by John M. Curtis
(310) 204-8700

Copyright Sept. 5, 2009
All Rights Reserved.

             Confirming the obvious, the Securities and Exchange Commission Inspector General admitted that “inexperienced” investigators at the SEC missed Bernard L. Madoff’s $65 billion Ponzi scheme.  SEC is the official U.S. government oversight body regulating stock market investments, including but not limited to publicly traded corporations and brokerage houses.  Failure on the part of the SEC to intercept fraud breached the SEC’s fiduciary duties to all Madoff’s investors.  With the IG’s finding, Madoff’s investors have recourse against the SEC for breach of fiduciary duty and accompanying duty to warn investors of potential risks.  But more to the point is the SEC’s responsibility to have shut down Madoff and returned all investors’ money with interest.  Failure to heed the numerous warnings exposes the SEC to massive liability to compensate Madoff’s investors.

            SEC IG David Kotz admitted that his department attorneys showed near willful suspension of disbelief in response to Madoff’s answers to investigators’ questions.  While not finding corruption, Kotz admitted to astonishing incompetence, repeatedly clearing Madoff of any doubts.  Because the SEC found no evidence of wrongdoing, it lent credibility to Madoff’s investments.  If the SEC repeatedly scrutinized the former head of the Nasdaq, he must have sold something legitimate.  Getting the SEC’s endorsement bolstered Madoff’s investments, allowing the 71-year-old con artist to keep going.  Madoff played his cards close to the vest, allowing only select employees to speak to the SEC.  Those that did told SEC attorneys “that Madoff himself was on the short list to be the next Chairman of the SEC,” putting SEC investigators on the defensive.

            Ranking GOP member of the Senate Finance Committee Sen. Charles Grassley (R-Iowa), who opposes President Barack Obama’s “public option” national health care plan, expressed dismay over the IG’s report about the Madoff scam.  “The SEC’s utter failure to follow up aggressively on detailed and specific information about Madoff’s fraud is further evidence of a culture of deference toward the Wall Street elite at the SEC,” further exposing the government’s liability.  Individual and institutional investors now have an action against the SEC for failing to properly vet a licensed SEC securities broker.  So far, Madoff’s investors have had little recourse to recoup losses, until the IG’s report clearly showed that the SEC did next to nothing to protect investors.  Madoff routinely took investors’ cash but entered no trades on any foreign or domestic stock exchanges.

            Confirming Madoff entered no trades, the IG reported that “at no time did the SEC ever verify Madoff’s trading through and independent third-party.”  None of the SEC attorneys considered the possibility that Madoff took investors’ cash without investing in securities.  When the SEC vets publicly traded corporations or brokerage houses, it’s supposed to assure investors that the stock or brokers are legitimate.  SEC rules and guidelines provide a rigorous process by which profit-driven businesses get the privilege of raising cash through initial public offerings and then selling regular common stock.  Brokerage houses, too, have responsibility to represent legitimate companies that meet strict SEC guidelines.  In Madoff’s case, questions were raised about a possible inappropriate relationship between Bernie’s niece Shana Madoff and SEC Chief Enforcement attorney Eric Swanson. 

            Securities expert Harry Markopolos warned the SEC about Madoff’s scam numerous times.  He provided SEC enforcement attorneys a step-by-step blueprint of Madoff’s Ponzin scheme.  While investigated five times in 16 years, the SEC overlooked the obvious that no private investment house could consistently offer 10% returns—about double the Wall Street average—without engaging in fraud.  SEC Chairman Christopher Cox was also warned about Madoff’s scam.  “It may be of interest to you that to know that Mr. Bernard Madoff keeps two (2) sets of records.  The most interesting of which is always on his person,” said an anonymous letter   At least seven other complaints about Madoff were filed with the SEC since 2001.  SEC Enforcement Director Linda Thomson and SEC Office of Compliance Inspections Director Lori Richards stepped down, raising more questions.

            Kotz’s finding so far don’t implicate SEC officials in a conspiracy with Bernard Madoff.  No one knows yet why Thomson and Richards resigned but it could be due to conflicts of interest or possible collusion.  Too many complaints were made over the years to the SEC about Madoff to rule out corruption.  Madoff had his hand in many areas and could have easily paid off some SEC officials to look the other way.  If Kotz truly ruled out corruption at the SEC, blaming it instead on only “incompetence,” he needs to step aside and let Congress appoint a truly independent auditor.  All indications point toward preferential treatment, turning a blind eye to the biggest scam in Wall Street history.  Because SEC officials missed the ball or secretly threw the game, the U.S. government bears financial responsibility.  Madoff’s investors are entitled to some bailout or compensation.

 John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.