SEC's Gaping Blind Spots Kept Madoff's Misdeeds Out of Sight

The Washington Post
By Steven Pearlstein
Wednesday, July 1, 2009
It will be the end of the summer before we learn how the Securities and Exchange Commission could have conducted at least five inquiries into Bernie Madoff's activities over 16 years and never found a Ponzi scheme so huge that it robbed billionaires and bubbies of $13 billion and won Madoff a 150-year, all-expenses-paid trip to prison.
That's when the commission's inspector general will issue his report on the Madoff screwup. By then, Mary Schapiro, the SEC's earnest and aggressive new chairman, will have done enough to restructure the agency, replace top management, expand the staff, step up enforcement and revive morale that she'll be able to declare, with sufficient credibility, that it won't happen again.
Make no mistake -- the IG's report is likely to be a devastating rebuke of an agency once regarded with equal measure of fear and respect.
It would be comforting to learn that it was only a lack of resources and poor leadership at the top that explains why the SEC blew so many opportunities to uncover Madoff's larcenous scheme, along with Madoff's cunning and charm.
But the list of particulars against the SEC is also likely to include an insular culture that casts an overly skeptical eye on tips from jealous competitors, unhappy customers, disgruntled employees or publicity-seeking state regulators; a staff top-heavy with lawyers but woefully lacking in people who understand traders, markets and complex new financial instruments; and a mentality within the agency that discouraged cooperation and information-sharing among its divisions.
And, then, of course, there are the venal sins of timidity, gullibility and sheer incompetence, all of which play a role in the Madoff drama.
In the past month, more details have begun to dribble out about how Madoff created the illusion of a legitimate investment business while operating with only a handful of loyal lieutenants from a tiny office using an outdated IBM computer. The information is contained in civil suits against three firms that helped direct most of the money and investors into Madoff's net.
In one suit, the SEC alleges that Cohmad, the biggest of the so-called feeder firms, maintained its offices right next to Madoff's office in the Lipstick Building in Midtown Manhattan. At various times, Cohmad's two top executives, Maurice Cohn and his daughter Marcia, shared the same reception area, the same photocopier, the same bathrooms as Madoff. Madoff and his brother even owned one quarter of Cohmad's stock, giving rise to the company name, which combined Cohn and Madoff.
So imagine you are an SEC investigator and you show up at Madoff's office in 2006 to check out allegations that he may be running a Ponzi scheme and engaging in an illegal trading technique known as "front running" to inflate his investors' returns.
You are aware that, as far back as 1990, the SEC had uncovered evidence that Madoff was managing money for investors without properly disclosing this line of business with the SEC.
Your initial inquiry reveals that Madoff is once again acting as an investment adviser without proper disclosure. You also find that he is executing all his trades for those accounts not through his own brokerage firm, located on another floor in the same building, but through offshore companies.
There is no visible sign of any marketing efforts for these investment advisory services, but there is this other brokerage in the same office with a surprising number of clients who live in the same posh Florida resort as Madoff and belong to his country club.