Legal News

A First Look at the Big Ol? Madoff SEC Report

By Amir Efrati

The SEC’s inspector general has submitted his long awaited report on the agency’s failings in uncovering the Bernard Madoff Ponzi scheme, despite the numerous investigations into Madoff’s firm. Click here for the WSJ story; here for a walk-up to the release of the report, by the WSJ’s Kara Scannell. In a 22-page executive summary (click here to see it) released today by the SEC, the inspector general, David Kotz, concluded the following:

> SEC personnel had “no financial or other inappropriate connection” with Madoff.

> A relationship between a former SEC official, Eric Swanson, and Madoff’s niece who worked at the Madoff firm, Shana, didn’t “influence the conduct of SEC examinations” of the Madoff firm.

> Despite initiating five separate probes of Madoff’s investment operation over the years, the SEC did not do a “thorough and comprehensive examination and/or investigation” of Madoff for operating a Ponzi scheme, despite six “substantive complaints that raised significant red flags. . . . ” One of these complaints, in 2003, came from a “respected” hedge fund manager who isn’t identified in the executive summary. Another in 2004 came from a Madoff investor whose employees wrote emails that “provided a step-by-step analysis of why Madoff must be misrepresenting his options trading.”

> In investigating Madoff for running a Ponzi scheme, the SEC never verified Madoff’s trading through an independent third party, such as the Depository Trust Company or the National Association of Securities Dealers (NASD). (Turned out he didn’t make trades during the life of the fraud.)

> The SEC came excruciatingly close to possibly uncovering the fraud: One time, SEC examiners “drafted a letter . . . seeking independent trade data, but they never sent the letter, claiming that it would have been too time-consuming to review the data they would have obtained.” Another time, after the SEC asked NASD whether Madoff had options positions on a certain date, NASD responded that he didn’t. “[T]hey took no other steps,” the reports says.

> SEC staff “almost immediately caught Madoff in lies and misrepresentations, but failed to follow up on inconsistencies.”

According to Scannell’s article, the SEC findings are expected to shape Congress’s thinking as it returns this month to look at a regulatory overhaul. The report is expected to shed light on regulatory gaps and turf battles that contributed to the SEC’s failure to catch Madoff before he confessed in December 2008.

Full post as published by Law Blog - WSJ.com on September 02, 2009 (boomark / email).