Taking the SEC to the Woodshed

September 10, 2009
The Legal Times
Inexperience. Incompetence. Laziness. All were cited as reasons behind the Securities and Exchange Commission's failure to detect Bernard Madoff's $50 billion Ponzi scheme at a packed hearing today before the Senate Committee on Banking, Housing and Urban Affairs.
"There can be no excuse for that colossal failure," said chairman Christopher Dodd (D – Conn). "How could this possibly have happened? And what can we do to minimize this ever happening again?"
SEC inspector general H. David Kotz, who on Aug. 31 released a 457-page report detailing the agency’s shortcomings, appeared before the committee to summarize his findings. He was joined by Robert Khuzami, head of the SEC’s Enforcement Division, and John Walsh, acting director of the Office of Compliance Inspections and Examinations, as well as fraud examiner Harry Markopolos, who in 1999 first attempted to alert the agency to Madoff’s scheme.
Kotz noted the SEC received six substantive complaints about Madoff between 1992 and 2008, but never conducted a thorough investigation. “There were so many opportunities. It seemed relatively easy to uncover this, and it wasn’t done.”
“They were too trusting of Madoff,” he continued. “A lot of people simply couldn’t believe Madoff was operating a Ponzi scheme. And they set the scope of their investigations too narrowly. There was too much of an emphasis on numbers – how many exams were going to get done that year?”
Madoff, 71, is serving a 150 year prison sentence after pleading guilty in March to fraud.
Kotz also described a culture of deference to the Wall Street star. “Junior examiners sat with him for hours while he told them stories about how he was on the short list to be the next SEC chairman.”
Khuzami, who was the general counsel for the Americas at Deutsche Bank prior to joining the SEC in March of 2009, testified that the division of enforcement is now “undergoing a fundamental restructuring.”
Among the new initiatives: creating five specialized investigative groups of in-house experts and newly-hired staff; cutting management by 40 percent and reassigning those personnel to front-line investigations; hiring the division’s first-ever chief operating officer, and implementing a new system for handling complaints and tips. He also promised better training and more rigorous performance reviews.
But IG Kotz added that throwing money at the agency isn’t the solution. “It’s more than just resources. At the end of the day, the SEC spent years investigating Madoff, but it didn’t do the appropriate thing.”