Madoff scandal sparks investigation into SEC failures
2009-01-06
News
The US Securities and Exchange Commission's failure to act on the "red flags" raised about Bernard Madoff's investment business has sparked a wide-ranging investigation of the regulator's inaction.
Speaking at a US House financial services committee hearing on the alleged Madoff fraud, SEC's inspector general David Kotz said his unit had launched the investigation at the initial request of SEC chairman Christopher Cox.
Cox asked Kotz to investigate why allegations made about Madoff as far back as 1999 were dismissed by the regulator as not credible. Kotz was also asked to look into alleged conflicts of interest arising from the Madoff family's relationships with members of the SEC's staff.
However, Kotz said his probe would go beyond the specific points raised by the SEC chairman and will include an evaluation of broader issues regarding the overall operations of the SEC's inspection and enforcement divisions.
Kotz told the House hearing his office would seek to "provide overarching and comprehensive recommendations to ensure that the commission fulfils its mission of protecting investors, facilitating capital formation and maintaining fair, orderly and efficient markets" following the completion of the investigation.
The investigation will be "independent and as hard-hitting as necessary" and would not shy away from criticism of the SEC where it is warranted, Kotz promised.
The investigation could lead to a shake-up of the SEC and other regulatory authorities who have been criticised for failing to spot the many problems in the financial industry that came to light in 2008.
Congressman Paul Kanjorski, a member of the financial services committee and chairman of the sub-committee on capital markets, insurance and government sponsored enterprises, said Madoff's Ponzi scheme fell through the cracks of the US regulatory system.
He was particularly critical of the apparent failure of the SEC to conduct inspections or obtain records after Madoff was initially forced to register as an investment adviser.
"It now appears that regulators should have detected the Madoff wrongdoing earlier because of the red flags raised by others," Kanjorski said.
He pointed out that outsiders had been unable to model Madoff's returns and highlighted articles in the specialist press published as early as 2001 raising questions about the company. "Other red flags include unrealistically steady investment returns and an auditor the size of a mouse examining a fund the size of an elephant," he said.
Kanjorski said the SEC needed greater resources to fulfil its functions. He pointed out that the enforcement unit was chronically understaffed, employing just 400 people to look at 11,000 investment advisers and thousands of mutual funds.
The hearing brought little comfort to clients who lost money in the fraud.
Stephen Harbeck, president of the Securities Investor Protection Corporation (SIPC), which oversees the liquidation of failed brokerage companies, said identifying investor assets in Madoff Investment Securities had proved problematic.
"The customer statements Madoff had been sending to investors bore little or no relation to reality. The records sent to customers were inaccurate when compared to the inventory of securities actually held by the brokerage firm," he said.
Harbeck said this had meant it was not possible to transfer all or parts of customer accounts to other brokerage companies.
He said claim forms had been mailed to over 8,000 Madoff investors since January 2, 2009 requesting details of the sums given to and withdrawn from Madoff Investment Securities. The responses will be used to analyse what each investor is owed.
However, Harbeck warned "extended time period of the deception and the numerous deposits and withdrawals of assets from the company over that time may make that reconstruction very difficult".
Harbeck also said over $830 million in liquid assets of the defunct brokerage company had been identified to date and may be subject to recovery by clients. A court order authorising the release of $29 million of debtor assets had also been obtained, he said.
Where securities or cash are found to be missing from customer accounts, the SIPC can use its own funds, within limits ($500,000 in missing securities, $100,000 in missing cash), to restore customer accounts.
The organisation currently has assets of just $1.6 billion in the SIPC Fund which is used to restore customer accounts.