Inspector General: SEC Failed To Properly Conduct Madoff Investigation

WASHINGTON, D.C. (Mealey’s), Sep. 3 — The Securities and Exchange Commission failed to follow up on six “substantive complaints” regarding allegations of wrongdoing on the part of convicted Ponzi scheme mastermind Bernard L. Madoff and his investment company, Bernard L. Madoff Investment Securities LLC (BLMIS), according to an executive summary released Wednesday by the SEC Office of the Inspector General (OIG).
 
The executive summary, written by Inspector General H. David Kotz, was released in advance of the OIG’s 450-page full report on its findings into what went wrong with the SEC’s oversight of Madoff and BLMIS and explains that the SEC also conducted two investigations and three examinations of Madoff’s operations but failed to follow up on a number of inconsistencies and failed to fully investigate Madoff himself.
 
Kotz says the OIG investigation found that between June 1992 and December 2008, “the SEC received more than ample information in the form of detailed and substantive complaints over the years to warrant a thorough and comprehensive examination and/or investigation of Bernard Madoff and [BLMIS] for operating a Ponzi scheme, and that despite three examinations and two investigations being conducted, a thorough and competent investigation or examination was never performed.” Two articles in “reputable publications” were also disregarded by the SEC, Kotz says.
 
Moreover, Kotz says the SEC’s examination unit, the Office of Compliance Inspections and Examinations, conducted a pair of “parallel cause examinations of Madoff” based on the allegations in one of the complaints “and the series of internal e-mails that the SEC discovered,” which were similar in nature but lacked in proper preparation, total overall scope and analysis of evidence gathered.
 
“During the course of both these examinations, the examination teams discovered suspicious information and evidence and caught Madoff in contradictions and inconsistencies. However, they either disregarded these concerns or simply asked Madoff about them. Even when Madoff’s answers were seemingly implausible, the SEC examiners accepted them at face value,” Kotz says, explaining further that it became known during the examinations that Madoff’s hedge fund business “was making significantly more money that his well-known market-making operation. However, no one identified this revelation as a cause for concern.”
 
“Astoundingly, both examinations were open at the same time in different offices without either knowing the other one was conducting an identical examination. In fact, it was Madoff himself who informed one of the examination teams that the other examination team had already received the information they were seeking from him.”
 
Kotz further explains that the examination teams caught Madoff in a number of lies and inconsistencies but never followed up on the information to investigate the possibility that Madoff was, in fact, running a Ponzi scheme.
 
Furthermore, Kotz explains that the OIG investigation found no evidence of SEC personnel connected to the investigations and examinations with any “financial or other inappropriate connection” to BLMIS or Madoff, that former SEC Assistant Director Eric Swanson’s “romantic relationship” with Madoff’s niece had no influence on the investigations and that no senior SEC officials “directly attempted to influence examinations or investigations of Madoff of the Madoff firm, nor was there evidence any senior SEC official interfered with the staff’s ability to perform its work.”
 
Madoff was sentenced to 150 years in prison after pleading guilty to 11 counts of criminal securities law violations for his running of the $50 billion Ponzi scheme in June. 
 
In a statement accompanying Kotz’s executive summary, SEC Chairman Mary L. Schapiro said Kotz’s report “makes clear that the [SEC] missed numerous opportunities to discover the fraud. It is a failure that we continue to regret, and one that has led us to reform in many ways how we regulate markets and protect investors.”
 
Schapiro further said she expects the full report to be released to the public “in the coming days.”