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Univ. of San Diego School of Law

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Thursday, December 18, 2008

To Catch a Thief

Bernard Madoff's alleged $50 billion fraud is giving politicians and investors who failed to diversify another excuse to blame too little enforcement in U.S. financial markets. Talk about compounding a case of misplaced trust. The real lesson is that financial enforcement nearly always fails to protect investors, and this Ponzi scheme is merely typical.

Since 2000 and especially after the fall of Enron, the SEC's annual budget has ballooned to more than $900 million from $377 million. (See the nearby chart.) Its full-time examination and enforcement staff has increased by more than a third, or nearly 500 people. The percentage of full-time staff devoted to enforcement -- 33.5% -- appears to be a modern record, and it is certainly the SEC's highest tooth-to-tail ratio since the 1980s. The press corps and Congress both were making stars of enforcers like Eliot Spitzer, so the SEC's watchdogs had every incentive to ferret out fraud.

Yet they still failed to nail Bernard Madoff. Since at least 1992, when the SEC sued two accountants peddling Madoff investments while promising sky-high returns, the commission missed opportunities to dig deeper into his operations. In 1999, trader Harry Markopolos wrote that "Madoff Securities is the world's largest Ponzi Scheme," in a letter to the SEC. More recently, multiple SEC inquiries and exams in 2005 and 2007 found only minor infractions.

Under New York law, meanwhile, Mr. Madoff had to register as a broker with the Investor Protection Bureau of the office of the New York Attorney General. The New York AG is among the most powerful state securities regulators in the country, because the Martin Act allows him to pursue criminal convictions without having to prove criminal intent. Yet neither current AG Andrew Cuomo nor Mr. Spitzer appears to have had a clue about Mr. Madoff's conduct. [Mark Godsey]

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