SEC Ignored Internal Madoff Whistleblower, Too

Jul 2 2009 | 3:55am ET

Since Bernard Madoff’s arrest, much has been made of Harry Markopolous, who for years tried—and failed—to get the Securities and Exchange Commission to take a closer look at Madoff’s operations. But it seems the SEC had an in-house whistleblower that it also ignored.

A lawyer in the SEC’s Office of Compliance Inspections and Examinations, assigned to look into Madoff’s relationship with hedge funds, told her supervisor that information provided by the now-convicted Ponzi schemer didn’t add up, the Washington Post reports. Genevievette Walker-Lightfoot offered a series of questions she suggested the agency put to Madoff, some of which touched directly on what proved to be major elements of his $65 billion fraud.

Instead, Walker-Lightfoot and her team were told to finish their probe and not look any further. That investigation, in 2004, into whether Madoff was allowing hedge funds to front-run his own trades, failed to uncover the massive scam that he had been running for more than two decades. At least four other SEC investigations of Bernard L. Madoff Investment Securities also missed the Ponzi scheme, which collapsed in December.

Madoff pleaded guilty to 11 counts related to the scam and was sentenced to 150 years in prison this week.

Walker-Lightfoot’s investigation uncovered a slew of inconsistencies in documents and filings from Madoff. The firm’s settlements were erratic, and he appeared to employ different trading strategies for different accounts, despite claiming that he used only one strategy.

She brought the matter to the attention of her supervisors, one of whom would go on to marry Madoff’s niece. Asked what she would like to ask Madoff, Walker-Lightfoot provided nine questions covering his trading patterns and how he ran his business. Later that month, she was more explicit, telling Mark Donohue, her branch chief, that there appeared to be “significant differences between the Tremont and Sway account transactions,” referring to a pair of hedge fund clients of Madoff, and that the variations in the dates of the trades “does not make sense.”

But Walker-Lightfoot’s attention was needed elsewhere. In 2004, the SEC was taking heat for its failure to uncover misdeeds in the mutual fund industry, as then-New York Attorney General Eliot Spitzer crusaded against them and other Wall Street misdeeds. Walker-Lightfoot was shifted to the mutual fund probe.

“I’m focusing on the mutual fund project, as requested,” Walker-Lightfoot wrote to Donohue. “Should we just focus on mutual funds and return to Madoff when we’re done?”

“Concentrate on mutual funds for the time being,” Donohue replied. He then told Walker-Lightfoot to hand her Madoff findings over to another SEC lawyer; shortly thereafter, the material was boxed for transfer.

RELATED ARTICLES:

SPECIAL COVERAGE: The Bernard Madoff Scandal


In Depth

Fundraising for Mid-Sized PE Funds: Should You Use a Registered B/D?

Dec 6 2016 | 7:18pm ET

When does a fund sponsor need to use a registered broker/dealer when raising capital...

Lifestyle

Trump Attends 'Villains and Heroes' Costume Party Dressed As...Himself

Dec 5 2016 | 11:16pm ET

U.S. President-elect Donald Trump attended a "Villains and Heroes" costume party...

Guest Contributor

Nowhere to Hide: Why the Future of Asset Management Depends on Innovation

Nov 15 2016 | 6:55pm ET

Information technology has reshaped the asset management industry’s periphery,...

 

From the current issue of

Since the inception of Modern Trader, a core editorial theme has centered on the wisdom and power of crowds. Editorial emphasis has focused on companies and projects engaged in the collection and analysis of information. 

AVAILABLE NOW at BARNES & NOBLE

NEWSTAND LOCATOR