Were the Regulators and the Regulated Too Close?

In this 1993 file photo, Richard Grasso, president, New York Stock Exchange, left, joined by former...

In this 1993 file photo, Richard Grasso, president, New York Stock Exchange, left, joined by former Security and Exchange Commission Chairman, David S. Ruder, center, and Bernard Madoff, chairman of Madoff Investment Securities, appear before the House subcommittee on Telecommunications and Finance in Washington. Madoff, the money manager accused of duping investors in one of Wall Street's biggest Ponzi schemes once boasted to the Securities and Exchange Commission about how much money he earned and formally advised the U.S. government on ways to protect investors from scam artists.

(AP Photo)

Financial wizard Bernard L. Madoff didn't just fool investors. He also conned the nation's top securities regulators, who investigated his business last year and apparently missed the fact that he was running a $50 billion Ponzi scheme.

It wasn't the first time the Securities and Exchange Commission overlooked clear warning signs of possible fraud.

"I can't comprehend how a well-run investigation would have missed a fraud of this magnitude," said Lynn Turner, a former SEC chief accountant.

Another expert agreed. "The fact that that this could go on for so long with someone who was known to the agency raises questions of the effectiveness of our regulatory scheme," said Charles Elson, the director of the Weinberg Center for Corporate Governance at the University of Delaware.

The SEC's enforcement division looked into Madoff's business in 2007. The agency did not refer the matter to commissioners for legal action. What did the investigators find and why didn't they look harder? The SEC isn't saying anything beyond a brief statement it issued Friday revealing the 2007 probe.

Related

The Grinch Who Stole...Holiday Tips?

Saved by Zero? Fed Slashes Key Rate

In Drive: White House Promises Big 3 Help

Securities law experts point to Madoff's written assertion to the SEC that he had 23 clients.

Demonstrably false, the experts say. Look at the dozens of well-heeled victims now strewn across the financial landscape. They include a charity of movie director Steven Spielberg; the family charitable foundation for Sen. Frank Lautenberg, D-N.J.; and a trust tied to real estate magnate Mortimer Zuckerman.

"One would think this would not have required a great deal of investigation," said Stanley Grossman, a veteran securities lawyer for plaintiffs who expects to represent many of the victims in the Madoff case.

Was the government's watchdog over Wall Street a lapdog? The SEC — the chief federal regulator protecting investors — has faced such charges before. Its oversight of the Wall Street investment houses — rotting within from piled-up securities tied to subprime mortgages — drew significant criticism. A review by the SEC inspector general determined that the agency's monitoring of the five biggest Wall Street firms, which included Bear Stearns, was lacking.