SEC checklist: Fix the mess, find the next Madoff
Written on September 5, 2009
The Securities and Exchange Commission should overhaul management and take advantage of the hungry, experienced lawyers it employs, so that when the next Bernard Madoff is staring in its face, it will catch him.
That’s the assessment of lawyers who once held top positions at the SEC, whose own inspector general blasted it this week for bungling repeated chances to snare the now imprisoned mastermind of a $65 billion Ponzi scheme.
“What needs to change is the message from the top,” said Michael MacPhail, a former SEC branch chief who is now a partner at Holme Roberts & Owen LLP in Denver.
“There are very skilled examiners, but the agency has traditionally cared more about its statistics than high-quality examinations,” leading to a “check-the-box” mentality, he said. “They need to show they want to find problems.”
Inspector General David Kotz’s report sets forth a battery of missed opportunities to catch Madoff, in part because inexperienced staff lacked the drive to follow up on leads.
Madoff would admit to being “astonished” that the SEC did not rein him in after a 2006 interview in which he provided account information that, if reviewed, could have unearthed his fraud.
“The key is, are they properly trained to find the bigger things?” said former SEC Commissioner Harvey Goldschmid, now a professor at Columbia Law School.
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SEC Chairman Mary Schapiro wants to invigorate enforcement after some agency critics said it atrophied under her predecessor, Christopher Cox Business Card Holders. Emails to Cox seeking comment were not returned.
Schapiro is making it easier for staff to issue subpoenas, negotiate penalties and hold investment advisers more accountable for their customers’ funds.
Some lawmakers in Congress, meanwhile, are trying to find new ways to funnel money to the agency to aid enforcement.
Money alone may not fix the SEC’s failings. Goldschmid and former Chairman Harvey Pitt have called for an overhaul of the agency’s compliance, inspections and examinations office.
“The place needs to be run less like a bureaucracy and more like a business,” said Barry Barbash, a former SEC director of investment management and now a partner at Willkie Farr & Gallagher LLP in Washington.
In 2004 and 2005, the SEC’s compliance office conducted two examinations of Madoff, but made no real effort to analyze red flags indicating that his trading activity and reported steady returns for his clients were a fiction, Kotz wrote.
He described how SEC examiners never sent a letter to an outside regulator seeking trade data, figuring it would be too time-consuming to review the information they obtained.
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