January 21, 2009
Re: Investing With Bernie Madoff: How It Happened, What Happened, And What Might Be Done. Part III.The SEC’s failure to investigate and put an end to Madoff’s crime, its announcing in 1992 that there was no problem with Madoff and its failure ever to correct that statement, its consequent sabotaging of thousands of investors with the literal impoverishing of countless numbers and the crippling of many charities, medical research organizations and injury to pension funds, must be one of the greatest regulatory failures in American history, if not the single greatest failure. Time after time the SEC had the opportunity to act. Time after time it was warned. Time after time it did little or nothing. Time after time, in fact every single time according to both witness testimony and Congressional statements at the hearing of January 5th, it did not subpoena Madoff’s books and records or testimony, but instead merely accepted whatever he chose to voluntarily tell it and whatever records he chose to voluntarily give it. Had it just once demanded his books and records, had it just once demanded to see securities he claimed to be buying and selling, had it just once checked whether claimed trades of securities and purchases of puts had occurred, the game would have been over for Madoff. But instead of stopping his crime, the SEC allowed him to continue as a one-man-wrecking-crew.
The SEC was at minimum willfully, horribly negligent. There are those, including at least one Congressman, who think it was complicitous.
As discussed previously, the SEC investigated the situation existing with regard to Bienes and Avellino in 1992, and said Madoff was doing nothing wrong. As indicated at the January 5th hearing, it must not have subpoenaed and inspected his books and records then; otherwise it couldn’t have said there was nothing to indicate fraud. Later Markopolos warned it both verbally and in writing in 1999 or early 2000. But the SEC did little or nothing, including not warning the public that serious red flags had been presented by a sophisticated, mathematically-expert analyst who worked with derivatives and had used the same investment system as Madoff. Then, when little known articles, the major one in a highly obscure professional publication unknown to the general public, appeared in 2001, after Markopolos’ warning, the SEC again failed to protect the public.
The SEC received more complaints about Madoff in the years between 2001 and 2005, I understand, and one gathers it may have “sort of” looked at the Madoff situation in a truncated way. But it did nothing to protect the public. Then in 2005 Markopolos sent it the 2005 version of his memo.
Starting in 2005 or 2006, the SEC apparently did inspect Madoff, perhaps sparked by Markopolos’ 2005 memo. It found some violations in his broker-dealer conduct, which have been passed off, rightly or wrongly, as technical and trivial. But it also found, after at least 20 years and maybe after 45 years of his doing so, that he also had been running an unlawfully unregistered investment management business. What did it do after finding out, after decades, that he was running an unregistered management advisory business? Did it make him stop running the business? Did it closely examine the business to find out whether a business that had been kept secret from it by Madoff for 20 or 45 years was on the up and up? No and no. All it did was it merely required him to register. It did not conduct an examination of the investment manager business, nor did it subpoena the books and records. I reiterate: after two to 4½ decades of illegality, it merely required him to register. It is little wonder that some think there had to be SEC complicity.
It is my understanding, at least I have read -- and please correct me if I am mistaken -- that the SEC is obligated to examine an investment manager when he first registers. If this is true, the SEC failed in this too, and thus failed again to protect the public, as it did so many other times.
You know, as I read over what has been written here, it seems desirable to quote the exact language used by Karen Scannell of the Wall Street Journal on January 5th. Speaking of the SEC’s examination, she says:
In 2005, the New York staff began a broader examination, interviewing Mr. Madoff, his brother, two sons and a niece, all of whom worked at the firm. The SEC found that his investment-advisory business had 16 clients and managed $8 billion. Any firm that offers advice to more than 14 clients is required to register with the agency and undergo review.
* * * * *
The [SEC] examination uncovered some technical trading violations.
* * * * * *
The SEC also found that Mr. Madoff misled the agency in 2005 about the strategy he used for customer accounts, withheld information about the accounts and violated SEC rules by operating as an unregistered investment adviser. “The staff found no evidence of fraud,” according to the SEC case memo. Mr. Madoff agreed to register his business that September, and the SEC didn’t make its findings public. (Emphases added.)
This is frankly staggering. The SEC interviewed Madoff, his brother, his son and his niece, and found that the investment advisory business had only 16 clients when he was running money for thousands of people? Thousands. And his relatives are supposed to be innocent? What did they tell the SEC?
And the SEC found Madoff had “misled the agency in 2005 about the strategy he used for customer accounts” and “withheld information about the accounts.” (Emphases added.) What does this mean? It sounds to me like “misleading the agency . . . about the strategy he used for customers’ accounts” could very well mean, perhaps even probably means, that he falsely told it he was using the split-strike conversion strategy, as he told everyone else, but in reality was not doing so. (Or maybe the reverse of these facts, but either way he had lied.) He lied to the SEC about his strategy, yet “the SEC didn’t make its findings public,” so the customer would know, but instead left his thousands of customers to twist in the wind, to be left in the lurch, to be unable to “defend themselves” and to lose all their money a few years later when they lost even more than they would have then? Wow!
One wonders as well about complicity of a slightly different form. With the extensive revolving door between Wall Street and the SEC, a revolving door that goes from young lawyers to midlevel bureaucrats to commissioners, and with so many people on Wall Street knowing that Madoff was investing money for large numbers of people (and probably often knowing as well of the wide disbelief about Madoff on Wall Street), how is it that nobody at the SEC who had been on Wall Street thought to inquire whether Madoff was registered as an investment adviser?
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