Monday, January 5, 2009

SEC on Madoff+Keystone Cops

Bernard L. Madoff Investment Securities LLC was examined at least eight times in 16 years by the Securities and Exchange Commission and other regulators, who often came armed with suspicions.

SEC officials followed up on emails from a New York hedge fund that described Bernard Madoff's business practices as "highly unusual." The Financial Industry Regulatory Authority, the industry-run watchdog for brokerage firms, reported in 2007 that parts of the firm appeared to have no customers.

Mr. Madoff was interviewed at least twice by the SEC. But regulators never came close to uncovering the alleged $50 billion Ponzi scheme that investigators now believe began in the 1970s.

The serial regulatory failures will be on display Monday when Congress holds a hearing to probe why the alleged fraud went undetected. Among the key witnesses is SEC Inspector General David Kotz, who was asked last month by the agency's chairman, Christopher Cox, to investigate the mess...

In November 2005, SEC investigators in New York met with Mr. Markopolos, who prepared a 21-page report outlining his concerns. His conclusion was that Mr. Madoff's firm "is the world's largest Ponzi scheme."

The 2005 review and Mr. Markopolos's report prompted the SEC to open an enforcement case, a notch more serious in the SEC's world than the previous examination. "The staff is trying to ascertain whether" the allegation that Mr. Madoff "is operating a Ponzi scheme has any factual basis," according to the SEC case memo.

After sifting through documents and interviewing Mr. Madoff, the SEC concluded that neither he nor Fairfield Greenwich Group, a New York firm that funneled investors' money into the firm, told investors Mr. Madoff was making investment decisions. Fairfield revised its disclosures to investors.

The SEC also found that Mr. Madoff misled the agency in 2005 about the strategy he used for customer accounts, withheld information about the accounts and violated SEC rules by operating as an unregistered investment adviser. "The staff found no evidence of fraud," according to the SEC case memo. Mr. Madoff agreed to register his business that September, and the SEC didn't make its findings public.

Finra's full-scale examination in 2007 indicated that parts of Mr. Madoff's firm had no customers. It didn't provide an explanation of this finding. "At this point in time we are uncertain of the basis for Finra's conclusion in this regard," SEC staff wrote last month, after Mr. Madoff was arrested.

"We don't have access to that document, nor have we received any feedback from the SEC on our examinations of the Madoff broker-dealer," said Nancy Condon, a spokeswoman for Finra.

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