Fed Page   |   E-Mail Newsletter  Fed Insider E-Mail   |    RSS   |   Column Archive

Federal Diary: SEC's Madoff Probe Botched by Inexperience

New SEC Chairman Mary L. Schapiro is taking steps to implement lessons learned the hard way that poor management was partly to blame.
New SEC Chairman Mary L. Schapiro is taking steps to implement lessons learned the hard way that poor management was partly to blame. (By Jay Mallin -- Bloomberg News)

Network News

X Profile
View More Activity
By Joe Davidson
Wednesday, September 9, 2009

One of the best things about dealing with federal employees is appreciating their sense of mission. Federal workers really care about ensuring our safety, protecting our health and safeguarding our natural resources, among their many, many duties.

So reading what the Securities and Exchange Commission's inspector general has to say about how that agency botched its probe of Bernard L. Madoff is particularly disturbing.

David Kotz, the inspector general, issued an exhaustive 477-page report last week with the title "Investigation of Failure of the SEC to Uncover Bernard Madoff's Ponzi Scheme."

And what a massive failure it was. While it was the result of many things, one point is clear: Federal employees failed miserably in their mission to protect American citizens from a gigantic ripoff.

And poor management is one culprit. Fortunately, new SEC Chairman Mary L. Schapiro is taking steps to implement lessons learned the hard way.

Right up front, Kotz makes it clear this failure was not due to corrupt employees.

The first sentence of the executive summary says his "investigation did not find evidence that any SEC personnel who worked on an SEC examination or investigation of Bernard L. Madoff Investment Securities, LLC (BMIS) had any financial or other inappropriate connection with Bernard Madoff or the Madoff family that influenced the conduct of their examination or investigatory work."

So if it wasn't corruption, was it incompetence?

In the final words of the report, Kotz provides this answer: "The conduct of the [SEC Madoff] examinations and investigations was similar in that they were generally conducted by inexperienced personnel, not planned adequately, and were too limited in scope. While examiners and investigators discovered suspicious information and evidence and caught Madoff in contradictions and inconsistencies, they either disregarded these concerns or relied inappropriately upon Madoff's representations and documentation in dismissing them. Further, the SEC examiners and investigators failed to understand the complexities of Madoff's trading and the importance of verifying his returns with independent third-parties."

"Inexperience" is a word found repeatedly in the report.

"Because of the Enforcement staff's inexperience and lack of understanding of equity and options trading, they did not appreciate that Madoff was unable to provide a logical explanation for his incredibly consistent returns," is one of many such findings.

The focus on inexperience says more about the incompetence of managers than it does about the performance of staffers. This and many other situations Kotz describes cries out for an explanation -- why didn't supervisors assemble better-trained, more well-rounded teams for this probe? "Junior examiners were overmatched in their interactions with Madoff," according to the report.


CONTINUED     1        >

© 2009 The Washington Post Company

Network News

X My Profile
View More Activity