Thursday, September 3, 2009

How the SEC bungled the Madoff investigation

The report on how the SEC bungled the Madoff investigation is so damning... (the 22-page summary (the full 450-page version will be out shortly):
Mr. Kotz recounted incidents in which investigators seemed hopelessly out of their depth, far too credulous and perhaps just plain lazy.

One investigator described Mr. Madoff as “a wonderful storyteller” and “a captivating speaker” after the 2005 encounter in which Mr. Madoff, a former Nasdaq chairman, boasted of his ties to people high up in the S.E.C. and said he was on the short list to be the next agency chairman — the post that went to Mr. Cox.

But Mr. Madoff turned angry — “veins were popping out of his neck,” an investigator said — when asked to produce certain documents, and he tried to dictate what paperwork he would yield. When the investigators reported back to their superior in the S.E.C.’s Northeast regional office, “they received no support and were actively discouraged from forcing the issue.”

The inspector general revisited the failure of the S.E.C.’s Boston office to take seriously the warnings of Harry Markopolos, a private fraud investigator who had been trying since 1999 to get the agency to investigate Mr. Madoff. The failure to heed Mr. Markopolos was almost inexplicable, except that some agency officials did not like him personally, Mr. Kotz said.

From 1992 until the Madoff empire imploded, one inquiry after another went nowhere, the inspector general said. Some investigators “weren’t familiar with securities laws,” and some seemingly refused to believe their own ears even when Mr. Madoff contradicted himself or offered illogical answers to questions.

At one point, investigators drafted a letter to NASD seeking independent trade data, “but they never sent the letter, claiming that it would have been too time-consuming to review the data they would have obtained,” the inspector general wrote.

There were also simple bureaucratic foul-ups, like the one in which different branch offices of the S.E.C. were both looking into the operations of Mr. Madoff. “Astoundingly, both examinations were open at the same time in different offices without either knowing the other one was conducting an identical examination,” Mr. Kotz noted.

Read the summary. H/T W.Tilson.