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The Securities and Exchange Commission disclosed that it
eight employees in connection with their failure to detect the massive Ponzi
scheme orchestrated by Bernard Madoff. The employees received various
forms of punishment over the past year that was made public by a Washington
Post article that had obtained documents detailing the sanctions through a
Freedom of Information Act. The SEC had received strong criticism
following widespread views that the agency had not done enough to uncover the
fraud at an earlier time. The most vocal of these proponents was Harry
Markopolos, an independent financial fraud investigator who made repeated
reports to the SEC claiming that Madoff was operating a Ponzi scheme.
These claims went largely unheeded, aided by an inter-office
communication system that effectively impeded the flow of information between
various SEC branch offices. The sanctions meted out by the SEC over the
past year ranged from "counseling memos" to a 30-day suspension.
No employee was ultimately terminated as a result of the investigation.
Following the discovery of Madoff's fraud, the SEC's
internal watchdog carried out an investigation that culminated in a 456-page
report concluding that the SEC had ample information to carry out a thorough
and comprehensive investigation that would have uncovered Madoff's fraud years
before Madoff confessed to his sons in December 2008. Specifically, the
report concluded that the SEC had adequate information to conduct an
investigation as far back as 1992 - 16 years before the fraud was ultimately
unraveled. Between 1992 and 2008, according to the report, the SEC
received six substantive complaints that raised
significant red flags concerning Madoff's hedge fund operations and should
have led to questions about whether Madoff actually engaged in trading.
While the SEC ultimately conducted two investigations and
three examinations of Madoff's operations, the report notes that Madoff's
trading was never verified through an independent third-party.
Additionally, while the SEC requested records from the Depository Trust
Company that would have demonstrated the fact that Madoff was not doing the
trading he advertised, it was Madoff himself who provided these records to the
SEC - not the DTC. In New York Times writer Diana Henriques' book
on the subject, Madoff himself noted several times that he was sure that the
SEC had detected his scheme through their investigation. However,
Madoff's stature and long tenure in the investment community likely acted as a
deterrent to any concerted effort by SEC employees - many of whom had neither
the experience or acumen of Madoff.
After the internal watchdog's report was filed, the SEC
hired an outside Washington law firm to recommend disciplinary action against
any employees associated with Madoff's fraud. By law, the SEC is
prohibited from disciplining former employees, and the decision to terminate
any employee must come directly from the agency's human resource director.
The law firm's investigation ultimately recommended the termination of
one employee unless that would have an adverse effect on the agency's work.
That employee was ultimately suspended for thirty days without pay,
demoted, and had their pay decreased. One other employee received a
30-day suspension, with other punishments ranging from a seven-day suspension
to pay reductions.
A copy of the Report of Investigation conducted by the
Office of Inspector General is here.
For more news and analysis of Ponzi schemes, visit
Ponzitracker, a blog by Jordan Maglich, an attorney at Wiand Guerra King P.L.
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