken and needs to be fixed". He points out that the "system is obviously flawed" and that "it's got to be rethought in terms of how investors can be protected".
Bernard Madoff was arrested about a week ago after admitting to key employees of his firm that he had been perpetrating a massive "Ponzi scheme" that may result in the loss of up to $50 billion dollars of investor capital. The house of cards finally came crashing down when investors moved to pull $7 billion dollars worth of capital out of the firm - capital that the firm simply didn't have. Madoff was using new investor capital to pay off older investors, and when new capital stopped flowing in and investor redemptions picked up, Madoff was forced to reveal the fraud.
Many banks, hedge funds and individual investors have been stung by this fraud. There is no specific number as of yet in terms of how much money was stolen - reports vary from $20 billion dollars all the way up to $50 billion dollars.
Bloomberg.com pointed out that the SEC's inspection team has actually shrunk in size over the past 4-5 years. While they clearly should have caught this fraud, it certainly appears as though the SEC needs much more in terms of government funding to properly keep on top of the markets.
A top-down overhaul is clearly needed at the SEC - hopefully sooner rather than later. One person can't take the blame for this mess - the entire agency needs to be looked at.
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The SEC issued a statement on Tuesday night, saying that it had missed repeated opportunities to discover the Madoff fraud that has resulted in the disappearance of many billions of dollars.
