Bernard Madoff got away with record-breaking investment fraud for far too long because of regulatory incompetence at the Securities and Exchange Commission, according to a shocking and angering report by the agency’s inspector general.
At one point SEC investigators decided against asking the NASDAQ stock market for data on trades Mr. Madoff claimed to have made because it would be too time-consuming to review the data.
The new IG report also cited two other botched chances to discover Mr. Madoff’s fraud when investigators overlooked obvious leads. They didn’t even talk to each other when parallel investigations were going on. The accumulation of missed opportunities to stop Mr. Madoff is reminiscent of the failure of the U.S. intelligence community to “connect the dots” before 9/11.
This raises questions about the competence and priorities of SEC investigators and mid-level managers, whether the agency’s budget was adequate and why it did not attract better staff, subjects that are due to get a thorough review by Congress in coming weeks.
The IG, David Kotz, found that despite eight detailed complaints and two news articles over 16 years raising questions about a potential Ponzi scheme by Mr. Madoff, “a thorough and competent examination or investigation was never performed.”
Instead, Mr. Madoff was slapped on the wrist by being required to register as an investment adviser. He promptly told prospective investors that the SEC had examined his operations and given him a clean bill of health, the IG said. Mr. Kotz dismissed suspicions that Mr. Madoff had received special treatment because a senior SEC attorney married his niece or that the agency’s failure rested with the top level of the SEC. .
But he did find that Mr. Madoff, who had been chairman of the NASDAQ stock market and had sat on SEC advisory committees, intimidated low-level SEC investigators and their mid-level bosses in the enforcement division.
SEC investigators in 2003 “almost immediately caught (him) in lies and misrepresentations but failed to follow up on inconsistencies,” the IG report said. They also declined numerous offers from private complainants to supply detailed information on how Mr. Madoff operated.
Mr. Madoff escaped justice for years while commiting $65 billion worth of investment fraud. But he was finally brought to stern account in June, receiving the maximum available sentence — 150 years — from a federal judge after pleading guilty to 11 criminal counts.
Regulators obviously, repeatedly and appallingly fell short in this case. The SEC is supposed to be the lifeguard on the beach, warning investors of dangers and ordering them out of the water when sharks like Mr. Madoff show up.
It seems these lifeguards were too busy with other distractions to do their job properly, so Mr. Madoff merrily went on defrauding investors.
Anger is an appropriate reaction.