SEC Enforcement and OCIE Directors Testify on Madoff

Both Linda Chatman Thomsen, SEC Director of Enforcement, and Lori Richards, Director of OCIE, testified today before the United States Senate Committee on Banking, Housing and Urban Affairs about the Madoff scandal.  In her written statement, Ms. Thomsen does not provide much, if any, new information on past SEC investigations into Madoff and why the SEC did not uncover the Madoff ponzi scheme earlier, particularly since they were given, in former Chair Cox's words, "credible and specific" allegations about the fraud at least as early as 1999.  Instead, her written statement discusses the SEC and criminal complaints that were filed in December 2008 and other possible remedies by other regulators and private parties.  She then goes into a long general description of how enforcement handles the "hundreds and thousands" of tips it receives each year and the usual rhetoric about scarce resources, dedicated staff, etc.   

Lori Richards acknowledged the obvious -- that examinations of the Madoff broker-dealer firm did not find the alleged fraud committed by Mr. Madoff -- and stated that the staff did not examine his advisory operations, which first became registered in late 2006. She then went on to describe the risk-based program for selecting firms for examination and the "expansive steps" being taken to identify possible improvements to the system.  Specifically, with respect to Madoff:

The SEC staff did not examine the Madoff investment adviser. The firm registered as an investment adviser in September 2006. As noted above, about 10% of registered investment advisers are examined routinely, every three years.

The Madoff broker-dealer operation was subject to routine examination oversight by the firm's SRO, and was also subject to several limited-scope examinations by the SEC staff for compliance with, among other things, trading rules that require the best execution of customer orders, display of limit orders, and possible front-running, most recently in 2004 and 2005. These examinations were focused on the firm's broker-dealer activities. (As noted above, the firm's advisory business became registered in 2006 and was not examined.) For the reasons I noted, I must not discuss these examinations in any greater detail.

In fairness to both Thomsen and Richards, this is an ongoing investigation, so it was probably a waste of everyone's time to bring them before Congress just to meet the legislators' apparent need to express their outrage over the SEC's failures.