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SEC chairman says agency failed to probe Madoff

(Agencies)
Updated: 2008-12-17 22:37

The Madoff affair "illustrates the lack of credible enforcement over several years by the SEC," said Reed, who chairs the Senate banking panel that oversees the SEC. He criticized the agency's "lack of a strong commitment to be vigilant."

A copy of the London Evening Standard front page is pictured outside the entrance to the London office of Madoff Securities International. The US finance watchdog has expressed concern at how repeated warnings about Bernard Madoff were ignored, ahead of the Wall Street investment baron's first court appearance over a 50 billion dollar fraud. [Agencies]

Shortly before Cox denounced his own staff, a widely respected former SEC chief accountant, Lynn Turner, aired her own skepticism. "I can't comprehend how a well-run investigation would have missed a fraud of this magnitude," Turner said.

The Madoff scandal is just the latest instance in which SEC regulators have overlooked clear warning signs of possible fraud.

An earlier review by the SEC inspector general determined that the agency's monitoring of the five biggest Wall Street firms, which included Bear Stearns, was lacking.

Cox himself has come in for strong criticism.

In March, a few days before Bear Stearns nearly collapsed into bankruptcy, Cox told reporters the agency was closely monitoring the five investment firms and had "a good deal of comfort" in their capital levels. Then, as federal officials orchestrated the rescue, Bear Stearns was bought by rival JPMorgan Chase with a $29 billion government backstop.

As for Madoff, the SEC's enforcement division looked into Madoff's business last year. Until Tuesday night, the SEC had refused to criticize the inaction that followed last year's probe.

Damaging the SEC's credibility in the Madoff case was the fact that a securities executive, Harry Markopolos, complained to the SEC's Boston office in May 1999. Markopolos told the SEC staff they should investigate Madoff because Markopolos felt it was impossible for the kind of profit he was reporting to have been gained legally.

But the SEC's Boston office has itself been accused in the past of brushing off a whistle-blower's legitimate complaints, in a case that led the head of that office to resign in 2003. The whistle-blower, Peter Scannell, eventually persuaded state regulators and the SEC to act against mutual fund giant Putnam Investments, where Scannell worked.

"It's flabbergasting that nobody can nail the bums in the SEC who turn their back on and/or aid and abet people who defraud investors," Scannell said in a telephone interview Monday.

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