Madoff and the Report of the Inspector General: The Failure to Look Around the Corner

We discussed yesterday, briefly, the Summary of the Report of the Inspector General on its "Investigation of Failure of the SEC To Uncover Bernard Madoff's Ponzi Scheme."  As we noted, the SEC received a number of credible reports and complaints over the years and conducted three examinations (run by OCIE and/or examiners from regional offices) and two investigations (conducted by the Division of Enforcement) of Madoff between 1992 and 2008 when the scheme finally collapsed. 

Parsing through the assorted allegations, one of the two investigations, which occurred in 1992, failed because the staff investigated one matter (an advisor feeding funds to Madoff) but did not expand the investigation to include Madoff.  In 2000-2001, the Boston District Office and the Northeast Regional Office (NERO) received complaints from Harry Markopolos but declined to investigate them.  Markopolos submitted another complaint in 2005.  The resulting investigation focused on whether Madoff was an unregistered investment advisor, in part because examiners who had examined Madoff's operations were critical of Markopolos and indicated that the complaint raised issues that were "basically some of the same issues we investigated. . . "

In short, the explanations for the failure to spot Madoff were unfortunate but not unreasonable.  The investigations may have been narrow, but the Commission has often been (and still is) excessively driven by statistics.  Enforcement attorneys who want to spend time examining every possible lead would end up conducting lengthy investigations with little to show for it, hurting the stats.  

Moreover, the fact that Madoff sometimes provided inaccurate or evasive answers sounds bad but is unfortunately common enough.  The staff was investigating Madoff for violating the securities laws (operating an unregistered investment advisor).  One way or another, he was going to try to provide answers that obscured or evaded the effort in an attempt to avoid charges.  This is not an uncommon strategy.

In other words, the staff wanted to examine the case before it then move to the next one.  There was no real desire to "look around the corner" and determine whether other violations were taking place.  In other words, the Division is generally reactive, not proactive.  A proactive response would require a change in approach and culture and one that would require the Division to move away from statistics as the measure of success and productivity.