Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, September 19, 2010

Wagner on the SEC and Madoff

Too Close for Comfort: The Problem with Stationary SEC Officers, by Robert E. Wagner, Case Western Reserve University School of Law, was recently posted on SSRN.  Here is the abstract:

The SEC was created in response to the market crash of 1929 to prevent fraud and corruption; in recent memory, however, the institution has greatly failed. One dramatic result of the flaws in the SEC's structure was its inability to detect the 50 billion-dollar fraud that Bernard Madoff perpetrated. Virtually all commentators agree that there was ample evidence as the fraud progressed, and that the SEC should have but was unable to recognize it in time. This Article posits that in Madoff's case, the problem was not a lack of harsh sentences to punish this type of offense as some have pondered (indeed, the court unsurprisingly gave him 150 years in prison). Rather, the SEC agents responsible for overseeing NYC did not act in a dispassionate manner when people brought red flags in Madoff's dealings to their attention. This Article suggests that the agents' objectivity was compromised by too great a degree of personal familiarity with Madoff as an individual and his history, which resulted from the fact that the same agents worked closely with the NYC industry for years on end. This Article proposes a mandatory system of office rotations through which most SEC officers - and certainly any with supervisory duties - would be regularly transferred to different geographic areas and internal departments. This simple but important step could provide a significant improvement into the investigative process and increase the scrutiny that officers lend to specific accounts.

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