Posted in: Greedy Brokers |
Everyone should read the New York Times article on the SEC’s investigations of Bernie Madoff.
Yesterday the SEC’s inspector general, H. David Kotz, issued a full report on the agency’s failures in discovering Madoff’s Ponzi scheme prior to December 2009.
As you might expect, it’s not pretty.
According to Kotz, the SEC missed red flags from as early as 1992, and “despite numerous credible and detailed complaints, [the SEC] never took the necessary, but basic steps to determine if Madoff was operating a Ponzi scheme.”
For those who don’t already know, Madoff was never actually caught by the SEC, or any government agency for that matter. He was allowed to let his Ponzi scheme run its course, until he eventually ran out of money and his sons reported him to the police.
Senator Charles Schumer, who is a member of the Senate Banking Committee, told reporters Thursday that the SEC is “a shadow of its former self,” because the agency “has been starved for resources.” That is why he, along with President Obama, are trying to give the agency an additional $43 million for the next fiscal year so that they can hire additional investigators.
Blaming the failures of the SEC on a lack of funds seems like the easiest way to diagnose the problem, but it’s probably not the best way.
It’s not as if the SEC didn’t have the resources to properly investigate Madoff. Kotz’ report detailed how SEC investigators were often sweet-talked by Madoff into not following up on complaints. “A simple inquiry to one of several third parties could have immediately revealed that Madoff was not trading in the volume he was claiming,” Kotz said in the report.
In 2005, when SEC investigators were talking with one of Madoff’s employees, and aide to Madoff broke up the conversation, explaining that it was time for lunch—at 3 in the afternoon. In the same year, Madoff had even boasted that he was on the short list to be the next chairman of the SEC.
Throwing money at an ineffective agency like the SEC will not necessarily stop these systematic failures from re-occurring.
The SEC, like FINRA, is made up primarily of industry insiders. In an extreme case like Madoff, their admiration of the financier doomed any chance of an unbiased and effective investigation. Adding more money and manpower will not radically change the culture of the SEC.
