SEC: Madoff fraud missed by ‘trusting’ investigators

Junior Securities and Exchange Commission investigators were intimidated and swayed by disgraced financier Bernard Madoff, allowing him to run a multibillion-dollar fraud scheme that went undetected for 16 years, a government watchdog told Congress on Thursday.

Securities and Exchange Commission (SEC) Inspector General H. David Kotz told a Senate panel that junior and midlevel investigators were “too trusting” of the powerful Wall Street trader and they didn’t receive sufficient support from supervisors when they did have concerns.

“I think a lot of people just didn’t believe Madoff could be running a Ponzi scheme,” Mr. Kotz testified before a Senate Banking, Housing and Urban Affairs Committee hearing. “He knew how to get [inspectors] off the track.”

Mr. Kotz also said investigators weren’t properly trained to crack a case as complex as Madoff’s.

“Just being a smart person who is a generalist is insufficient,” he said. “They simply just didn’t have the skills to match up with him.”

Madoff pleaded guilty in March of operating a Ponzi scheme that has been called the largest investor fraud ever committed by a single person. Federal prosecutors estimated Madoff’s clients lost at least $50 billion. He was sentenced to 150 years in federal prison.

Mr. Kotz’s office last week released a scathing report said that concluded that SEC repeatedly bungled investigations into allegations of fraud in Madoff’s business practices.

Two top SEC enforcers promised to fix problems within the agency that led to the fraud going undetected for so long.

“We all sincerely regret that we did not detect the Madoff fraud,” said John Walsh, acting director of the SEC’s Compliance, Inspections and Examinations Office. “We view the Madoff case as a terribly unfortunate example of what can happen when we fail.”

SEC Enforcement Director Robert Khuzami said he has started the most extensive restructuring of his division in 30 years.

“It is a lesson we should not and will not forget,” he said.

A bipartisan chorus of senators expressed outrage at the SEC’s admitted lack of due diligence.

“Because the SEC failed to do its job, Madoff stole $50 billion,” said Senate banking panel Chairman Christopher J. Dodd, Connecticut Democrat. “I am stunned and angry, as many people are in this country, that this fraud was allowed to happen.”

Sen. Richard C. Shelby of Alabama, the panel’s top Republican, said that if the SEC doesn’t reform itself, “Congress will do it for them.”

The inspector general’s office also said Thursday that the SEC rejected whistleblowers’ offers to provide additional evidence against Madoff, including repeated red flags raised by Boston financial analyst and certified fraud examiner Harry Markopolos.

Mr. Markopolos, whose attempts to blow the whistle on Madoff have led many to view him as an unsung hero in the case, told the Senate panel that SEC investigators were overmatched and incompetent, and called for mass firings at the agency.

“It was a failure of Fraud Examination 101,” he said. “Most of these attorneys at the SEC couldn’t find steak at an Outback.”

Meanwhile, on Thursday, Madoff’s former Palm Beach, Fla., waterfront mansion was put on the market for $8.5 million, while his Manhattan, N.Y., apartment will have an asking price of $9.9 million.

A beach house in Montauk, N.Y., used by Madoff as a weekend getaway, also is for sale for $8.75 million.

The government seized his homes in New York and Florida and plans to sell them along with his boats and other property. Proceeds will go to Madoff’s victims.