SEC mishandled Madoff probes, agency watchdog says

The SEC's inspector general revealed that the agency missed numerous clues.

ByABC News
September 2, 2009, 10:15 PM

— -- Inexperienced Securities and Exchange Commission investigators bungled repeated opportunities over 16 years to expose Wall Street scam artist Bernard Madoff, the SEC's inspector general revealed in a devastating report released Wednesday.

"Despite numerous credible and detailed complaints, the SEC never properly examined or investigated Madoff's trading and never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme," Inspector General H. David Kotz concluded in a summary of his 450-page report. "Had these efforts been made with appropriate follow-up at any time beginning in June of 1992 the SEC could have uncovered the Ponzi scheme well before Madoff confessed."

Madoff, a former Nasdaq chairman, was sentenced in June to 150 years in prison for swindling investors out of billions of dollars.

The SEC failed to end Madoff's scam despite conducting five probes and receiving "six substantive complaints that raised significant red flags" about his operations and investment claims. Moreover, two 2001 articles in financial journals conveyed skepticism about Madoff's eye-popping investment returns and obsessive secrecy.

The only good news for the SEC: Kotz found no evidence of "any financial or other inappropriate connection" between Madoff and SEC officials. And he found no evidence that a former SEC official's romance with Madoff's niece the couple married influenced the investigations.

Some highlights from Kotz's report:

The SEC botched its first chance to stop Madoff in 1992. Investigating an investment firm controlled by Madoff that offered "100% safe" investments with high returns, the SEC suspected a Ponzi scheme and ordered the firm to repay investors. But SEC investigators never suspected that Madoff might have repaid them with money "from other clients as part of a larger Ponzi scheme."

Investigators several times caught Madoff in lies and never pursued them. Another time, they accepted at face value his assertion that his "gut feel" for the markets were responsible for his incredible investment results.