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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September 4th, 2009 at 12:58 pm
September 3, 2009
As a members of the Madoff Coalition for Investor Protection as well as all innocent investors in the Madoff Ponzi scheme, we appreciate the efforts extended by SEC Inspector General David Kotz and staff to detail the failures of the SEC in its handling of the Madoff investigation over the last two decades.
With all due respect, the Inspector General’s summary review does little more than confirm the assertions made by Harry Markopolos in his testimony to Congress on February 4, 2009. Mr. Markopolos defined the SEC as incompetent in its dealings with Bernard Madoff. The Inspector General reconfirms Mr. Markopolos’ assessment.
Who else had regulatory oversight of Madoff over the years? The NASD and its offspring FINRA (Financial Industry Regulatory Authority). How did Mr. Markopolos define FINRA during his riveting testimony? He pointedly characterized FINRA as being ‘in bed’ with the industry.
We have learned that FINRA has its own multi-billion internal investment portfolio. This portfolio had hundreds of millions invested in hedge funds, fund of funds, private equity, and auction-rate securities amongst its overall holdings.
On August 10th, Amerivet Securities of Moreno Valley, CA filed a complaint against FINRA. This complaint requests that FINRA fully open its books and records for a thorough investigation of all its business practices, including its investment activities. The Madoff Coalition for Investor Protection fully supports this Amerivet complaint.
We know Bernard Madoff had longstanding and extensive relationships with the NASD, Nasdaq, and FINRA. In light of those relationships, who wouldn’t support a requirement obligating a financial self-regulatory organization such as FINRA to open its books for an independent investigation? We call on the media, Washington, and Wall Street to support our call for this independent investigation of FINRA. The American public deserves nothing less.
Ronnie Sue Ambrosino
Coordinator,
Madoff Coalition for Investor Protection