Bernard Madoff was convinced that Securities and Exchange Commission (SEC) investigators were on to his Ponzi scheme in 2006 and was “astonished” to learn that they overlooked key evidence that he himself had given them.
An SEC report by Inspector General H. David Kotz explains how Madoff provided investigators with his account number at Depository Trust Co., an independent clearing agency, which would have alerted them to a lack of trades.
“This was perhaps the most egregious failure in the enforcement investigation of Madoff,” Kotz’s report said. “They never verified Madoff’s purported trading with any independent third parties.” By checking with the clearing agency, the SEC would have “immediately realized that Madoff was not trading in anywhere near the volume that he was showing on the customer statements.”
The Kotz report—to date the most complete examination into the SEC’s failure to detect the world’s biggest Ponzi scheme—outlines repeated missed opportunities by the agency, despite being alerted six times since 1992 that something was amiss with the Madoff fund.
A lack of experience and incompetence is blamed for SEC staff’s inability to see what was happening after it was revealed that Madoff would dodge questions relating to the “remarkable” returns posed by investigators who were unfamiliar with options trading.
The report describes how most of the work on the investigation by the Northeast office was led by a “staff attorney who recently graduated from law school and only joined the SEC 19 months before she was given the Madoff investigation.” Not only did the attorney have no experience leading an investigation, but the assignment was also her “first real exposure to broker-dealer issues.”
It was also revealed that evidence provided by former money manager Harry Markopolos in 2005 was discounted from the start, when investigators “almost immediately expressed skepticism and disbelief about the information,” Kotz wrote. “The enforcement staff claimed that Markopolos was not an insider or an investor, and thus, immediately discounted his evidence.”
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