The SEC and Bernie Madoff

See here The Bernie Madoff fraud where I point out that it's not just the Securities and Exchange Commission (SEC) that failed; but there's no doubt they were shockingly dismal.

The Washington Post has a good analysis –

SEC Ignored Credible Tips About Madoff, Chief Says – washingtonpost.com

The nation's chief securities regulator said yesterday it was "deeply troubling" that his agency had failed to catch perhaps the largest Ponzi scheme in history despite "credible and specific allegations . . . repeatedly brought to the attention of SEC staff" regarding the activities of Bernard L. Madoff.

In making this unusually frank statement, Securities and Exchange Commission Chairman Christopher Cox announced he had ordered an internal investigation.

His remarks followed a day of growing demands for the agency to explain how it missed Madoff's alleged $50 billion fraud, including the apparent failure of regulators to spot numerous and massive inconsistencies during an investigation of his company that ended quietly in 2007.

Cox offered the beginnings of answers. He said the agency inappropriately discounted allegations, that staff did not relay concerns to the agency's leadership and that examiners relied on documents volunteered by Madoff rather than seeking subpoenas to obtain critical information. And Cox said the agency's inspector general would investigate whether personal relationships between Madoff's family and SEC staff played a role in the failed oversight.

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The SEC said yesterday that it conducted routine examinations of the company in 1999 and 2004, as well as a previously disclosed examination in 2005 and an investigation that ended in 2007. The 2005 examination found minor problems; the others closed without incident.

Cox said last night that Madoff kept multiple sets of books and falsified documents, allowing him to mislead investors and regulators.

Cox and other commissioners have been angered that they learned information about the case from the news media instead of from agency staff, according to people familiar with the matter. For example, when senior staff members told the commissioners about the relationship between Swanson and Madoff's niece, they said Swanson had not been involved in the 2005 examination. They did not, however, tell the commissioners that Swanson had been involved in previous looks at Madoff, these people said.

A Boston investment professional, Harry Markopolos, started writing letters to regulators in 1999 alleging that Madoff was conducting a Ponzi scheme. Markopolos continued to send letters, including most recently in April. Markopolos said that his charges were detailed and specific, and he said he was still angry that the SEC ignored him.

"They have a lot to answer for," Markopolos said. "They refuse to enforce rules against this industry."

The extent of the alleged fraud has also raised questions about the possible involvement of other people. Cox's statement yesterday mentioned "others who may be involved."

Simply generating monthly account statements for all of his clients would have required an extensive effort on Madoff's part, said Laurie S. Holtz, a forensic accountant who has investigated similar schemes.

"That isn't going to be done by Mr. Madoff sitting at home with a PC," Holtz said. "There's got to be a whole retinue of support to make this happen."