SEC Confesses, Blew Years of Chances to Nab Madoff


The SEC looked into the Ponzi scheme as early as 1992 but kept flubbing it, according to its own probe. In part, Bernard Madoff seemed too "reputable"

The Securities & Exchange Commission had several chances to uncover Bernard Madoff's huge Ponzi scheme dating back to 1992 but failed because of a combination of inexperienced staff, inadequate preparation, bureaucratic inaction, and the simple failure to ask the right questions. That's the theme of the executive summary of the SEC Inspector General's report on the fraud, released on Sept. 2. It's unlikely to make Madoff's victims—who lost billions of dollars in the scheme—happy.

"[D]espite numerous credible and detailed complaints, the SEC never properly examined or investigated Madoff's trading and never took the necessary, but basic, steps to determine if Madoff was running a Ponzi scheme," Inspector General H. David Kotz said in the report. "Had these efforts been made with appropriate follow-up at any time beginning in June of 1992 until December 2008, the SEC could have uncovered the Ponzi scheme well before Madoff confessed."

The investigation found that between 1992 and 2008, the SEC received six credible complaints that "raised significant red flags" about Madoff's operations and was also aware of two articles in business publications, published in 2001, that raised questions about Madoff's remarkably consistent returns. The SEC conducted three examinations and two investigations of Madoff during that time period, but either accepted Madoff's explanations or failed to follow up on questions and inconsistencies in the information the agency was given.

Madoff's Stories Cowed Investigators

Most significantly, the report says, SEC investigators did not seek records from independent third parties—such as the Depository Trust, which held Madoff's funds on account—that would have shown that Madoff was not trading in the fashion and volume that he claimed. "Had they sought records from DTC, there is an excellent chance they would have uncovered Madoff's Ponzi scheme in 1992," the report said.

The report also said that Madoff—a former Nasdaq chairman—sometimes intimidated inexperienced investigators, regaling them with stories about his prominent role in the securities industry.

Madoff pleaded guilty in March. He is serving 150 years in federal prison.

SEC Chair Mary L. Schapiro, in a statement, said the report "makes clear that the agency missed numerous opportunities to discover the fraud. It is a failure that we continue to regret, and one that has led us to reform in many ways how we regulate markets and protect investors."

Markopolos' Tips Seemed Incredible

Schapiro said the agency has revamped its enforcement procedures and is "putting more experienced staff on the front lines."

The report found that the gist of most of the complaints—such as the March 2008 tip that "Mr. Bernard Madoff keeps two (2) sets of records"—turned out to be credible.

The report also cites several attempts by financial analyst Harry Markopolos to raise red flags about Madoff—including an October 2005 complaint titled "The World's Largest Hedge Fund Is a Fraud." The report said that Markopolos' complaints were given short shrift by investigators because Madoff "did not fit the 'profile' of a Ponzi scheme operator" and because of apparent bias by investigators toward the "sort of people who are seen as reputable members of society."

The SEC is expected to release the full 450-page report on Madoff within days.

Mintz is news editor for BusinessWeek.com in New York.

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