After Madoff, SEC May Send Investigators to “College”

Speculation has been high in the months following disgraced financier Bernard Madoff’s arrest, that the Securities and Exchange Commission (SEC) may have dropped the ball in stemming what may be the largest Ponzi scheme in history. The SEC has come under fire for apparently missing warnings that something was amiss with Madoff’s investment advisory business.

In response to the accusations, scandals, resignations, and bad press, the SEC is considering the development of a so-called “fraud college” to teach staff how to locate market abuses, according to Chairman, Mary Schapiro, reported Bloomberg.com. “The fraud college concept is a great one,” said Schapiro at a joint meeting with the Commodity Futures Trading Commission (CFTC) in Washington. Schapiro added that collaborating fraud-detection training with the CFTC “would be particularly valuable,” quoted Bloomberg.com.

Madoff is now spending 150 years in prison for orchestrating a Ponzi scam estimated to have cost duped investors an incomprehensible $65 billion.

Recently, the SEC’s inspector general, H. David Kotz, delivered a scathing report to the agency discussing its part in failing to notice or prevent Madoff’s scam. In December, following Madoff’s arrest, Kotz initiated an investigation into how the SEC handled its dealings with Madoff, said FOX Business previously. Christopher Cox, former SEC chairman, requested the investigation, asking, for example, why the agency believed allegations made through the years about Madoff to be “not credible,” reported FOX Business. The summary of the nine-month investigation released by Kotz, said Bloomberg.com. The report revealed incompetence and inexperience at the agency, enabling Madoff to elude the SEC, amass a fortune, and rob scores of investors, some of their life savings.

Now, the agency is training over 300 examiners on how to spot fraud, said Schapiro, responding to John Coffee, a securities law professor at Columbia University, reported Bloomberg.com, which noted that Madoff flew under the SEC’s radar for over 16 years.

The SEC also recently announced that its enforcement division will now be comprised of five specialty divisions: Asset management, structured products, municipal securities, foreign corrupt practices, and market abuse, reported Bloomberg.com. But the plan has its critics. “Specialization can be a danger as well as an asset,” said Coffee—Coffee suggested a joint SEC-CFTC task force for swap contracts—“The greater danger is that specialized units don’t share information well,” quoted Bloomberg.com

Last month we wrote that the Madoff scandal might have played a role in the departure of a key SEC official. According to Bloomberg.com previously, Lori Richards, director of the SEC’s Office of Compliance Inspections and Examinations, was widely criticized for missing warning signals about Madoff. Richards, who held her post since 1995, was scheduled to vacate August 7. Earlier this year, former Enforcement Director Linda Thomsen resigned following a pretty severe drubbing at the hands of a Congressional committee investigating the Madoff debacle. Also, money manager Harry Markopolos has long claimed that he tried to warn the SEC numerous times over several years about Madoff. According to an earlier Bloomberg.com report, Markopolos has said that SEC inspectors lack knowledge about products such as derivatives and have inadequate understanding of the businesses they are supposed to review.

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