- The Washington Times - Monday, July 6, 2009

Last week brought some closure to Bernard Madoff’s victims, who were swindled out of $65 billion in the largest recorded financial fraud — a scheme that was exposed in part because the plummeting stock market led investors to demand repayment of money that was long gone.

With Madoff sentenced in New York to 150 years in prison, attention is shifting to the next fraud — and to the agency responsible for preventing it.

The Securities and Exchange Commission lost credibility when it emerged that a tipster had been trying to blow the whistle on Madoff for years but had been brushed off repeatedly. Since Madoff’s case came to light, the agency has announced a series of changes it hopes will improve enforcement, making it easier to detect and root out fraud before it approaches this massive scale.

But obstacles remain, including the finding in a recent oversight report that agency lawyers lack necessary support staff and resources. And even with the benefit of hindsight, experts say, eliminating fraud is about as likely as eliminating greed.

Here are some questions and answers about what the SEC is doing to shore up its examination and enforcement actions, and how far these changes will go to prevent the next Madoff-style scandal.

Q: Could a Madoff-style fraud happen again?

A: Of course it could. Enforcement is by definition a backward-looking process, with officials exposing and punishing wrongdoing only after it’s been committed. As far as the SEC knows, there are more Madoffs starting up right now.

But officials say fraud on Madoff’s scale is unlikely because he was an uncommonly talented crook, quietly gaining the trust of investors, regulators and power brokers over decades in the financial world.

Q: Does that mean they’re not doing anything to stop the next Madoff?

A: Regulators are doing quite a bit to prevent similar Ponzi schemes from bilking more investors.

The examinations division, which is responsible for day-to-day oversight, will be improving examiners’ expertise in fraud detection and in complex financial products, looking more closely at firms deemed more likely to commit fraud and improving handling of tips and complaints. That’s according to a recent speechby Lori Richards, who directs the SEC’s Office of Inspections and Examinations.

SEC Chairman Mary Schapiro has installed a new director of the Division of Enforcement: Robert Khuzami, a former federal prosecutor. He has launched efforts to improve the SEC’s enforcement capabilities, including streamlining key processes and pouring vast resources into hiring new staff.

Testifying before Congress in May, Mr. Khuzami said, “Not a day goes by that I don’t think about how we can stop the next big fraud.”

The agency also will introduce a new computer system intended to track and sift through the complaints that come in, which number between 750,000 and 1.5 million a year.

Q: That all sounds nice, but aren’t there some concrete loopholes the SEC needs to close to prevent future scams?

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