The SEC's internal watchdog has concluded that the agency missed many chances to expose Bernard Madoff??s giant ??Ponzi? scheme because the staff either did not know what to do or failed to follow up on detailed complaints.In spite of eight credible complaints over the years, including one as recently as March 2008, ??a thorough and competent investigation or examination was never performed,? said a summary of the findings, released on Wedesday. The SEC ??never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme.?
The report by David Kotz, the SEC??s inspector-general, offers the most exhaustive account yet of how the SEC failed to detect Mr Madoff??s Ponzi scheme during five probes conducted since 1992. It described an inexperienced staff that did not understand the significance of ??red flags? and did not take steps to verify facts, including whether Mr Madoff actually engaged in trading.
It also highlights internal communication problems, with different units conducting simultaneous probes into Mr Madoff??s business without knowing of each other??s activities. Officials also approached examinations ????too narrowly.???? Even when they caught Mr Madoff in contradictions, SEC staff accepted his ?seemingly implausible? explanations at face value.
Mr Madoff, who is now serving a 150-year prison term, was himself ????astonished???? the SEC did not verify his claim that he cleared his trades through the Depository Trust Company. ??I thought it was the end game, over,? he told Mr Kotz. ??Monday morning they??ll call DTC and this will be over... and it never happened.?
Examiners once drafted a letter to the National Association of Securities Dealers (NASD) seeking independent trade data but never sent the letter because it would have been ??too time-consuming? to review the information they would have received, according to the report. In another example, an SEC official was told by a financial institution that purportedly cleared Mr Madoff??s trades that there was ??no transaction activity? but the official decided not to follow up.
The SEC??s failure to uncover fraud inadvertently caused more investors to entrust money to the Mr Madoff, who ??proactively informed potential investors that the SEC had examined his operations,? the report said. However, Mr Kotz did not find evidence that any SEC staff members had inappropriate connections to Mr Madoff or his family or were influenced by them during investigations.
