Why Madoff Warnings Were Ignored: Regulators Had Wrong Incentives
Posted Jan 5, 2009 4:53 PM CDT
By Martha Neil
For nine years, Harry Markopolos tried to persuade the SEC that Bernard Madoff must be running an investment scam, contending that the strategy he claimed to be using didn't match up with known facts such as the volume of trading on the options market.
But, despite numerous investigations by the Securities and Exchange Commission and other regulators, reports the Wall Street Journal (sub. req.), the $50 billion Ponzi scheme Madoff allegedly ran under the guise of a hedge fund was never uncovered by the feds until Madoff himself reportedly confessed it to his sons late last year. Shortly thereafter, a federal criminal case ensued.
How can this be? One big part of the problem was that many in a regulatory role at the SEC and elsewhere were more concerned about advancing financial industry interests—and polishing their own resumes for subsequent jobs within it—than serving in the unpopular role of public watchdog, reports the New York Times in a scathing op-ed column over the weekend.
And, in a congressional hearing today, a top SEC official seemingly agreed that the agency had fallen down on the job, according to another Wall Street Journal article.
In addition to investigating to determine who specifically may have failed to follow up appropriately on complaints about Madoff by Markopolos and others dating back at least to 1999, SEC Inspector General H. David Kotz said in the text of his prepared testimony for the House Financial Services Committee, an attempt should also be made "to provide the Commission with concrete and specific recommendations to ensure that the SEC has sufficient systems and resources to enable it to respond appropriately and effectively to complaints and detect fraud through its examinations and inspections."
Kotz also said that he may expand the SEC investigation beyond the scope initially envisioned by commission chairman Christopher Cox, and indicated that possible conflicts of interest between SEC staff and those it oversees are one area of concern, according to a New York Times article about the hearing today.
Both the Times and the Wall Street Journal also say that whether regulators deferred unduly to Madoff could also be of concern to investigators.
"The financial crisis on Wall Street, coupled with the ever-growing Mr. Madoff scandal, have motivated Congress to consider a sweeping rewrite of the nation's regulatory structure for the financial services industry," the WSJ writes.
Markopolos, a former investment officer with Rampart Investment Management in Boston, also was supposed to testify today, but reportedly called in sick. Kotz plans to meet with him soon.
Updated at 5:05 p.m. to include link to additional Wall Street Journal article.
Earlier ABAJournal.com coverage: