SEC inspector general investigating agency's handling of Madoff fraud

By David S. Hilzenrath
Washington Post Staff Writer
Friday, March 4, 2011; 1:12 PM

The inspector general of the Securities and Exchange Commission has opened an investigation into allegations that the agency mishandled potential conflicts of interest in its response to Bernard Madoff's Ponzi scheme.

The action by H. David Kotz comes as congressional Republicans have been pressing SEC chairwoman Mary L. Schapiro for an explanation of what she knew about and what action she took on the alleged conflicts.

Kotz said by e-mail Friday that he had called an investigation.

Rep. Darrell Issa (R-Calif.), chairman of the House Oversight and Government Reform Committee, and Sen. Sen. Charles E. Grassley (R-Iowa), the ranking Republican on the Senate Judiciary Committee, said in a statement Thursday that Schapiro had allowed her general counsel to represent the agency on Madoff issues "without fully properly examining" his financial interest.

The Republicans' criticism was the toughest since it came to light that former SEC general counsel David M. Becker and his brothers inherited and then liquidated a $2 million Madoff account years before the 2008 collapse of Madoff's fraud. Becker rejoined the SEC as general counsel in early 2009 and left the agency last week.

Lawmakers are trying to determine whether a criminal law was violated, according to Hudson Hollister, a counsel for Issa's committee. In a letter to Schapiro on Thursday, Issa and Grassley cited a federal law that they said prohibits federal officers from participating in proceedings in which they have a financial interest.

The Becker brothers were recently sued by the trustee trying to recover money for Madoff's investors, seeking to recover $1.5 million of payouts from their family account. The trustee, who says the money rightfully belongs to investors who were defrauded, has filed "clawback" suits against many "net winners" - people who took out more than they put in.

In his role at the SEC, Becker helped frame the agency's position on how much money investors should be entitled to recoup in the Madoff bankruptcy.

Many investors have been fighting to establish that they are owed the full, bogus amount shown on their last account statements.

But in ongoing litigation, the SEC has rejected the investors' position, siding instead with the trustee. The SEC has argued that investors' claims should be limited to what they put in minus what they took out - with one exception: Unlike the trustee, the SEC has argued that investors should also receive an inflation adjustment on the money they deposited with Madoff.

"Chairman Schapiro knew that Becker, her general counsel, was responsible for this work, but failed to determine whether the advice he was providing might affect his personal financial interest," Issa and Grassley said in a statement.

SEC spokesman John Nester declined to comment, except to say, "The e-mail exchange makes clear that Mr. Becker appropriately sought the advice of the Chief Ethics Counsel and followed that advice."

Becker participated in the Madoff matter after consulting the SEC ethics counsel and getting a green light. The ethics counsel, William Lenox, gave Becker approval on May 4, 2009, about 25 minutes after Becker sought guidance, according to an exchange of e-mails the lawmakers released Thursday. Issa and Grassley said the ethics counsel acted without independently verifying the facts.

The SEC ethics counsel told Becker that it was okay for him to work on the matter because it would have "no direct and predictable effect" on whether the trustee would try to claw back money from Becker.

David Bernfeld, a lawyer for a group of Madoff victims, said the SEC's decision to let Becker participate reflected "insensitivity" to victims "who are already deeply concerned by the agency's multiple failures to prevent or uncover the Madoff scandal in the past."

Bernfeld said Becker's involvement - and the SEC's decision to side with the trustee - left the agency open to suspicion. It could appear that the SEC was trying to curry favor with trustee Irving Picard so he wouldn't sue Becker, Bernfeld said.

But from a financial point of view, he said, the SEC's position appears to run contrary to Becker's interest. That's because, if investors were entitled to their full fictitious account balances, the money Becker withdrew would have been his own, and it would not have been subject to clawback, Bernfeld explained.

Hollister, the oversight committee staff member, offered a similar assessment. But he also said that the SEC's position that investors be awarded interest on their deposits could help Becker by reducing the amount that the trustee could try to take back from him. The SEC advocated awarding interest in a legal brief signed by Becker.

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