WASHINGTON (CN) – In a blandly written, damning report to Congress on the SEC’s failure to detect Bernard Madoff’s $65 billion Ponzi scheme despite more than a decade of warnings, SEC Inspector General H. David Kotz wrote that, had the SEC asked Madoff for records, “there is an excellent chance it would have uncovered Madoff’s Ponzi scheme in 1992.”
Kotz testified to the Senate Banking Committee on Thursday, and the SEC released a 23-page transcript of his testimony.
Kotz said the SEC “investigated” Madoff in 2004 and 2005. Kotz said:
“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 Madoff’s answers were seemingly implausible, the SEC examiners accepted them at face value.
“In both examinations, the examiners made the surprising discovery that Madoff’s mysterious hedge fund business was making significantly more money than his well-known market-making operation. However, none of the examiners identified this revelation as a cause for concern.
“Astoundingly, both examinations were open at the same time in different offices without either office knowing the other one was conducting a virtually identical examination. In fact, it was Madoff himself who informed one of the examination teams that the other examination team had already received the information being sought from him.
“In the first of the two OCIE examinations, the examiners drafted a letter to the National Association of Securities Dealers (NASD) (another independent third party) seeking independent trade data, but they never sent the letter, claiming that it would have been too time-consuming to review the data they would have obtained. The OIG’s expert opined that had the letter to the NASD been sent, the data collected would have provided the information necessary to reveal Madoff’s Ponzi scheme. In the second examination, the OCIE Assistant Director sent a document request to a financial institution that Madoff claimed he used to clear his trades, requesting trading done by or on behalf of particular Madoff feeder funds during a specific time period, and received a response that there was no transaction activity in Madoff’s account for that period. However, the Assistant Director did not determine that the response required any follow-up and the examiners working under the Assistant Director testified that the response was not shared with them.
“Both examinations concluded with numerous unresolved questions and without any significant attempt to examine the possibility that Madoff was misrepresenting his trading and operating a Ponzi scheme.
“The investigation that arose from the most detailed complaint provided to the SEC, which explicitly stated it was “highly likely” that “Madoff was operating a Ponzi scheme,” never really investigated the possibility of a Ponzi scheme. The relatively inexperienced Enforcement staff failed to appreciate the significance of the analysis in the complaint, and almost immediately expressed skepticism and disbelief about the complaint. Most of the investigation was directed at determining whether Madoff should register as an investment adviser or whether Madoff’s hedge fund investors’ disclosures were adequate.
“As with the examinations, the Enforcement staff almost immediately caught Madoff in lies and misrepresentations, but failed to follow up on inconsistencies. They rebuffed offers of additional evidence from the complainant, and were confused about certain critical and fundamental aspects of Madoff’s operations. When Madoff provided evasive or contradictory answers to important questions in testimony, the staff simply accepted his explanations as plausible.”
And so on.
The report makes no mention of what role, if any, SEC Director Christopher Cox played in the agency’s incompetence, other than a phone call Cox made to Kotz on in the “late evening” of Dec. 16, 2008, after Madoff had confessed. “Cox contacted me and asked my Office to undertake an investigation into allegations made to the SEC regarding Bernard L. Madoff (Madoff), who had just confessed to operating a multi-billion dollar Ponzi scheme, and the reasons why the SEC had found these allegations to be not credible,” Kotz said.