SEC Watchdog Blasts Handling Of Madoff Investigations

Sep 3 2009 | 6:59pm ET

The Securities and Exchange Commissioned botched its handling of Bernard Madoff in almost every conceivable way, according to a report from the agency’s inspector general that is as scary as it is disheartening.

H. David Kotz’s report, which is based in part on interviews with Madoff himself, said the SEC should have caught Madoff at least six times over the past 17 years. The failures were due to inexperience and incompetence on the part of SEC investigators, a reluctance to expand probes and the beguiling influence of Madoff himself, alternately charming and intimidating the young SEC staffers sent to have a look at his operations.

There were blunders from first to last, according to Kotz. A 1992 investigation as doomed by an “inexperienced” team that conducted only a “brief and very limited examination of Madoff.”

“The result was a missed opportunity to uncover Madoff’s Ponzi scheme 16 years before Madoff confessed” to running a $65 billion scam.

Most recently, in 2006, Madoff thought the SEC had him dead to rights: He gave investigators his Depositary Trust Co. account number, which would allow the agency to find out he hadn’t been trading nearly as much as he claimed to be.

“I thought it was the end game, over,” Madoff told Kotz. “Monday morning they’ll call the DTC and this will be over.” Madoff confessed he was “astonished” that he wasn’t caught right then and there.

“They never verified Madoff’s purported trading with any independent third parties,” Kotz’s report concludes. Had they done so, investigators would have “immediately realized that Madoff was not trading in anywhere near the volume that he was showing on customer statements.”

“This was perhaps the most egregious failure in the enforcement investigation of Madoff,” Kotz wrote.

And it is a failure, SEC Chairman Mary Schapiro said, that the agency “continues to regret.”

How did Madoff survive so many close calls? Kotz says only part of it can be blamed on incompetence or inexperience. The young staffers sent to probe Madoff didn’t understand what he claimed to be doing. But they were also taken in by Madoff’s mystique. In 2006, for instance, Madoff said “his remarkable returns were due to his personal ‘feel’ for when to get in and out of the market.”

“Each member of the enforcement staff accepted as plausible Madoff’s claim that his returns were due to his perfect ‘gut feel.’”

Madoff would name-drop during the examinations, offering tidbits to show how plugged in he was. During an April 2005 investigation, Madoff said that then-Rep. Christopher Cox would be named to head the agency three weeks before his appointment was announced.

If ingratiation didn’t work, Madoff turned to intimidation. Perhaps the most terrifying revelation in Kotz’s report is Madoff’s claim that he was on the short-list for appointment as SEC chairman. He also wasn’t above throwing a fit if he didn’t get his way: On one occasion, “veins were popping out of his neck” after examiners asked for documents he didn’t want to show them.

Despite Madoff’s apparent influence at the SEC, Kotz said he found no indication that any of the probes were improperly swayed by Madoff or his family.


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