When SEC officials appeared before Congress last January and February to answer questions about their handling of the Madoff Ponzi scheme, they rebuffed many questions posed by lawmakers on the ground that there was a pending investigation of the SEC by its inspector general. Now that Inspector General David Kotz has completed his investigation and issued a report on the matter, the SEC is full of regret, reports Paul Wiseman of USA Today in his September 3 article entitled “Inspector general’s report blasts SEC over Madoff.”
The 450 page report includes some pretty startling revelations, including Madoff’s own astonishment that the SEC failed to follow up on information he provided them which should have revealed the Ponzi scheme. Some highlights of the report include:
- Madoff thought it was all over when he had to give the SEC his account number at Depository Trust Corp. All investigators had to do was look at his DTC trading records, and they would have seen that Madoff was not trading anywhere near the volume he was showing on customer statements. Madoff told Kotz: “I thought it was end game, over. Monday morning they’ll call DTC and this will be over.” When that did not happened, Madoff was “astonished,” and the Ponzi scheme continued for 2 ? years.
- SEC enforcement staff, asking how Madoff managed such consistent returns trading options, accepted Madoff’s “explanation” that he just had an infallible “gut feel” for it.
- Madoff alternately bullied and impressed SEC enforcement staff by dropping the names of SEC higher-ups, telling them that Christopher Cox would be appointed as SEC Chairman three weeks before it was announced, and intimating that he “was on the short list” to be their new SEC Chairman. Against that backdrop, when SEC attorneys requested documents Madoff did not want to produce, he blew his top, neck veins bulging, and SEC staff backed down.
- The SEC could have nailed Madoff in 1992, 16 years before he confessed. The SEC was investigating customer complaints about a firm that traded with Madoff. The SEC suspected the firm was a Ponzi Scheme but never checked to see if it was part of a larger Ponzi scheme involving Madoff.
With all the unflattering talk about being inexperienced, inept, and duped, the SEC may create a “fraud college” to train staff in detecting financial fraud, said new Chairman Mary Shapiro, according to a September 3 article in Bloomberg by Joshua Gallu and Dawn Kopecki. When J. Boyd Page, senior partner of Page Perry, heard the news he declared, “What a novel idea ? the SEC teaching its employees about fraud. In all seriousness, though, the Kotz report truly does demonstrate the need for a strong bar of private attorneys to deal with the increasing complex abuses that are occurring in the capital markets.”
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