SEC Didn't Act on Madoff Tips

By Binyamin Appelbaum and David S. Hilzenrath
Washington Post Staff Writers
Tuesday, December 16, 2008

The Securities and Exchange Commission learned about what it describes as one of the largest securities frauds in history when Bernard L. Madoff volunteered his confession, raising questions about the agency's ability to police the financial marketplace.

The SEC had the authority to investigate Madoff's investment business, which managed billions of dollars for wealthy investors and philanthropies. Financial analysts raised concerns about Madoff's practices repeatedly over the past decade, including a 1999 letter to the SEC that accused Madoff of running a Ponzi scheme. But the agency did not conduct even a routine examination of the investment business until last week.

On Thursday, Madoff was charged with securities fraud after telling his sons that he had taken $50 billion from investors. The list of victims ranges from some of the world's largest banks to small charities. The Securities Investor Protection Corp., which offers limited protection to brokerage customers in cases of fraud, said yesterday that it would liquidate the company, Bernard L. Madoff Investment Securities.

Multiple investigations are just beginning. Investigators have not said when they believe Madoff began the fraudulent practice of using new investments to pay existing investors. It is not clear how much money was lost or how many people were involved.

But there is the beginning of an explanation as to how so many people failed to spot the alleged fraud.

Madoff may have avoided scrutiny, regulatory experts said, in part because he simultaneously operated a legitimate, regulated and high-profile business as one of the largest middlemen between the buyers and sellers of stock. In that role, he helped to create Nasdaq, the first electronic stock exchange, and advised the SEC on electronic trading issues. He was a large campaign contributor and a familiar of senior regulators.

"Bernie had a good reputation at the SEC with a lot of highly placed people as an innovator as somebody who speaks his mind and knows what's going on in the industry. I think he was seen as a valuable resource to the commission in its deliberations on things like market data," said Donald C. Langevoort, a Georgetown University law professor who specializes in securities regulation and served with Madoff on an SEC advisory committee.

At the same time, Madoff's separate investment business operated on the outskirts of regulation, during a period when the government has intentionally allowed private, unregulated transactions. Private investment pools, such as hedge funds, are subject to limited oversight, and Madoff constructed his investment business to avoid most of it. The SEC said Madoff did not register with it as an investment adviser until September 2006.

Finally, experts say the Madoff case may simply point to the inherent limits of regulation.

"The SEC going back to its formation, and the Justice Department going back to its formation, are never adequate to crime at its time. It's simplistic to look back and say that this was the SEC's fault," said former SEC chairman Arthur Levitt, who knew Madoff when both worked on Wall Street and consulted with him while at the SEC. "A very skillful criminal can almost always outfox the regulator or the overseer."

Ira Lee Sorkin, an attorney for Madoff, has said Madoff's firm is cooperating fully with the government in its investigation. Madoff has been released on bail.

Madoff's business as a middleman, or broker-dealer, was subject to regular scrutiny by the SEC, including a routine examination in 2005 that identified some problems and a 2007 investigation that was closed without any further action.

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