America’s top securities watchdog received six “substantive” tip-offs about Bernard Madoff’s $65 billion Ponzi scheme between 1992 and 2008 but failed to uncover world’s biggest financial scam.
A summary of a 450-page report by the office David Kotz, the Securities and Exchange Commission’s (SEC) inspector general, said: “Despite three examinations and two investigations being conducted, a thorough and competent investigation or examination was never performed”.
The inspector general’s findings are a further embarrassment for the regulator, which in the past had asked Madoff for advice on its dealings with financial markets.
Madoff confessed last December to running the largest Ponzi scheme ever known. He was jailed for 150 years in June and is currently serving his sentence at a North Carolina prison.
In January President Barack Obama replaced long-time SEC chairman Christopher Cox with Mary Schapiro, who has since brought in a series of tougher rules to repair the regulator’s reputation.
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Ms Schpiro said today that the SEC’s mishandling of Madoff “is a failure that we continue to regret and one that has led us to reform in many ways how we regulate markets and protect investors”.
Mr Kotz found that the SEC’s failure was not influenced by financial or other inappropriate connections to Madoff and his family. There had been suspicions that the romance and subsequent marriage of Eric Swanson, a former SEC assistant director, and Shana Madoff, the swindler’s niece, allowed Madoff’s scam to remain uncovered.
Instead, Mr Kotz blamed inexperienced investigators who did not follow up numerous suspicious signs uncovered by their preliminary examinations of Madoff’s Manhattan investment and trading business.
“When Madoff provided evasive or contradictory answers to important questions in testimony, they simply accepted as plausible his explanations,” the report said.
Even when SEC staff asked independent third parties for information and this information identified inconsistencies, they failed to follow up the red flags.
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One indicator of fraud came from another business regulated by the SEC, which spelled out in a series of emails how it was impossible for Madoff to be trading options in the volumes that he claimed.
“Yet at no time did the SEC ever verify Madoff’s trading through an independent third party,” the report said.
On another occasion a hedge fund manager wrote to the SEC to point out inconsistencies at Madoff’s business. But SEC staff ignored the red flags raised by the fund manager and instead concentrated on looking at whether Madoff was guilty of front-running because that was where their own expertise lay.
“They conducted their investigation by simply asking Madoff about their concerns and accepting his answers,” the report said.
After Madoff’s arrest last December, Harry Markopolis, a Boston accountant and investor, revealed that he had written to the SEC on numerous occasions to alert the regulator to the fraud.
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Mr Kotz’s report also reveals how carefully Madoff controlled his employees in order to cover up his crime.
“On one occasion, when a Madoff employee was speaking to [SEC] examiners at Madoff’s firm, after a couple of minutes another Madoff employee rushed in to escort her from the conversation, claiming she was urgently needed,” the report said.
“When the examiners later asked Madoff the reason for the urgency, Madoff told them her lunch had just arrived, even though it was 3pm.”
When he was asked by SEC investigators to provide documents, Madoff became furious, Mr Kotz found. One investigator described how “veins were popping out of his neck” as the phony fund manager grew “increasingly agitated”.