Friday, September 4, 2009

SEC "Botched" Madoff Inquiries - That's A Comfort

I will be going out of town for a couple of days this coming weekend. Most likely, there will be a couple of days there when I won't get a chance to get something written. In that event, I hope you all have a safe and relaxing Labor Day Weekend.

I came across this story in my daily paper Thursday, and was immediately taken by the title, first of all, but the sheer incompetence demonstrated by the SEC over a number of years, second of all. It is truly staggering. This headline is only part of the story, though SEC Botched Inquiries Into Madoff Scheme: Inspector General Cites Inexperienced Staff and Delays; 'A Failure That We Continue to Regret'.

A "failure" that you "continue to regret"? Uh, no shit, Sherlock! And how do you think all of those people who lost their LIFE SAVINGS feel? Do you think they "regret" your incompetence?? I mean, really - no freakin' duh. That's putting it so mildly as to be insulting (to say the least), especially given what people went through, are going through, WILL be going through as a result of this "botch":
The Securities and Exchange Commission botched numerous opportunities to uncover Bernard Madoff's Ponzi scheme, in part because of an inexperienced staff and delays in examinations, said an SEC inspector general report.

How did one of the largest financial scandals of our time go on for so long without being detected? WSJ reporters offer insight into Bernard Madoff's alleged Ponzi scheme.

The report, an executive summary of which was released on Wednesday, provides the most-detailed, strongest criticism to date of the agency's failure to uncover the multibillion-dollar scheme. The release of the findings comes as the SEC is seeking to rebuild its credibility.

According to the report, the SEC received six warnings about Mr. Madoff's trading business over 16 years, but failure of staff to follow up adequately -- including to determine whether trades were executed when Mr. Madoff said they were -- and poor communication within the agency's divisions enabled him to continue his scheme.

Mr. Madoff confessed to the scheme in December and is serving a 150-year prison sentence.

So, that's 6 warnings over 16 years, with "poor communication" and inept staff (okay, that wasn't their word for their staff, but really - that's the bottom line, is it not?) allowed this man to continue stealing the life savings of numerous people. It boggles the mind, especially that they think this will help rebuild their credibility. Oh, yeah - sure thing. At least there is this one positive that came out in the report:
The investigation found no evidence that the SEC staff had been influenced by Mr. Madoff or any of his family members. A senior SEC examinations official was dating Mr. Madoff's niece during part of that period and is currently married to her, sparking speculation that Mr. Madoff's firm may have gotten a break.

SEC Chairman (sic)Mary Schapiro said on Wednesday that missing the fraud "is a failure that we continue to regret." She has taken some steps to address the SEC's problems, including recruiting a new enforcement director, who is implementing substantial changes to how the agency operates. Ms. Schapiro has also proposed rules aimed at tightening regulatory holes that Mr. Madoff had taken advantage of.

Oh, whew, that's a relief. Between the family not being involved and Chairwoman Schapiro's acknowledgment that this was a "failure that we continue to regret."

Good grief, how do these people SLEEP at night?? Seriously! Sheesh.

Perhaps some oversight over those who are supposed to be overseeing is in order:
Sen. Charles Grassley (R., Iowa) called the SEC's failures "further evidence of a culture of deference toward the Wall Street elite at the SEC." He said, "Until that culture is transformed, the SEC will not be the tough cop on the beat that the public needs."

Ms. Schapiro said in a letter to Sen. Grassley that she expected to have approval from the full commission to distribute the full, 450-page inspector general report on Friday. She said she wouldn't permit redacting the substance of the findings but sought to "safeguard" the names of junior employees who didn't play central roles in the reviews.

The warnings and tips about Mr. Madoff's operation ran the gamut. Some were based on hunches, others on analysis of his firm's purported trading strategy. One self-described "concerned citizen" offered specific information alleging that Mr. Madoff combined customer accounts with those of the firm and that he kept two sets of records, one real, one phony.

The 22-page executive summary said agency staff was too inexperienced or too narrowly focused, and missed opportunities to uncover the fraud. It said the SEC's structure hampered its effectiveness, with two groups of examiners looking separately into Mr. Madoff's business at one point without knowing about the other.

That is just pathetic. I'm sorry - it just is. I mean, c'mon - did they have to see it up in lights or something? Oh, wait - I should save some of my ire for this:
SEC Inspector General David Kotz said "perhaps the most egregious failure" was that the SEC failed to corroborate Mr. Madoff's trading records with those held by the Depository Trust & Clearing Corp., the clearinghouse for stocks, even after Mr. Madoff handed them his account number.

Sputter, sputter, #*%&*&*&# - say whaaaa? Perhaps "inept" is too kind a word:
The summary described how the SEC staff at times didn't follow through on leads, failing to seek information from a third party because reviewing such information could be too time-consuming. In another instance, an SEC examiner looked into an institution that Mr. Madoff had said he used to clear his trades. The examiner learned from the institution that there was no trading activity by Mr. Madoff during the period under review but never followed up or informed the rest of the staff, according to the executive summary.

Despite three examinations and two enforcement investigations into Madoff, "at no time did the SEC ever verify Madoff's trading through an independent third-party, and in fact, never actually conducted a Ponzi scheme examination or investigation," the summary said.

The SEC, during two of the examinations, caught Mr. Madoff in inconsistencies or contradictions, the report said, but the staff only questioned him and took his answers, even those that were "seemingly implausible," at face value.

Well, golly gee - what could be problematic about that, huh? Just some glaring inconsistencies, and downright fabrications - whaddya want from them anyway??

Oh, you know there's more:
The IG report found that Mr. Madoff attempted to intimidate SEC staff during an examination in 2005 by dropping names of senior SEC officials, but the report didn't conclude whether he was successful. It said Mr. Madoff told prospective investors that he had been reviewed by the SEC, as a way to attract business.

The report confirmed the agency had received three tips from Harry Markopolos, a former rival to Mr. Madoff, from 2000 through October 2005, who urged the SEC to investigate Mr. Madoff's trading operation, saying it was "too good to be true."

The SEC received another complaint in 2003 from "a respected" hedge-fund manager who wasn't identified in the executive summary. The report said the manager questioned whether Mr. Madoff was trading options at the volume he claimed, arguing that his strategy and returns weren't duplicated by anyone else. He said these factors were "indicia of Ponzi scheme."

That tip, which wasn't pursued for seven months, was ultimately picked up by the SEC examination group focused on broker-dealers, which the report said lacked intimate knowledge of the investment-advisory business. The group only looked into allegations of potential front-running, or trading ahead of client orders, because that was the group's expertise, the report said.

Aren't you glad to know that Madoff's intimidation apparently WORKED?? Good grief. And I don't know about you, but I firmly suspect if these kinds of complaints and allegations came up against a regular ol' person, they would have been treated pretty differently. As in, it would not have taken them SIXTEEN YEARS to figure it out!! Ahem. So how did they finally clue in? Like this:
During a review of another firm, the SEC discovered internal emails questioning the firm's investment in Mr. Madoff's business. One email provided a "step-by-step analysis of why Madoff must be misrepresenting his options trading," according to the report. The email said Mr. Madoff couldn't have been trading over an options exchange since the volume of trades he would need to execute to match his strategy couldn't be supported in the market.

The SEC exam staff in New York said the emails indicated "some suspicion as to whether Madoff is trading at all." It was eight months before a team was in place to look into the issue.

One SEC examiner said of Mr. Madoff during the examination that "veins were popping out of his neck." When examiners reported Mr. Madoff's aggressively pushback tactics to higher-ups, they didn't get any support and were "actively discouraged from forcing the issue," the report said (emphasis mine). (Write to Kara Scannell at )

Well, thank heavens for email, huh? Though it STILL took them 8 months to get off their duffs and do something about it. So many complaints, over so long, and only when they basically get it all spelled out for them are they able to make a move. When they got around to it, that is.

And what is the deal with the lack of support, no, check that, the discouragement from "forcing the issue"?? From where did that come, I wonder? Hmmm. Curious.

Isn't it so big of the SEC to admit it completely botched the inquiries into Madoff's shenanigans? After sixteen years? At the expense of BILLIONS of dollars of other people's money? I reckon we can all rest easy now that the SEC has admitted its failures, make that numerous failures, over a number of years, right? I mean, really - lightning can't strike twice in the same place, can it? Can it?

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