The SEC and the Madoff Report

A summary of the Report by the Inspector General of the SEC has been posted on the Commission's web site, a long with a comment by Chairman Mary Schapiro.   The full 450 page missive will eventually follow.

The study concludes that there was no impropriety by anyone working on the case, including the SEC official who had a relationship with Madoff's niece.  The study does conclude, however, that the Commission staff failed in its task of ferreting out the fraud when it had ample notice.  As the Summary described:

• The OIG investigation did find, however, that 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 BMIS 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. The OIG found that between June 1992 and December 2008 when Madoff confessed, the SEC received six substantive complaints that raised significant red flags concerning Madoffs hedge fund operations and should have led to questions about whether Madoff was actually engaged in trading. Finally, the SEC was also aware of two articles regarding Madoff's investment operations that appeared in reputable publications in 2001 and questioned Madoff's unusually consistent returns.

In short, the explanation was mostly a story of lost opportunities.  The Agency was hindered by poor coordination, inexperienced attorneys and examiners, and a failure to follow up, particularly when requesting documents by third parties that would have demonstrated Madoff's deceit.  The summary contains examples of browbeating by Madoff and evidence of personal dislike by Commission staff that may have affected the investigation.  In short, there is no single smoking gun but a series of lost opportunities, with each of the three examinations and two investigations failing for somewhat different reasons.     

Of interest, one of the tips about Madoff's activites went to the Office of the Chairman.  According to the Summary:

• In March 2008, the SEC Chairman's office received a second copy of the previous complaint, with additional information from the same source regarding Madoff's involvement with the investor's money, as follows:  "It may be of interest to you to that Mr. Bernard Madoff keeps two (2) sets of records. The most interesting of which is on his computer which is always on his person."

The matter was forwarded to the staff in the Division of Enforcement who had conducted an investigation of Madoff.  The only response was that "we will not be pursing the allegations on it."  Another opportunity lost.