Senate Panel to Question Regulators on Madoff Case
January 27, 2009 - 6:35 AM<br />
The Securities and Exchange Commission has faced heavy criticism over its failure to discover the $50 billion Ponzi scheme allegedly run by Madoff, the prominent Wall Street figure and money manager now fallen into disgrace -- despite credible allegations against him that were brought to the agency over the course of a decade.
Against the backdrop of the worst financial crisis since the 1930s, the SEC also is accused of contributing to that disaster with lax oversight of Wall Street and the markets, and lawmakers of both parties are calling for a shake-up of the agency to help restore investor confidence.
The Senate Banking Committee was to take testimony at a hearing Tuesday from SEC Enforcement Director Linda Thomsen and the director of the agency's inspections office, Lori Richards. Also to appear before the panel was Stephen Luparello, the interim chief executive of the Financial Industry Regulatory Authority, the securities industry's self-policing organization.
Sen. Christopher Dodd, D-Conn., the banking panel's chairman, recently asked Mary Schapiro -- President Barack Obama's newly confirmed chairman of the SEC -- about the failure of the industry regulatory agency to detect the alleged Madoff fraud in its inspections of his brokerage operation. Schapiro, who has led FINRA as its CEO since 2006, said that the matter went undiscovered because the scheme was carried out through Madoff's investment business and FINRA was empowered to inspect only the brokerage operation.
After acknowledging last month that staff members at the SEC repeatedly had failed since at least 1999 to fully investigate Madoff's operations, then-SEC Chairman Christopher Cox ordered the agency's inspector general, H. David Kotz, to determine what went wrong. Kotz told a House hearing recently that he was expanding the inquiry to examine the operations of the divisions led by Thomsen, who has been the enforcement chief since mid-2005, and Richards, who has held that position since mid-1995.
Among other facets, Kotz has been examining the relationship between a former SEC attorney, Eric Swanson, and Madoff's niece, Shana, who are now married. As an SEC attorney, Swanson was part of a team that examined Madoff's brokerage operation in 1999 and 2004. Neither review resulted in any action against Madoff, a former chairman of the Nasdaq Stock Market who was a member of SEC advisory committees.
Lawmakers say Madoff's alleged fraud, which caused massive damage to investors large and small around the world and may be the largest pyramid scam in history, reflects deep, systemic problems at the SEC.
The Banking Committee is examining the case "to determine how so many people could have been deceived and how such a massive fraud could have gone undetected for so long," Dodd said in a statement recently. "American investors deserve an explanation and the responsible parties must be held accountable. I am hopeful that our findings will also help inform our efforts to improve regulation so that such abuses do not occur in the future."
The committee has requested an extensive array of documents related to Madoff from the SEC.
Six weeks after Madoff's arrest in New York, thousands of victims who lost money investing with him have been identified -- including ordinary people and Hollywood celebrities -- as well as big hedge funds, international banks and charities in the U.S., Europe and Asia.
In Brussels, Belgium, on Monday, the European Union said it will check investor protection rules in all 27 member nations after France complained of lax standards that saw French investors lose billions of euros in the scandal. The review should clarify how far European funds could be held responsible for placing client money with Madoff -- and whether they could be ordered to compensate investors.
FINRA recently sent letters to its approximately 5,100 member brokerage firms asking whether they referred any customers to Madoff's firm.
Also slated to testify at Tuesday's hearing was Stephen Harbeck, president of the Securities Investor Protection Corp., an industry-funded organization that steps in when a brokerage firm fails. The group can provide up to $500,000 for each customer of the failed firm.
The estimated $50 billion in losses from Madoff dwarfs the $1.6 billion currently available to SIPC.
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