SEC To Probe Its Oversight Of Madoff
Liz Moyer, 12.16.08, 11:07 PM EST
Cox admits agency received 'credible and specific' charges of wrongdoing as far back as 1999.
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The Securities and Exchange Commission said late Tuesday it would open an investigation into its oversight of Bernard Madoff Investment Securities, after repeated warnings since 1999 failed to lead it to uncover an alleged $50 billion Ponzi scheme.
SEC Chairman Christopher Cox said in a statement Tuesday that initial findings in its investigation into the Madoff case were "deeply troubling." The case is the latest in a series of what critics charge are missteps by the SEC, reinforcing a belief by these critics that the agency lacks teeth and should be abolished.
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Cox said the SEC had been given "credible and specific" allegations about wrongdoing at Madoff's investment advisory business dating back to 1999, but the agency failed to take formal action. The SEC never even got subpoena power to investigate, instead relying on information produced voluntarily by Madoff's firm.
Madoff kept multiple books and false records of his activities, enabling him to dupe not only investors but regulators and others, SEC also said Tuesday.
"I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them," Cox said in the statement.
Now the SEC's inspector general will look at the agency's handling of the matter. This comes after the agency admitted last week its enforcement division probed Madoff Investment Securities in 2007, but didn't recommend formal action.
Congress lit a fire under the SEC in early 2007, saying it botched an insider trading investigation into the hedge fund Pequot Capital. In that investigation in 2005, SEC investigator Gary Aguirre was fired after seeking to interview John Mack, a well-connected Wall Street chief who is now head of Morgan Stanley.
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Aguirre contends that he was fired in retaliation for saying his investigation was derailed by political pressure within the agency. "At best, the picture shows extraordinarily lax enforcement by the SEC," the Senate concluded in a February 2007 report on the matter. "At worse, the picture is colored with overtones of a possible cover-up."
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The SEC and the U.S. attorney in Manhattan charged Madoff last week with fraud in operating a $50 billion Ponzi scheme through his investment advisory business. Madoff, according to court documents, told law enforcement officials who arrested him Dec. 11 that "he paid investors with money that wasn't there," and that there "is no innocent explanation."
One of the questions in the case is who else might have known about the alleged fraud, though Madoff is said to have implicated only himself. Several of Madoff's family members worked at the firm, another fact that has raised eyebrows. His brother, Peter, is director of trading and chief compliance officer. Peter's daughter, Shana, is a compliance attorney at the firm. She married a former SEC compliance official, Eric Swanson, in 2007, one year after he left the agency.
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Madoff's sons Andrew and Mark are directors of proprietary trading and are believed to be the two senior officials to whom Madoff confessed the scheme last week and who turned him in through an attorney, as outlined by the prosecutor's complaint, which did not identify them.
Relationships between the firm and the SEC will be studied, according to Cox. "The investigation should also include all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by staff regarding the firm," he said in his statement Tuesday night.
That means anyone at the agency who had more than cursory contact with Madoff's firm will not be allowed to participate in the investigation.
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