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S.E.C. Report on Madoff Suggests Agency Was Asleep at the Wheel

By Joel Zand on September 02, 2009 | Last updated on March 21, 2019

Most of the time, 10-Ks, 10-Qs, and annual reports can be pretty dull stuff. At least that's what a new SEC Inspector General's report on why the agency failed to 'discover' Madoff's Ponzi scheme suggests.

But every once in a while, the seemingly dry and monotonous business of regulating financial trading and securities enforcement comes alive. 

Like when S.E.C. officials failed discover Madoff's securities fraud and criminal wrongdoing despite a host of formal complaints made between 1992 and 2008.

The new report (see below) is an admission by the S.E.C. that the agency was asleep at the wheel when it had the ability and the information to discover and put a stop to Madoff's Ponzi scheme.

Among the conclusions:

    • The SEC "received more than ample information" to justify investigating Bernie Madoff and his investment firm for operating a Ponzi scheme.  Despite ostensibly conducting three examinations and two investigations, "a thorough and competent examination was never performed."

      Translation: The SEC wasn't doing its job.

    • "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 was actually engaged in trading."

      Translation: SEC examiners weren't doing their job.

    • The SEC never "verifi[ed] Madoff's trading activity through an independent third-party, and...never actually conducted a Ponzi scheme examination or investigation of Madoff."

      Translation: The SEC never double-checked Madoff's trading activity, so they only learned of his criminal wrongdoing when it was too late.

    • "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."

      Translation: SEC examiners weren't doing their job.

    • "Even when Madoff's answers were seemingly implausible, the SEC examiners accepted them at face value."

      Translation: SEC examiners weren't doing their job.

    • The SEC conducted two simultaneous investigations of Madoff, from "different offices without either knowing the other one was conducting an identical examination."

      Translation: The right-hand didn't know what the left-hand was doing.

    • Senior SEC officials neither directly attempted to influence examinations or investigations of Madoff or the Madoff firm, nor was there evidence any senior SEC official interfered with the staff's ability to perform its work.

      Translation: Senior SEC officials didn't appear to double-check their staff's investigations and examinations of Madoff'.

 

On the bright side, the Inspector General's report concluded that S.E.C. Assistant Director Eric Swanson's 'romantic relationship' with, and subsequent marriage to Madoff's niece Shana Madoff did not "[influence] the conduct of the SEC examinations and his firm"  Ain't love grand!

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