The Securities and Exchange Commission "never took the necessary and basic steps" that would have led to the agency uncovering Bernard L. Madoff's $65 billion Ponzi scheme, according to a scathing report issued by the agency's inspector general.
The 450-page report, for which 122 individuals were interviewed and 140 testimonies taken, documents in detail the failure of the agency to follow up on several complaints lodged against Madoff over a 16-year span.
In the report, SEC Inspector General H. David Kotz wrote, "That the SEC received numerous substantive complaints since 1992 that raised significant red flags concerning Madoff's hedge fund operations should have led to questions about whether he was actually engaged in trading and should have led to a thorough examination and/or investigation of the possibility that he was operating a Ponzi scheme."
Despite some five investigations and examinations, the SEC failed to detect Madoff's scam.
Kotz urged SEC Chair Mary Schapiro to review the findings of the report with the agency's Office of Compliance Inspections and Examinations and its Enforcement Division's management and focus on the "performance failures by those employees who still work at the SEC, so that appropriate action (which may include performance-based action, as appropriate) is taken."
Schapiro issued a letter in response to the report, reiterating her commitment to improving the commission's performance.
Several high-level SEC officials have left the agency in the wake of the controversy.
The report cited a number of opportunities to catch Madoff that the SEC missed, including failing to pursue allegations brought roughly eight years ago by Harry Markopolos, a certified fraud examiner, who posited that Madoff's entire fund was nothing more than a Ponzi scheme. Markopolos explained his analysis to the commission in two separate meetings, but no investigation resulted.
In addition, a 1992 investigation of Avellino & Bienes, a troubled investment firm with ties to Madoff, found that Madoff had complete control over the firm's customer funds - yet the SEC conducted only a brief and very limited examination of Madoff, run by an inexperienced examination team. Although the SEC examiners did review records from the Depository Trust Co., they obtained those records from Madoff, rather than going to the DTC itself.
The SEC also apparently ignored articles in a number of leading financial publications, including Barron's, questioning Madoff's investment methods.
Kotz further criticized the SEC, saying that it put inexperienced personnel on the probes and that the investigations were too limited in scope.
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