Securities Law

Where Was Compliance, as Madoff Allegedly Lost $50B?


Compliance is suddenly a hot topic, in the wake of the Bernard Madoff scandal.

Specifically, how is it possible that his investment firm allegedly could have lost $50 billion in a claimed Ponzi scheme without anyone else at the firm figuring out that something was wrong? (Of course, the SEC didn’t spot any major problems either, despite tips dating back as far as 1999.) Not until Madoff himself reportedly confessed the scheme to his sons and they sought legal help did the situation come to light. Allegedly, it has been ongoing since the 1970s, and Madoff says he was the only one aware of it, reports the Wall Street Journal (sub. req.).

“How could you have this massive scandal going on in a firm that’s adopted adequate procedures? That’s what compliance is all about,” professor James Fanto of Brooklyn Law School tells the newspaper. On the other hand, it is entirely possible that appropriate compliance procedures would fail to detect an ongoing fraud if the books were cooked, another expert says.

Part of the reason why the massive claimed fraud went undetected may be that the firm was run more in the manner of a small business, despite the enormous size of its investments. Madoff’s brother, Peter, a 63-year-old attorney, is chief compliance officer for Madoff’s investment advisor and broker-dealer businesses. And Peter Madoff’s 38-year-old daughter, who also is an attorney, was a rules compliance attorney for its market-making arm on the broker-dealer side, according to regulatory filings.

Meanwhile, a small accounting firm was responsible for auditing the operation, even though the Madoff firm acted as its own funds custodian, triggering additional oversight responsibilities on the part of its accountant, according to Bruce MacKenzie, a Minneapolis attorney.

The director of the Securities and Exchange Commission has castigated his own agency for failing to follow up aggressively on tips that something was wrong at Madoff’s firm, and has called for an investigation.

Under it, “the SEC’s inspector general is looking into Ms. Madoff’s early relationship with her husband, Eric Swanson, a former SEC compliance lawyer, as part of a larger investigation into the SEC’s repeated failure to catch Bernard Madoff,” the Journal article states, citing the newspaper’s own earlier reporting. “The couple met in 2003 but didn’t marry until 2007, after Swanson had left the agency,” the article notes.

Details about the lawyers in the Madoff family have also been discussed by the Wall Street Journal Law Blog.

Earlier ABAJournal.com coverage:

How SEC Probe Missed Alleged $50B Madoff Fraud, Despite 2000 Tip

Cox: SEC Lax on Madoff Oversight, Seeks Probe of His Own Agency’s Work

Ex-SEC Lawyer Who Married into Madoff Family Said to be ‘Straight Arrow

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