SEC Acknowledges ‘Failures’ In Madoff Dealings

Dec 17 2008 | 1:49am ET

The head of the U.S. Securities and Exchange Commission acknowledged that the agency had failed to detect the alleged scam run by Bernard Madoff despite repeated opportunities over the past decade.

SEC Chairman Christopher Cox yesterday announced an internal investigation into how what might be the largest Ponzi scheme in history, totaling some $50 billion, managed to slip through the cracks for so long. Cox called the revelation that the SEC had been warned on a number of occasions about Madoff and done nothing “deeply troubling.”

“The Commission has learned that credible and specific allegations regarding Mr. Madoff’s financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action,” Cox said in a statement. “I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them.”

On Thursday, the SEC took emergency action against Madoff and his Bernard L. Madoff Investment Securities. On the same day, Madoff was arrested and charged with securities fraud. He allegedly confessed to his sons that his well-regarded, nearly-50-year-old firm was nothing but a “giant Ponzi scheme.”

In the statement, Cox said that in early indications are that Madoff “kept several sets of books and false documents, and provided false information involving his advisory activities to investors and to regulators.” A number of hedge funds have been ensnared in the alleged fraud.

Cox has charged SEC inspector general H. David Kotz with determining why the earlier allegations were not found credible—one letter to the SEC in 1999 presciently accused Madoff of running “the world’s largest Ponzi scheme.” Kotz has recently written reports extremely critical of the agency, notably blasting its handling of the Bear Stearns collapse and an investigation of alleged insider trading at hedge fund Pequot Capital.

“The review will also cover the internal policies at the SEC governing when allegations such as those in this case should be raised to the Commission level, whether those policies were followed, and whether improvements to those policies are necessary,” Cox said.

Cox also announced stricter-than-usual recusal policies to ensure that no SEC staffer with “more than insubstantial personal contacts with Mr. Madoff or his family” is involved in the internal probe. The heightened scrutiny has apparently been triggered by the revelation that Eric Swanson, a former assistant director of compliance and examinations at the SEC, is married to Madoff’s niece, who also worked at his firm. There have been no allegations of wrongdoing against Swanson.


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