SEC chief wants to know why agency missed Madoff fraud
— -- Securities and Exchange Commission Chairman Christopher Cox on Tuesday said he has asked for an investigation into how Bernard Madoff's alleged $50 billion Ponzi scheme went undetected despite repeated "credible and specific allegations" made to SEC staff since at least 1999.
Cox said SEC attorneys never bothered to seek a formal commission-approved investigation that would have forced Madoff to surrender vital information under subpoena. Instead, the staff relied on information voluntarily produced by Madoff and his firm.
In a statement, Cox said he is "gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations."
Madoff, 70, was charged last week with operating what authorities allege is a massive fraud that wiped out billions of dollars and whose victims range from major banks to individual investors. Critics have questioned how the SEC missed red flags about Madoff's firm.
Cox said relationships between the Madoff family and the SEC will be studied, as will the SEC's internal policies.
The SEC chairman said Madoff kept several sets of books and false documents, and provided false information involving his investment advisory activities to investors and to regulators.
Separately, Stephen Harbeck, chief executive of the Securities Investor Protection Corporation (SIPC), said one set of Madoff's books kept track of the losses at his investment advisory arm, while the other is what investors were shown.
SIPC, created by Congress and funded by the securities industry, can give customers up to $500,000 if it is determined their money was stolen. SIPC has about $1.6 billion to make payouts, which means that amount could quickly be depleted in the Madoff case, where losses could reach $50 billion. That figure comes from the SEC's court complaint, which quotes Madoff admitting to losses in that amount to two senior employees of his firm before his arrest last Thursday.
Tuesday, investigators said inconsistencies they have found in Madoff's books could delay for months the unwinding of the alleged scam.
Shortly before Cox denounced his own staff, a widely respected former SEC chief accountant, Lynn Turner, aired her own skepticism. "I can't comprehend how a well-run investigation would have missed a fraud of this magnitude," Turner said.
The Madoff scandal is just the latest instance in which SEC regulators have overlooked clear warning signs of possible fraud.
An earlier 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.
Cox himself has come in for strong criticism.
In March, a few days before Bear Stearns nearly collapsed into bankruptcy, Cox told reporters the agency was closely monitoring the five investment firms and had "a good deal of comfort" in their capital levels. Then, as federal officials orchestrated the rescue, Bear Stearns was bought by rival JPMorgan Chase with a $29 billion government backstop.
Authorities want to know who else is to blame in the Madoff affair. Massachusetts Secretary of State William Galvin has subpoenaed Madoff's brother Peter, the firm's chief compliance officer, and Marcia Beth Cohn, chief compliance officer of Cohmad Securities, which is located in the same Manhattan building as Madoff's firm. Galvin wants to identify "feeder firms" that directed investors to Madoff without doing proper due diligence.
Some funds that invested their shareholders' money with Madoff are already under fire. Tuesday, New York Law School filed a lawsuit against Ascot Partners, manager J. Ezra Merkin and the Ascot fund's audit firm, BDO Seidman. The lawsuit alleges Ascot "recklessly" invested $1.8 billion, nearly the entire fund, with Madoff. The law school invested $3 million in the Ascot fund. Merkin, who also is chairman of GMAC, is a victim of Madoff himself and "intends to defend this lawsuit vigorously," attorney Andrew Levander of Dechert said in an e-mail. BDO Seidman said in a statement that it "is not and has never been the auditor of Madoff Securities. BDO Seidman's audits of Ascot Partners conformed to all professional standards and we will vigorously defend ourselves against these unfounded allegations."
Madoff could face a court appearance Wednesday if he's unable to meet the stipulations of his bail. He was released on $10 million bond, secured in part by his $7 million New York apartment, and needs two co-signers in addition to his wife and brother.