Sunday, September 6, 2009

Monday Morning Quarterbacking with the Madoff Report

As noted here, the SEC's release of the executive summary of the Madoff Report (Investigation of Failure of the SEC to Uncover Bernard Madoff's Ponzi Scheme) demonstrated that there was no finding of corrupt conduct.  But the bottom line was that the ball was dropped on more than one occasion.  It is, of course, easy to look back and examine the mistakes made.  The 477 page Report, now released, allows that to be done. But as people ponder the sad findings in this report, the more important report and findings that need to now be made - is what to do about all of this to make certain it won't happen again. Clearly the new SEC chair has put into place some measures to allow for better regulations and control.  But is this enough? Some thoughts -

  • If this had been a company that had missed the red flags, the DOJ would be making them pay a lot of money, institute a more effective corporate compliance program, and probably have monitors in place to make certain that wrongdoing would not occur again. 
  • Is Madoff no different from the rogue employee who operates improperly and hurts innocent victims (in this case the victims are those who invested, those who benefitted from entities that had invested, and the general public).
  • Will there ever be sufficient controls in place without thorough outside monitoring?  In the case of corporations, the DOJ typically wants more than a company compliance program and looks for outside monitors to make certain there are no future violations.  Should the SEC be held to a lesser standard? No -  I am not suggesting that we employ John Ashcroft for this one.
  • An Inspector General Report after-the-fact is wonderful, but where was the oversight when this fraud was occurring.
  • It is easy to put blame on individuals who may have missed items, but we need to also consider their workload and whether it was reasonable for them to discover this fraud and whether more resources and systems are needed to assure they can properly perform their jobs.
  • Clearly it is easy to Monday morning quarterback, especially on a Sunday over Labor Day - but this amount of fraud needs more thought and consideration.

The 477 pages tells us what happened.  Now we need to examine the controls in place to assure it will never happen again.


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Are the thousands of people who were impoverished by this, who depended upon the SEC's "good" word that Madoff had been investigated numerous times and was clean, to be left as "roadkill." As the author of the above article stated, had this been a company, not a gov't agency, the DOJ would have fined them heavily. Similarly, had this been a private company that failed miserably at what it was created to do, it would have been sued into oblivion by the victims of this crime. As things stand now the SEC has stated that SIPC does not have the money to pay the victims (and whose fault is that?), and Congress has decided by its silence that its alright for the US Treasury to keep money that it was paid in taxes on income that never existed. Yes, "roadkill."

Posted by: Richard Friedman | Sep 6, 2009 3:43:19 PM

I want to know who was fired from the SEC for this gross dereliction of duty. Wasn't there a whistleblower who explicitly and repeatedly warned the SEC of Madoff's activities? And yet these blinkered bureaucrats, with specific direction still could not find their burro with both hands.
And now we get a report that in 477 pages says, "Ooopsy doopsy."

Posted by: BlogDog | Sep 7, 2009 5:48:38 AM

this amount of fraud needs more thought and consideration

Oh yes. That'll fix things so this will never happen in the future. Just what we need for justice to prevail in our country .... more thought and consideration.

Good grief.

Posted by: Paul A'Barge | Sep 7, 2009 6:20:31 AM

"... demonstrated that there was no finding of corrupt conduct. "

The report did not demonstrate this. It merely asserted that investigators had so far not uncovered who was corrupted.

The SEC is investigating itself. It's interest is not in conducting a thorough investigation, because many of the people who were aiding Bernie Madoff are still employed by the SEC.

Not until an independent prosecutor is appointed will there be a thorough independent investigation of how the SEC, over 16 years and 5 investigations, failed to notice that Bernie Madoff had never purchased an option from anyone and was running a simple Ponzi scheme.

The SEC is corrupt. It is still corrupt. And the people inside the SEC who helped Bernie Madoff are still working there.

Posted by: madofftracker | Sep 7, 2009 6:32:08 AM

Nothing here is unique to the SEC. Think of all the other agencies that have hundreds of thousands of employees and spend BILLIONS every year.

---ENERGY Dept, created 35 yrs ago to reduce our reliance on foreign oil. Great job, huh?
---EDUCATION Dept -- need I say more?
---MEDICARE: bragging about its low "administrative" costs while that very lack of oversight allows billions in fraud.
---JUSTICE: where's the "justice" when they drop charges in the most flagrant case of voter intimidation since Jim Crow?
---LABOR & COMMERCE--how much have we spent on these departments while our manufacturing sector all but disappeared?

The common theme here is that bureaucracies never fulfill a "mission". They always become nothing more than a self-perpetuating bureaucratic job machine. That won't change until we, the public, insist they be fired if they don't meet objectives (and their budgets should be sunsetted).

Posted by: Jeanne | Sep 7, 2009 6:38:05 AM

It's a fact that if you are a snake oil salesman, you're going to approach fleecing people by promising the sun, the moon, and the stars.

Madoff was great at know how to reach BILLIONAIRES, who had pushed aside money that would have been taxed, but put, instead, into charities. (Heck, folks, even Haarvard got snookered.) So you want some paper document that 'guarantees you can prevent people from jumping on investments where they believe they can't lose?" First, you'd have to design humans differently. Maybe, you'd have to create a race of two-headed men? Because right now GREED works just fine.

And, Madoff fooled a lot of sophisticated people! He especially went after a particular sector. Religious Jews, in America, interested in building a paradise for the ultra-religious folk in Israel. So that they would never be short of cash. (That was the sales pitch.)

Once Madoff got going, and people heard of the "returns," the gossip became an genormous plus. People came out of the woodwork begging him to take their money. And, many times he did. And, other times? He turned people down. Making them feel like shnooks. Who weren't part of this man's rich club.

I have no sympathy.

I think it's reasonable to know, when Joseph told the Pharaoh that he'd have "seven bad years," and he'd be wise to prepare for this during good times, Joseph was spelling out the advantages of looking ahead. Stop being greedy in using up all you have now. Save some for a rainy day.

You still think the SEC is going to pass laws that stop human nature in its tracks? Well, then, I guess there's a sucker born every minute. (And, Barnum developed the art of bringing the crowds into his tent not just to see animals and acts. But to view freaks. Oh, and if you wanted to see "the egress" ... when you were in the side show; he asked for a dime. And, gave you the exit.) Exits, folks, are free.

Some lessons are easier to learn than others. And, even in Vegas, a "hot table" doesn't stay hot for long.

Posted by: Snarky | Sep 7, 2009 7:48:03 AM

I believe the appropriate standard for comparison would be the fate of the Arthur Anderson cpa firm. Whatever happened to them? Why wouldn't the involved members of the SEC staff have the same experience?

Posted by: Keith Stanley | Sep 7, 2009 8:36:51 AM

In his Great Crash of '29, Galbraith defined the unknown sum of money that has been stolen at any given time but not yet discovered as 'the bezzle.' He further postulated that the bezzle tends to be larger in good times and shrink when money gets harder to come by - just as it did by a record amount when Maddoff's little boodle came to light. What we are likely to get is over regulation (like Sarbanes Oxley) that has unintended consequences that distort the investment business still further. What we wont get is protection from the next Maddoff, because the new re4gulatory regime will create conditions such that some new form of con will emerge to take advantage of the next wave of 'irrational exuberance.' We should tighten regulation judiciously but not pretend to ourselves that we can eliminate this kind of problem. It's is a great example of the perfect driving out the good.

Posted by: Lorenz Gude | Sep 7, 2009 9:31:43 AM

"we need to also consider their workload and whether it was reasonable for them to discover this fraud"

Don't alibi for them. From the SEC report summary on why they didn't catch Madoff:

"In the first of the two OCIE examinations, the examiners drafted a letter to the National Association of Securities Dealers ... 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."

If they had sent the letter, they would have gotten back no data ... zilch. Madoff never made any trades. That would have blown the cover, but not even asking, for fear of having to do more work ... That is inexcusable. The only way this episode will have any impact is if every one involved top to bottom is fired.

And we all know that they will skate.

35 years of dealing with the SEC, have taught me only that they are completely worthless. Now maybe others will begin to see that as well.

And I am not bitter.

Posted by: Fat Man | Sep 7, 2009 11:27:57 AM

I have not read the report but I have seen some comments about it. These comments include the following:
1. In checking on Madoff's operations, several investigators asked about specific records of trades from him. However, only one checked on them with the firm that Madoff dealt with to see if the records were correct.
2. The one who did check found that the outside firm found no trades by Madoff corresponding to his claims. No action was taken on this finding.
3. Some report or reports were made to higher ups at SEC questioning Madoff's operations.
The response was apparently to discourage further investigation.
4. Madoff made significant contributions to many Democrats (and even perhaps to some Republicans.)
5. Madoff was "aggressive" in defending himself from investigators.
I have some questions about these points.
1. Are they true? If so,
2. Who were the individuals who failed to follow through to check Madoff's claims? Who was the individual who found a discrepancy and ignored it? Why was that done? Who checked with
what higher-ups? Was there influence on decisions by political appointees or politicians? Who made the decisions to clear Madoff?
What constituted aggressive defense by Madoff?
3. Did anyone in the SEC check on Madoff's phony auditor?
4. Can one expect an internal study to unravel the truth about what happened in these many failed investigations?
Might the truth implicate some of the authors of the study or their friends?

The report suggests gross supine negligence in these investigations. But if the claims above are true, and are connected together they are quite consistent with and even indicative of corruption.

How can we find out the truth here?

Posted by: Daniel | Sep 7, 2009 12:25:31 PM

When Arthur Andersen failed the investors it was supposed to protect in the Enron case, it went belly up. But the SEC failed in Madoff and the government wants to give more power, money, and responsibility to the SEC to see it doesn't happen again?

Posted by: Vern | Sep 7, 2009 9:30:17 PM

The report doesn't go near the underlying issue of institutional culture at the SEC. This agency is notorious for legalism rather than substantive investigation. A big deal to them is a small-cap company missing the proper presentation of income from continuing/discontinued operations in their statement of cash flows (real life example; no action taken, since they got it right in the footnotes and the statement of operations). When the mutual fund scandals broke, they showed no interest until Eliot Spitzer saw his chance for greater glory. Madoff had filed all the proper forms, so he was in the clear. From the SEC's point of view, it is much more agreeable to sit in the office and scrutinize a 10-K, prospectus, or Form ADV than to do something that might involve leaving their comfort zone, physical and professional. They seem to depend on the Wall Street Journal to point them toward things that might need to be looked into.

Until they change their focus from monitoring technical compliance to protecting investors from financial fraud, we can expect more of the same.

Posted by: Mitch | Sep 8, 2009 7:02:41 PM

The question: "What happened?" 400+ pages to answer, "We don't know."

Posted by: Daniel | Sep 18, 2009 1:33:28 PM

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