Congress digs into Madoff scandal today

Congress gets its first crack today at the $50 billion financial fraud involving Wall Street investing legend Bernard Madoff, with Democrats vowing to use the scandal to spur an overhaul of the government’s financial regulatory system.

The House Financial Services Committee today will grill the inspector general of the Securities and Exchange Commission over why the SEC failed to detect what has been called a massive Ponzi scheme dating back more than a decade. Rep. Paul Kanjorski, chairman of the panel’s subcommittee that oversees financial regulation, said the expanded Democratic majorities in Congress and Presidednt-elect Barack Obama are planning a “substantial rewrite of the laws governing the U.S. financial markets” this year.

Mr. Obama, in a year-end radio address, said the Madoff scandal, which took in charities, pension funds, U.S. and foreign banks, universities and a slew of prominent investors, “shows how badly reform is needed.”

SEC Chairman Chrisopher Cox, who is leaving the agency this month, conceded last month that the agency failed to follow up on “serious and credible” questions raised about Mr. Madoff’s investment fund and oredered an internal investigation. The government filed charges against Mr. Madoff Dec. 11, only after the investor confessed to his sons that his financial empire had been built on lies.

Harry Markopoulos, a Boston investor who first flagged numeous irregularities in Mr. Madoff”s investment record in the late 1990s, will not be testifying at today’s hearing because of an illness.

But Allan Goldstein, a retiree who lost his investment when Mr. Madoff’s fund collapsed, will be among the committee witnesses today.

Also testifying will be SEC Inspector General H. David Kotz and Stephen Harbeck, president of the Securities Investor Protection Corp., which charged with helping investors recoup at least some of their losses as the result of market fraud. One subject likely to draw committee scrutiny is Mr. Madoff’s own dealings with the SEC. His niece, who worked for the investment fund, married a former SEC attorney.

SIPC officials said they have mailed out some 8,000 claims to investors who potentially may have been victims of the Madoff scheme.

Critics say the SEC missed a number of red flags about Mr. Madoff’s operation, including the improbable string of quarterly profits he earned over the years and his unusual accounting and bookkeeping methods.

Democrats have vowed to reverse what they say was the extreme deregulatory bent of the Bush administration. The SEC, which could be combined with other oversight agencies, was already under the gun over the spectacular failures of Lehman Brothers, Bear Stearns and other major Wall Street investment banks last year.

“Obviously, the Securities and Exchange Commission did a lousy job,” Senate Majority Leader Harry Reid, Nevada Democrat, said Sunday on NBC’s “Meet the Press.”

“The evidence is clear that you cannot have no regulation, it doesn’t work,” Mr. Reid said. “…We can’t be overzealous and overregulate, but there must be regulation.”

Major questions still hang over the investigation into Mr. Madoff’s dealings, including the exact total of losses for investors. A survey by the Bloomberg news service said that Madoff investors have reported at least $37 billion in principal and reported profits managed by Mr. Madoff’s exclusive fund.

The financier provided a list of his remaining assets to a New York court on New Year’s Eve, and reportedly has personal assets of only about $300 million.