WASHINGTON – In a stunning rebuke, the Securities and Exchange Commission chairman blames his career regulators for a decade-long failure to investigate Wall Street money manager Bernard L. Madoff, now accused of running one of the largest Ponzi schemes ever.
On Tuesday night, SEC Chairman Christopher Cox ordered an internal investigation of what went wrong and offered a scathing critique of the conduct of his staff attorneys. He said they 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.
Credible and specific allegations regarding Madoff's financial wrongdoing going back to at least 1999 were repeatedly brought to the attention of SEC staff, said Cox.
Madoff remains free on $10 million bail. A hearing is scheduled in federal court in New York on Wednesday afternoon to iron out the terms of his bail package.
Shock waves from the Madoff affair have radiated around the globe as a growing number of prestigious charitable foundations, big international banks and individual investors acknowledge falling victim to an unprecedented fraud. Madoff remains free on $10 million bail.
"I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them," Cox said in a written statement.
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, 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.
Cox's harsh assessment may have the effect of shifting questions away from the politically appointed five-member commission and placing blame squarely — if not solely — on the agency's staff for failing to aggressively pursue a massive fraud.
Cox's statement is sure to fuel a new criticism of the SEC, an agency increasingly seen in Congress and elsewhere as incapable of carrying out its basic mission: to ensure a basic level of honesty on Wall Street.
Cox spelled out the taint produced by the previous failure to aggressively pursue Madoff: The SEC commission chairman ordered removal from the Madoff criminal investigation of any SEC staff members who have had contact with the prominent Wall Street figure or his family.
Cox's strong statement came as at least two senators signaled they have lost patience with the SEC.
"They were asleep at the switch," Sen. Charles Grassley, R-Iowa, said of the SEC's failure to uncover Madoff's alleged fraud.
As Grassley had urged, Cox ordered the SEC's inspector general to conduct the internal probe of his agency's inaction.
Sen. Jack Reed, D-R.I., said the problems go much deeper.
The Madoff affair "illustrates the lack of credible enforcement over several years by the SEC," said Reed, who chairs the Senate banking panel that oversees the SEC. He criticized the agency's "lack of a strong commitment to be vigilant."
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.
As for Madoff, the SEC's enforcement division looked into Madoff's business last year. Until Tuesday night, the SEC had refused to criticize the inaction that followed last year's probe.
Damaging the SEC's credibility in the Madoff case was the fact that a securities executive, Harry Markopolos, complained to the SEC's Boston office in May 1999. Markopolos told the SEC staff they should investigate Madoff because Markopolos felt it was impossible for the kind of profit he was reporting to have been gained legally.
But the SEC's Boston office has itself been accused in the past of brushing off a whistle-blower's legitimate complaints, in a case that led the head of that office to resign in 2003. The whistle-blower, Peter Scannell, eventually persuaded state regulators and the SEC to act against mutual fund giant Putnam Investments, where Scannell worked.
"It's flabbergasting that nobody can nail the bums in the SEC who turn their back on and/or aid and abet people who defraud investors," Scannell said in a telephone interview Monday.