SEC Dropped the Ball on Madoff – Again, Again and Again, Officials Say

A new report out today on the Securities and Exchange Commission’s handling of the Bernard Madoff $65 billion Ponzi scheme finds financial regulators repeatedly failed to uncover the fraudster’s historic rip-off.

The report from the SEC inspector general’s office said the agency missed many “red flags” in Madoff’s financial operation, which collapsed in December 2008 when Madoff admitted it was all “a big lie.”

Madoff, who pleaded guilty and is now serving a life prison term for his crimes, admitted he never made a single trade on behalf of a client for nearly 20 years and instead paid early clients purported proceeds contributed by later investors in a classic Ponzi scheme.

Others, including Madoff’s longtime accountant and the operators of feeder funds that brought investors to the scheme, also face criminal and SEC charges for their parts in the crime.

The new report from inspector general H. David Kotz on the SEC’s mishandling of the Madoff scam leads one to believe it could happen again if things don’t improve at the agency.

Basic Steps Were Never Taken

According to Kotz, the SEC failed to investigate Madoff for years “despite numerous credible and detailed complaints.” For years, the SEC “never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme,” Kotz said in his report, cited in a New York Times 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 report concluded.

Botched Exams and Investigations

The SEC bungled at least three agency exams and two investigations of Madoff due to inexperience, incompetence, and a lack of sufficient internal communication within the agency, the report found.

The poor communication resulted in at least one instance of multiple SEC offices investigating Madoff’s operations at the same time without anyone knowing about the others’ investigations, officials said. It wasn’t until Madoff, the target of the investigations, spilled the beans about the ongoing probes that the SEC authorities realized what was going on.

“It was Madoff himself who informed one of the examination teams that the other examination team had already received the information they were seeking from him,” the report found.

SEC Admits Mistakes, Vows to Get it Right

Reeling from the black eye and public flogging delivered by Kotz’ report, SEC chairwoman Mary L. Schapiro, who came on board under President Barack Obama, said changes “made since January will help the agency better detect fraud.”

Those improvements, Schapiro said, include improving the SEC’s enforcement procedures and strengthening its inspection program with more training for staffers and other measures.

Shapiro said the SEC’s handling of the Madoff’s investigation is “a failure that we continue to regret.”

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