The Full Madoff Report is Out

After releasing the executive summary earlier this week, the Commission released the full report of the Inspector General on the Madoff debacle.  The report can be found here.   The report is full of nuggets.  We mention one of them.

Officials in OCIE's investment management group received credible information on Madoff from a hedge fund manager.  Madoff was not a registered advisor but was a registered broker-dealer.  Although much of the ponzi scheme had apparently been run out of the advisory business, registration as a broker dealer gave the staff the authority to search all of his records.  As the report noted: 

• According to the FTI Engagement Team, Madoff’s books and records were subject to examination whether or not he was registered as an investment adviser. As a registered broker-dealer, the Madoff firm’s books and records (including e-mails) related to that business are subject to compliance examinations and review by the SEC staff under Section 17 of the Exchange Act. If the firm had been registered as an investment adviser at that time, the firm’s books and records related to that business would have been subject to compliance examinations and review by the SEC staff under Section 204 of the Advisers Act. However, since Madoff was running the investment advisory business out of discretionary brokerage accounts at BMIS and it was a registered broker-dealer, those records were also subject to compliance examinations and review by the SEC staff under Section 17 of the Exchange Act.   

The problem, therefore, was not access but expertise.   In part because of the silo structure of the office, the broker-dealer group apparently lacked advisor experience (and the advisor group no doubt lacked broker dealer expertise).  While the examiners had access, they didn't have the expertise to take full advantage of the access.   

It took six months but examiners from OCIE scheduled an examination of Madoff.  According to the report, Lori Richards, head of the office, called Madoff.  As the report noted:  "Richards "recall[ed] telephoning him in advance of an exam that we were going to perform to tell him that we expected full cooperation of the firm."  In short, whatever the reason, Madoff was told in advance of the examination. 

Finally, the examination ended unexpectedly with matters unfinished.  "Work on the Madoff examination came to a halt as OCIE shifted its focus to other priorities. Walker and Wood were directed by their supervisors to focus on a mutual fund revenue sharing sweep being conducted by OCIE."  In other words, shifting priorities within the Agency may have resulted in the inability to uncover the ponzi scheme.