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SEC Ignored Credible Tips About Madoff, Chief Says

By Binyamin Appelbaum and David S. Hilzenrath
Washington Post Staff Writers
Wednesday, December 17, 2008

The nation's chief securities regulator said yesterday it was "deeply troubling" that his agency had failed to catch perhaps the largest Ponzi scheme in history despite "credible and specific allegations . . . repeatedly brought to the attention of SEC staff" regarding the activities of Bernard L. Madoff.

In making this unusually frank statement, Securities and Exchange Commission Chairman Christopher Cox announced he had ordered an internal investigation.

His remarks followed a day of growing demands for the agency to explain how it missed Madoff's alleged $50 billion fraud, including the apparent failure of regulators to spot numerous and massive inconsistencies during an investigation of his company that ended quietly in 2007.

Cox offered the beginnings of answers. He said the agency inappropriately discounted allegations, that staff did not relay concerns to the agency's leadership and that examiners relied on documents volunteered by Madoff rather than seeking subpoenas to obtain critical information. And Cox said the agency's inspector general would investigate whether personal relationships between Madoff's family and SEC staff played a role in the failed oversight.

"Our initial findings have been deeply troubling," Cox said. "I am gravely concerned by the apparent failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them."

The statement came as criticism of the SEC grew from legislators and former regulators for failing to check a number of Wall Street frauds and excesses that have been exposed by the economic slowdown.

Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, was among those demanding a fuller accounting yesterday.

"Senator Dodd is concerned not only about the people caught up in this reported scheme who may have been misled, but also about how such a massive fraud could have gone undetected," spokeswoman Kate Szostak said. "Senator Dodd is seeking more information from the SEC about this case."

H. David Kotz, the inspector general of the SEC, has issued a number of scathing reports this year that have ruffled feathers and called for disciplinary actions against senior officials. "We received the chairman's request to open an investigation," Kotz said last night. "We intend to do so immediately and plan to conduct a through, comprehensive investigation and issue a report as soon as possible."

Among the issues investigators will consider is the extent of relationships between Madoff's family and regulators.

Madoff's niece, Shana Madoff, who worked as a compliance lawyer for his company, is married to Eric Swanson, a former SEC official who had been involved in the agency's examinations of Madoff's operations. Swanson's current employer, Bats Trading, said the relationship began in 2006. Swanson left the SEC shortly after and the couple was married in 2007, Bats said.

Bernard Madoff mentioned the marriage last year as he boasted about his close ties with regulators while speaking at a conference in New York. The Washington Post reviewed a digital video of the speech.

"I'm very close with the regulators, so I'm not trying to say that they can't, you know, that what they do is bad. As a matter of fact, my niece just married one," Madoff said, adding in an apparent reference to Swanson, "Very nice attorney."

A Bats spokesman who said he was speaking at Swanson's request said that the relationship began after the end of Swanson's role in regulating Madoff, and that the couple met through their involvement in a securities industry trade group.

Swanson "did not participate in any inquiry of Bernard Madoff Securities or its affiliates while involved in a relationship with Shana," Bats said in a statement. "Throughout his career, Eric has displayed the highest ethical standards and his reputation has been -- and continues to be -- above reproach."

Swanson participated in the 2004 examination of Madoff's company, and helped to conduct an internal review of a previous examination of the company in 1999, according to the SEC. The agency issued a statement underscoring that Swanson was not involved in regulating Madoff after the relationship began.

"The SEC has very strict rules prohibiting SEC staff from participating in matters involving firms where they have a personal interest," the agency said. "Subsequently, Mr. Swanson did not work on any other examination matters involving the Madoff firm before leaving the agency."

Investigators also will review why the SEC's regular examinations of the company failed to find problems.

The SEC said yesterday that it conducted routine examinations of the company in 1999 and 2004, as well as a previously disclosed examination in 2005 and an investigation that ended in 2007. The 2005 examination found minor problems; the others closed without incident.

Cox said last night that Madoff kept multiple sets of books and falsified documents, allowing him to mislead investors and regulators.

Cox and other commissioners have been angered that they learned information about the case from the news media instead of from agency staff, according to people familiar with the matter. For example, when senior staff members told the commissioners about the relationship between Swanson and Madoff's niece, they said Swanson had not been involved in the 2005 examination. They did not, however, tell the commissioners that Swanson had been involved in previous looks at Madoff, these people said.

A Boston investment professional, Harry Markopolos, started writing letters to regulators in 1999 alleging that Madoff was conducting a Ponzi scheme. Markopolos continued to send letters, including most recently in April. Markopolos said that his charges were detailed and specific, and he said he was still angry that the SEC ignored him.

"They have a lot to answer for," Markopolos said. "They refuse to enforce rules against this industry."

The extent of the alleged fraud has also raised questions about the possible involvement of other people. Cox's statement yesterday mentioned "others who may be involved."

Simply generating monthly account statements for all of his clients would have required an extensive effort on Madoff's part, said Laurie S. Holtz, a forensic accountant who has investigated similar schemes.

"That isn't going to be done by Mr. Madoff sitting at home with a PC," Holtz said. "There's got to be a whole retinue of support to make this happen."

The attorney general of Massachusetts subpoenaed documents yesterday from Bernard Madoff's brother, Peter Madoff, who served as chief compliance officer.

Madoff is scheduled to appear in a Manhattan court today for a bail hearing. He was released last week on a personal recognizance bond of $10 million. Meanwhile, a team of people responsible for liquidating Madoff's business arrived at his Manhattan office yesterday and joined federal investigators in beginning to comb the records.

"It's going to take a tremendous amount of time to unwind and separate fact from fiction," said Stephen Harbeck, president and chief executive of the Securities Investor Protection Corp., which has a federal mandate to recover funds for clients of failed brokerages.

Staff writer Amit Paley and staff researcher Julie Tate contributed to this report.

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