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Add Madoff case to SEC’s list of failed reviews

The Associated Press

Published: December 17th, 2008 12:05 AM

WASHINGTON – Financial wizard Bernard Madoff didn’t just fool investors. He also conned the nation’s top securities regulators, who investigated his business last year and apparently missed the fact that he was running a $50 billion Ponzi scheme.

It wasn’t the first time the Securities and Exchange Commission has overlooked clear warning signs of possible fraud.

“I can’t comprehend how a well-run investigation would have missed a fraud of this magnitude,” said Lynn Turner, a former SEC chief accountant.

Another expert agreed. “The fact that that this could go on for so long with someone who was known to the agency raises questions of the effectiveness of our regulatory scheme,” said Charles Elson, director of Weinberg Center for Corporate Governance at the University of Delaware.

The SEC’s enforcement division looked into Madoff’s business in 2007. The agency did not refer the matter to commissioners for legal action. What did the investigators find and why didn’t they look harder? The SEC isn’t saying anything beyond a brief statement it issued Friday.

Securities law experts point to Madoff’s written assertion to the SEC that he had 23 clients.

But there are dozens of well-heeled victims now strewn across the financial landscape. They include a charity of movie director Steven Spielberg; the family charitable foundation for Sen. Frank Lautenberg, D-N.J.; and a trust tied to real estate magnate Mortimer Zuckerman.

“One would think this would not have required a great deal of investigation,” said Stanley Grossman, a veteran securities lawyer who expects to represent many of the victims in the Madoff case.

Was the government’s watchdog over Wall Street a lapdog? The SEC – the chief federal regulator protecting investors – has faced such charges before. Its oversight of the Wall Street investment houses – rotting within from piled-up securities tied to subprime mortgages – drew significant criticism.

The chairman of the Senate Banking panel that oversees the SEC, Sen. Jack Reed, D-R.I., said Tuesday that the Madoff affair “illustrates the lack of credible enforcement over several years by the SEC.” He criticized the agency’s “lack of a strong commitment to be vigilant.”

Cox responds that the SEC has taken decisive actions in response to the market turmoil, including an unprecedented temporary ban this fall on short-selling of stocks of financial companies.

In the Madoff case, a securities executive, Harry Markopolos, complained to the SEC’s Boston office in May 1999. Markopolos told SEC staff to investigate Madoff because it was impossible for the kind of profit he was making to have been gained legally.

But the SEC’s Boston office has itself been accused in the past of brushing off a whistleblower’s legitimate complaints, in a case that led the head of that office to resign in 2003. The whistleblower, Peter Scannell, eventually persuaded state regulators and the SEC to act against mutual fund giant Putnam Investments, where Scannell worked.

“It’s flabbergasting that nobody can nail the bums in the SEC who turn their back on and/or aid and abet people who defraud investors,” Scannell said Monday.