America’s main financial regulator will come under intense scrutiny from lawmakers for allowing its top lawyer to work on the case of Bernard Madoff, even though he inherited money tied to the convicted fraudster’s Ponzi scheme.
Mary Schapiro, chair of the Securities and Exchange Commission, will appear before a Congressional committee today to answer questions on the “multiple potential conflicts” of David Becker, who left his post as SEC general counsel last month.
Mr Becker and his two brothers are currently being sued by Irving Picard, the trustee seeking to recover money for investors who lost money with Madoff’s Ponzi scheme. The suit seeks to “claw back” $1.5 million in alleged “fictitious profits” that their mother’s estate received after she made an original investment of just $500,000 in Madoff’s fund. It does not suggest that the brothers knew about Madoff’s fraud.
Mr Becker, who is a co-executor of his mother’s estate, has told Republican lawmakers, that “either shortly before or after”he took up his post at the SEC in 2009 he informed both Chairman Schapiro and William Lenox the then-SEC Ethics Counsel about his interest in his mother’s Madoff account. However, he did not publicly disclose this information.
In a letter to lawmakers, Mr Becker has further stated that he did not recuse himself from dealing with the Madoff case because he had been advised by the SEC’s Ethics Counsel that that “a reasonable person with knowledge of all of these facts would not question [his] impartiality.”
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His involvement with the Madoff case included helping the SEC recommend a method of valuing net equity to determine which Madoff victims could file claims and how much they could claim – a matter which could suggest a serious personal conflict of interest, because the solution he proposed would benefit his family.
Madoff was arrested in 2008 and is serving a 150-year prison sentence after pleading guilty to a scam spanning decades in which he used money from new clients to pay off old ones.
Given the SEC’s spectacular failure to detect Madoff’s 25-year fraud earlier, despite many warnings and red flags, and that Mr Becker did an earlier stint as SEC general counsel between 2000 to 2002, just when the SEC received a serious tip off that Madoff was perpetrating a gigantic fraud, the regulator’s decision to allow him to be involved in the Madoff case has aroused much interest and puzzlement.
Randy Neugebauer, a Republican Representative from Texas, one of several lawmakers who have written to Ms Schapiro seeking explanations, has said that it is vital to ensure that people working at the SEC are properly vetted and that they do not have potential conflicts of interest.
“Since the SEC holds companies to be transparent and accountable, we want to know what processes are in place to ensure that the same standards apply to the SEC,” a spokesman for Mr Neugebauer said.
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SEC’s inspector general David Kotz has started an internal investigation into Mr Becker’s case and today a joint congressional committee will seek further answers from Ms Schapiro. In particular, they are keen to establish whether she agrees with the SEC’s Ethics Counsel that Mr Becker’s position did not give rise to a conflict of interest and to know what steps she took to manage the appearance of or actual conflict of interest presented by Mr Becker’s financial interest in the Madoff proceedings.
They are also likely to ask for a list of any other SEC employees who may have had a financial interest in Madoff’s investments on or after 2000, when the SEC received its first major tip off that Madoff was acting fraudulently.
The SEC, which says that Mr Becker’s departure has nothing to do with his involvement with the Madoff case, declined to comment.