- The Washington Times - Wednesday, January 28, 2009

Key lawmakers Tuesday demanded much tougher government oversight of Wall Street and the securities markets as regulators struggled to explain how they failed to detect the $50 billion Ponzi scheme reportedly operated by financier Bernard Madoff for more than a decade.

“The Madoff scandal was a regulatory failure of historic proportions,” Senate Banking, Housing and Urban Affairs Committee Chairman Christopher J. Dodd, Connecticut Democrat, said. “…The era of ‘don’t ask, don’t tell’ regulation on Wall Street is over.”

Top officials of the Securities and Exchange Commission testified for the first time since the scandal broke late last year. They faced repeated questions over why they had failed to follow up on what lawmakers said were numerous red flags and explicit warnings that Mr. Madoff’s high-profile investment advisory firm was essentially a long-running scam in which early investors were paid off with funds from later investors.

Among those taken in in the scam were banks, hedge funds, charities, universities and Hollywood celebrities. Zsa Zsa Gabor is the latest well-known victim, with her financial adviser saying this week the 91-year-old actress may have lost up to $10 million in funds invested in Bernard L. Madoff Investment Securities LLC.

The undermanned SEC has had to perform regulatory “triage” in deciding which reports of possible financial fraud to pursue, SEC Enforcement Director Linda Thomsen said at the hearing. She said the agency receives “hundreds of thousands of tips” each year on possible wrongdoing and has fewer than 750 regulators and investigators to follow up.

She said the revelations of the scale of Mr. Madoff’s wrongdoing, which emerged after he was investigated and cleared by the SEC in 2006, were “every law enforcement officer’s, every cop’s nightmare.” Former SEC Chairman Christopher Cox last month ordered an internal investigation into how the Madoff scheme went undetected for so long.

But Ms. Thomsen faced repeated questioning from lawmakers over the agency’s failure to follow up on repeated warnings about Mr. Madoff’s activities. Boston investor Harry Makropoulos, a longtime Madoff skeptic, mailed SEC investigators in 2002 a detailed 29-page expose, noting Mr. Madoff’s secretive business practices, lack of oversight and suspicious profits even in years of sharp market downturns. Among the warning signs: Mr. Madoff’s giant money management business was audited by a tiny three-person accounting firm with an office in a New Jersey strip mall.

“I can’t imagine receiving a document like this tip sheet and not acting,” said Sen. Jeff Merkley, Oregon Democrat.

Under questioning from Democratic Sen. Mark R. Warner of Virginia, Lori Richards, head of the SEC’s office that inspects brokerages and investment advisers, acknowledged that the identity of an investment firm’s auditors and its record of profits are not part of the risk assessment the agency has used to target companies for investigation.

Congressional Democrats are considering a boost to the SEC’s oversight and enforcement budget as part of a larger overhaul of the nation’s financial services regulation. Many blame what they say was the lax regulatory approach of the Bush administration for scandals such as the suspected Madoff fraud and for the larger credit woes plaguing Wall Street.

Sen. Charles E. Schumer, New York Democrat, and Alabama Sen. Richard C. Shelby, ranking Republican on the banking panel, have called for an additional $110 million to increase the investigative staffs at the SEC, the FBI and Justice Department, including the hiring of 100 new SEC enforcement officers.

John Coffee, a law professor at Columbia, told the committee that scams like the one Mr. Madoff is accused of pulling are not rare in the U.S. financial markets, although its scale and duration may be unprecedented.

“Ponzi schemes are not rare. They are increasing and they are fairly recurrent,” he said.

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