- The Washington Times - Thursday, September 3, 2009

A government watchdog has concluded that the Securities and Exchange Commission repeatedly bungled investigations of the disgraced former financier Bernard Madoff for 16 years, but said it found no evidence of improper ties between agency officials and the convicted felon.

A report released Wednesday by the Securities and Exchange Commission Inspector General’s Office said that the SEC, while investigating allegations of fraud in Madoff’s business practices, caught him in several lies and misrepresentations but failed to follow up on these “inconsistencies.”

The inspector general’s office also said the SEC rejected whistleblowers’ offers to provide additional evidence.

“Despite numerous credible and detailed complaints, the SEC never properly examined or investigated Madoff’s trading and never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme,” said the report, which was dated Monday and signed by SEC Inspector General H. David Kotz.

“Had these efforts been made with appropriate follow-up at any time beginning in June of 1992 until December 2008, the SEC could have uncovered the Ponzi scheme well before Madoff confessed,” the report said.

Madoff pleaded guilty in March of operating a Ponzi scheme that has been called the largest investor fraud ever committed by a single person. Federal prosecutors estimated Madoff’s clients lost nearly $65 billion. He was sentenced to 150 years in federal prison.

Victims of the scheme include charities, universities, investment funds, Hollywood celebrities, municipalities and individual investors. Many elderly investors have seen their life savings wiped out.

The inspector general’s office said that SEC investigators failed to properly follow up on document requests that were submitted incompletely by Madoff or his staff, and that contradictory statements by Madoff should have led investigators to discover the Ponzi scheme.

In one particularly embarrassing instance, two SEC divisions conducted separate investigations of Madoff without either office being aware of the other’s efforts. The investigating teams eventually learned of each other’s cases after Madoff himself told one of the teams that he had already given the information they sought to the other team, the report stated.

Sen. Charles E. Grassley of Iowa, the top Republican on the Senate Finance Committee, blasted the SEC Wednesday, saying that the “utter failure” to follow up aggressively on specific information about Madoff’s fraud is “further evidence of a culture of deference toward the Wall Street elite at the SEC.”

The inspector general’s office also found that between 1992 and December 2008, when Madoff confessed, the SEC received six substantive complaints that raised significant concerns about his hedge fund operations that should have led to questions about whether he was actually engaged in trading.

Boston financial analyst Harry Markopolos, who tried repeatedly over several years to blow the whistle on Madoff, told a congressional panel in February that it took him four hours to figure out that Madoff’s financial empire was built on fraud, but that he could not get the SEC to investigate his suspicion despite nearly a decade of trying.

Mr. Kotz’s 450-page report doesn’t make recommendations for actions the agency should take.

But SEC Chairman Mary Schapiro, appointed by President Obama, has brought changes since taking the helm in January. Enforcement efforts have been strengthened and the agency has started a number of initiatives meant to protect investors in the wake of the financial crisis, agency officials say.

Three of the five high-ranking SEC officials who had been severely criticized over the Madoff affair — including the enforcement director and the head of the inspections office — have left the agency.

The report brought calls from Capitol Hill for market regulatory reforms.

“It further reminds us how essential it is that we improve both financial regulation and the competence of the regulator,” said Senate Banking, Housing, and Urban Affairs Committee Chairman Christopher J. Dodd, Connecticut Democrat. “We will use this report to learn what went wrong and figure out how best to get things right.”

Mr. Dodd said his committee will hold a hearing on the report Sept. 10.

Rep. Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, cautioned that “smarter regulation and more aggressive enforcement” of current laws — not additional regulation — is needed.

“The report confirms what I have been saying since the very first congressional hearing on this matter: that the Madoff case - which was essentially handed to the SEC on a silver platter - demonstrates not a lack of enforcement and oversight tools, but a failure to use them,” he said.

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