SEC incompetence

The Inspector General's report on how the agency bungled its investigations of Bernie Madoff has lots of detail, but lacks a couple of key elements. The first is any mention of names. Who exactly handled these cases, what were their backgrounds, their expertise? The other missing piece is context. We know that the tips were looked into, but we don't know why they were not pursued. Is this how the agency handled most other inquiries? Was there an impossible workload that required major triage? Did they not believe the Madoff case could be strongly prosecuted? Do these investigators still work for the agency? To say the agency staffers were incompetent isn't good enough. The fact that two separate investigations were open in different offices without either knowing the other one was conducting an identical examination speaks to a system-wide breakdown in communications. (It was Madoff who told one of the teams that another office was looking into the same questions.)

In 2004 and 2005, the SEC's examination unit, OClE, conducted two parallel cause examinations of Madoffbased upon the Hedge Fund Manager's complaint and the series of internal e-mails that the SEC discovered. The examinations were remarkably similar. There were initial significant delays in the commencement of the examinations, notwithstanding the urgency of the complaints. The teams assembled were relatively inexperienced, and there was insufficient planning for the examinations.

The scopes of the examination were in both cases too narrowly focused on the possibility of frontrunning, with no significant attempts made to analyze the numerous red flags about Madoffs trading and returns. During the course of both these examinations, the examination teams discovered suspicious information and evidence and caught Madoff in contradictions and inconsistencies. However, they either disregarded these concerns or simply asked Madoff about them. Even when Madoffs answers were seemingly implausible, the SEC examiners accepted them at face value.

From the NYT story:

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."