How Did Madoff Fool the SEC?

Kara Scannell has been looking at the SEC's Madoff memos:

The 2005 review and Mr. Markopolos's report prompted the SEC to open an enforcement case, a notch more serious in the SEC's world than the previous examination. "The staff is trying to ascertain whether" the allegation that Mr. Madoff "is operating a Ponzi scheme has any factual basis," according to the SEC case memo...
"The staff found no evidence of fraud," according to the SEC case memo.

Henry Blodget asks the obvious question: how on earth can you fail to uncover a Ponzi scheme when it's right in front of your face and it's exactly what you're looking for? He concludes:

The SEC made mistakes, but Madoff's combination of broker-dealer, reputation, track record, happy clients, twin sets of books, sophisticated explanations, and patient approach would have required a highly aggressive investigation to uncover.

I'm not entirely sure about this. If you're looking for a Ponzi scheme, you only really need to ask one question: is the money there? Madoff at this point was admitting to the SEC that he was running billions of dollars, so the SEC just needed to ask to see the money. If the SEC got in return statements from Madoff's own brokerage, then that implicates not only the investment-advisory group on the 17th floor, but the main brokerage as well, including Madoff's brother and sons.

In the case of Madoff, it should have been even easier, since he claimed to be extremely liquid and mostly invested in Treasury bills whenever there was a down market. Where were the Treasury bills? Did it not occur to the SEC to ask? I'm not sure such a question really counts as "highly aggressive" -- it's the first question you ask if you're investigating the thesis that all of the funds are in fact fictitious.

Still, the main lesson here is highly sobering: investors simply cannot rely on regulators to protect them. Either there's an explicit government guarantee, like the one on bank and brokerage accounts, or you're basically on your own.

Comments

[NITRAM:]

WHY IOS MR. COX STILL INCHARGE? IT IS OBVIOUS TO ME THAT HE HAS DONE NOTHING DURING THIS FINANCIAL CRISIS. AGENCIES KEEP LOOKING AT VARIOUS REASONS FOR WHAT HAPPENED. HOW ABOU A COMPLETE INVESTIGATION OF MR. COX. THE LEASE THAT WE WOULD FIND IS SOME TYPE OF FIDUCIARY WRONGS. AS MR. ICHAN HAS SAID, HOW COME WE, THE TAXPAYER, GIVE MONIES TO THE PEOPLE THAT CAUSED THE CRISIS. NOT ONE OFFICER OR BOARD MEMBER FROM THESE COMPANIES HAS BEEN CHARGED LET ALONE PROCESURQUITED. WHY?

Jan 05 02:38 PM

[NITRAM:]

AS ONE OF OUR PRESIDENTS SAID "THE BUCK STOPS HERE". MR. COX FROM THE SEC HAS NOT RECEIVED THE LEGAL ATTENTION THAT HE SHOULD. THROUGH THE ENTIRE FINANCIAL CRISIS, MR COX HAS NOT DONE ONE GOOD THING. THE ONLY THING HE IS GOOD AT IS PUTTING THE BLAME ON OTHERS. WHAT WAS HIS JOB? TO PROTECT THE INVESTOR?
AS MR ICHAN HAS SAID, WHY ARE WE THE TAX PAYER GIVING UNLIMITED MONIES TO THE SAME PEOPLE THAT FRAUDED THE AMERICAN PUBLIC. NOT ONE OFFICER OR BOARD MEMBER HAS BEEN CRIMINALLY CHARGED. THE LEASE IS DEFINITELY FIDUCARY NEGLECT. AN OFFICER CANY SAY ON MONDAY THAT EVERYTHIN IS OK AND THE BE BROKE ON FRIDAY. MR. FULD SUPPOSEDLY HAD OFFERS TO PURCHASE THE COMPANY. WHY DID HE AND FELLOW BOARD MEMBERS REFUSE. THIS IS DEFINITELY AN EGO TRIP AND FIDUCARY NEGLECT.

Jan 05 02:46 PM

[waf76:]

It's embarrassing that the SEC suspects fraudelent activity, specifically a Ponzi scheme and didn't seek to confirm Madoff's balance sheet and any other off-balance liabilities. What type of auditors and investigators do they have working for them? Auditing 101.

Jan 05 08:30 PM

[Clavis:]

The shambles continues, a case of buyer beware across the spectrum of USA and Canadian shares.
Is there anyone out there NOT involved in nefarious dealings?

Jan 06 09:02 AM

[Bruce Vande...:]

Well, yes this is exactly right. Verifiable statements are first thing to look at.

Reminds me of my father who put $50,000 into an Arizona real estate company in the early 90's. He never saw a balance sheet or statements but wasn't concerned because they "looked, acted and communicated "like professionals He was right. They were professionals, professional crooks! Interest payments soon stopped and he never saw the money again.

The basics have to be followed. Otherwise you might as well as not even have the SEC.

Jan 06 09:15 AM

[john s. gordon:]

high levels of incompetence at SEC.
> jack

Jan 06 09:20 AM

[bill d:]

Just like big Al Capone, it will probably be the IRS to take him down. I also invested in a second mortgage back in the 80's - great return except never saw a cent. Turns out the same property had 50 mortgages on it just like mine. Still can't figure out how I could have discovered the bastards - return was a little too good to be true should have been first clue but there were a lot of legitimate operations going on at the time. I'd like 5 minutes with him.

Jan 06 11:39 AM

[MARTYHK0:]

iTS NO COINCIDENCE ALL THIS HAPPENED UNDER BUSH. YOU PEOPLE VOTED THE BIGGEST THIEVES OF ALL INTO OFFICE-BUSH AND CHENEY, WHATS THAT SAYING? A FISH ROTS FROM THE HEAD DOWN. NOW LOOK AT YOURSELVES ALL YOU BUSH SUPPORTERS AND REPUBS. YOU CONTRIBUTED TO THE DAMAGING AND ALMOST WAS DESTRUCTION OF OUR COUNTRY. NOT TO MENTION THE DECIMATION OF THE WORKING MIDDLE CLASS. THATS WHAT YOU GET WHEN YOU VOTE FOR A GUY YOU WANT TO HAVE A DRINK WITH RATHER THEN ONE WITH BRAINS, ITS ALMOST LAUGHABLE- YOU REPUBS SCREWED YOUR SELVES. REAP WHAT YOU SEW SUCKERS!!


On Jan 05 02:38 PM nitram wrote:

> WHY IOS MR. COX STILL INCHARGE? IT IS OBVIOUS TO ME THAT HE HAS DONE
> NOTHING DURING THIS FINANCIAL CRISIS. AGENCIES KEEP LOOKING AT VARIOUS
> REASONS FOR WHAT HAPPENED. HOW ABOU A COMPLETE INVESTIGATION OF MR.
> COX. THE LEASE THAT WE WOULD FIND IS SOME TYPE OF FIDUCIARY WRONGS.
> AS MR. ICHAN HAS SAID, HOW COME WE, THE TAXPAYER, GIVE MONIES TO
> THE PEOPLE THAT CAUSED THE CRISIS. NOT ONE OFFICER OR BOARD MEMBER
> FROM THESE COMPANIES HAS BEEN CHARGED LET ALONE PROCESURQUITED. WHY?

Jan 15 07:21 PM

[bigbucks brad:]

OK, from what I'm reading and agreeing with, all of the Wall Street and trading problems we have are the result of no regulation and the incompetence of the SEC. So, if we appoint a competent human resources executive and a new head of the SEC, and PINK-SLIP the entire department, no exceptions, everyone gone and start over, can we expect this new group to guard our finances and future any better than the last group, or in the words of Alan Greenspan; in the furure we will be having this discussion again.

Mar 05 02:34 AM