The SEC Repeatedly Missed Opportunities To Nail Madoff, According to Report

The Office of the Inspector General at the SEC (Securities and Exchange Commission) released a report earlier today titled "Investigation of Failure of the SEC to Uncover Bernard Madoff's Ponzi Scheme".

The Office of the Inspector General sought to uncover why the SEC had failed to uncover Madoff's scheme, despite numerous warnings and complaints.

The report sought to answer these questions, and more:

Was the SEC simply incompetent in their investigations of Madoff and his firm, or was there something more sinister at work?

Did any SEC personnel have an improper relationship with Madoff that may have influenced their investigations?

Did the relationship between Shana Madoff (Bernard Madoff's niece) and SEC Assistant Director Eric Swanson have any role in keeping the fraud in operation for so long?

Did any senior officials at the SEC directly influence any examinations of Madoff and his company?

According to the report released earlier today, the SEC was simply incompetent in their handling of the Madoff case. The report goes on to say that there is no evidence of any inappropriate conduct between employees of the SEC and Madoff's firm.

According to the report, the SEC received "six substantive complaints" against Madoff between 1992 and 2008.

The SEC was apparently also made aware of two articles in "reputable publications" that questioned Madoff's unbelievable returns. Still they failed to take down the fraudster.

According to the report, "the SEC actually suspected the investment company was operating a Ponzi scheme" after receiving the first complaint against Madoff in 1992. Umm.. considering that Madoff WAS running a Ponzi scheme, I'm not exactly sure what happened there..

Five more complaints were initially filed against Madoff and his firm in:

-May 2000
-May 2003
-April 2004
-October 2005
-December 2006

In reality, there were a total of eight complaints filed against Madoff's company, as Harry Markopolos refiled his complaint with the SEC two more times (in March 2001 and October 2005). Markopolos' complaint, titled "The World's Largest Hedge Fund is a Fraud", detailed approximately 30 "red flags" that needed to be investigated.

Markopolos had actually met with SEC officials, but still nothing was done.

The report goes on to talk about the SEC's numerous investigations of Madoff's company over the years, and how the agency repeatedly missed out on chances to uncover the fraud.

The report points out various mistakes that the SEC made in their investigations of Madoff, including:

-the use of inexperienced employees
-lack of follow-up on unanswered questions
-narrow investigations that ignored the possibility that Madoff may be running a "Ponzi scheme"
-acceptance of Madoff's sometimes contradictory statements without further follow-up
-lack of follow-up with European counterparties that would have helped to expose Madoff's scheme
-lack of co-ordination of investigations at the SEC
-insufficient planning

And the list goes on and on..

One of the most troubling aspects of the report is the revelation that Madoff used the existence of the SEC investigations to bolster investor confidence in his firm. He apparently cited the SEC investigations as proof that he was doing nothing wrong, which presumably led investors to sink more money into his firm. So, the SEC's incompetent handling of the situation likely led to even more money being lost in the end.

I have linked to the 22 page report from Inspector General H. David Kotz below.

Read it, and you will be absolutely amazed that the SEC didn't bust Madoff years ago. Numerous complaints were submitted over the years that were absolutely 100% accurate. Articles were published in well-respected publications (such as Barron's) that questioned the unbelievable returns of Madoff's firm.

However, Madoff was only caught when he confessed his sins to his sons.

Madoff only confessed because the downturn in the markets (and exodus of capital from the hedge fund industry) had forced him to do so.

How long would his scam have continued if the "Great Recession" hadn't happened?

Can we ever trust the SEC to properly police our markets again?

How much money would have been saved if the SEC had conducted a proper investigation of Madoff way back in 1992?

Source: SEC.gov - Investigation of Failure of the SEC to Uncover Bernard Madoff's Ponzi Scheme (*.pdf)

DM.com - Harry Markopolos Completely Nailed the Madoff Fraud, But the SEC Did Nothing

Filed under: Stock Market Scandals