Madoff Case 'Failures' Put SEC in Spotlight

Bernard L. Madoff told investigators that he took $50 billion from clients in a Ponzi scheme. Last year, investigators determined that there was no fraud.
Bernard L. Madoff told investigators that he took $50 billion from clients in a Ponzi scheme. Last year, investigators determined that there was no fraud. (By Jason Decrow -- Associated Press)
By Binyamin Appelbaum
Washington Post Staff Writer
Friday, December 19, 2008

An investigation of Bernard L. Madoff's company by the Securities and Exchange Commission that ended without finding evidence of fraud is emerging as a defining failure for an agency struggling to defend its reputation.

Investigators from the SEC's New York office set out in January 2006 with a list of questions including, specifically, whether Madoff was running a Ponzi scheme. They concluded in November 2007 that there was no evidence of fraud.

Last week, Madoff confessed that his company was "one big lie," according to a complaint filed by SEC officials. Madoff told investigators that he had taken $50 billion from clients -- perhaps the largest Ponzi scheme in history.

The SEC's inability to catch Madoff is the subject of an internal investigation announced this week by Chairman Christopher Cox, who criticized his staff for "apparent multiple failures." Experts on securities fraud, including a number of former SEC employees, said the most troubling of those failures is that investigators went looking for fraud yet did not find it.

"Finding a Ponzi scheme is easy if you know that that's what you're looking for," said one former SEC enforcement official, who spoke on condition of anonymity because he still has dealings with the agency.

The experts cautioned that much remains unclear about the history of the SEC's interactions with Madoff, including the 2006-07 investigation. Without a full picture, they said, it is impossible to determine what mistakes may have been made by SEC staff.

Some also criticized Cox for passing judgment before the investigation was complete and for failing to accept a measure of responsibility.

"I am outraged that Chairman Cox immediately points the finger at front-line employees, even before he begins the internal investigation," said Colleen M. Kelley, president of the National Treasury Employees Union, which represents SEC employees. "The hardworking, dedicated front-line employees at the SEC have been outgunned, underfunded and have suffered from inadequate leadership that is ambivalent about the agency's mission."

Yesterday an agency spokesman declined to comment, citing the ongoing investigation.

Madoff attracted investors by promising steady returns with almost no risk of losses. He quoted a long-term average return of 1 percent a month and 12 percent a year, according to materials distributed to his clients.

It was a spectacular and improbable track record. Measured by a Wall Street ratio that compares risk and reward to evaluate hedge funds, investing with Madoff was more than a sixfold improvement over simply investing in the broad-based Standard & Poor's 500-stock index.

Michael S. Meade, chief executive of Lampost Financial Group, a brokerage and hedge-fund manager, said one client who had invested with Madoff asked him for an evaluation. He investigated, then cautioned the client, saying the results were implausible. The investor remained with Madoff.

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