SEC Contrite About Missing Madoff, Vows Reforms

WASHINGTON (Reuters) - Contrite U.S. Securities and Exchange Commission officials apologized for bungling five probes that should have uncovered Bernard Madoff's $65 billion fraud and pledged to overhaul the way the agency operates.

A scathing report issued last week by SEC Inspector General David Kotz found that the agency missed numerous red flags, did not properly follow up on leads and dismissed tips and complaints that might have uncovered Madoff's investment sham.

At a congressional hearing to examine the SEC's shortcomings, top SEC officials said that in the Madoff case the agency failed in its "fundamental mission to protect investors."

"It is a sobering and humbling experience," said the SEC's director of enforcement Robert Khuzami and John Walsh, the agency's acting director of exams and compliance, in joint testimony to Congress.

"We deeply regret our failure to detect the Madoff fraud and pledge to continue to fix the problems that contributed to this failure," said Khuzami and Walsh, both of whom described reforms underway.

Madoff pleaded guilty in March and is now serving a 150-year prison term.

Lawmakers expressed outrage over the SEC's missteps. Richard Shelby, the top Republican on the Senate Banking Committee, threatened the agency with legislation if it refused to reform itself.

Democratic Senator Robert Menendez asked who should be held accountable and suggested that staffers who dropped the ball on the Madoff case be fired. "Where there is gross incompetence... the first thing you have to do is clean house," Menendez said.

An SEC spokesman said the agency will thoroughly examine all of the conduct and take appropriate action"

Senate Banking Chairman Christopher Dodd said the SEC's culture needs to be reformed to encourage aggressive investigations and said the agency should hire staff with real-world experience.

Khuzami and Walsh said this was underway and agreed with Democratic Senator Charles Schumer's proposal to give the SEC a bigger budget and allow the agency to keep the fees it collects. Currently Congress appropriates the SEC's budget.