Congressmen sound off against SEC in Madoff affair

By: AP
By: AP

WASHINGTON – Republican and Democratic House members said Monday that the alleged $50 billion fraud involving Wall Street figure Bernard Madoff reflects deep, systemic problems at the Securities and Exchange Commission.

Inspector General H. David Kotz said he is so concerned about the SEC's failure to uncover Madoff's alleged Ponzi scheme that the IG is expanding the inquiry called for last month by SEC Chairman Christopher Cox. Cox had pushed the blame squarely onto the SEC's career staff for the failure to detect what Madoff was doing.

Kotz said he will examine the operations of the SEC's enforcement and inspection divisions and will make recommendations for changes, steps beyond what Cox had called for.

At the first congressional hearing on the scandal, Rep. Spencer Bachus, R-Ala., called for Congress to create a regulatory structure "for the 21st century."

The House Financial Services Committee is trying to determine how, despite warnings back to at least 1999 to SEC staff members, Madoff continued to operate his alleged scheme.

"Clearly, our regulatory system ... failed miserably and we must rebuild it now," said Rep. Paul Kanjorski, D-Pa.

Rep. Paul Hodes, D-N.H., said the Madoff scandal is like "the cherry on a bad sundae."

In the Senate, Banking Committee Chairman Chris Dodd, D-Conn., and Sen. Richard Shelby of Alabama, the panel's senior Republican, announced that they have opened an investigation of the Madoff affair. They told Cox in a letter that they are reviewing the SEC's oversight of Madoff's firm and requested relevant documents from the agency.

Thousands of individuals — including ordinary people and Hollywood celebrities — as well as big hedge funds, international banks and charities around the globe lost money investing with Madoff. A prominent French financier who had entrusted his fortune and his clients' money to Madoff was found dead at his office in New York on Dec. 23, an apparent suicide.

Federal prosecutors said in court Monday that the 70-year Madoff violated bail conditions by mailing about $1 million worth of jewelry and other assets to relatives and should be jailed without bail.

"I am a human face on this tragedy," said Allan Goldstein, a retired New York textile distributor who testified at Monday's House hearing.

Goldstein, 76, said he lost his entire life savings with Madoff and had to cash in his life insurance policies to cover his mortgage.

"Everything I worked for over a 50-year career is gone," Goldstein said. He said he had no reason to question the steady returns of 8 percent to 12 percent a year that Madoff's firm told him he was earning.

The Securities Investor Protection Corp. and the trustee handling the liquidation of Madoff's firm said Monday they mailed more than 8,000 claim forms to customers on Friday.

SIPC's president, Stephen Harbeck, faced pointed questioning at the hearing as lawmakers spelled out the math: an estimated $50 billion in losses from Madoff, $1.6 billion available to SIPC. The industry-funded organization, created by Congress to protect investors when a brokerage firm fails, can provide funds up to a maximum of $500,000 for each customer.

The SIPC shortfall will only worsen the distrust of investors, already deepened by the worst financial crisis since the Great Depression, said Rep. Gary Ackerman, D-N.Y. His district encompasses the affluent north shore of Long Island, home to many of Madoff's alleged victims.

Harbeck testified that the estimated $50 billion in losses includes an unknown measure of "false profits" not legitimately earned by Madoff investors — but on which the investors have been paying income taxes.

Lawmakers, many of whom had received calls from constituents and charities in their districts that lost money, jumped on the opportunity to show concern. The hearing was held on the final day of the current Congress.

Rep. Brad Sherman, D-Calif., insisted that all five SEC commissioners should tender their resignations to President-elect Barack Obama.

Republicans warned against rushing to new regulation as a response to the SEC breakdown.

"While the failures of regulatory and private-sector due diligence exposed by the Madoff matter are obvious, they do not lead me to conclude at this stage of the inquiry that what is needed are broad new legislative or regulatory mandates on the rest of the securities industry," said Rep. Spencer Bachus of Alabama, the senior Republican on the panel.

"What we may have in the Madoff case is not necessarily a lack of enforcement and oversight tools, but a failure to use them," he said.

The Madoff scandal allegedly involves a Ponzi scheme, in which people are persuaded to invest in a fraudulent operation. The early investors are paid their returns out of money put in by later investors.

It is named after Charles Ponzi, an Italian immigrant to Boston who worked as a waiter, bank teller and nurse before he talked investors into sinking their money into a complex — and, it turned out, bogus — scheme involving postal currency. His swindle in 1919-20 cheated thousands of people out of $10 million. He was sent to prison for mail fraud and, in 1934, deported.

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Associated Press writer Pete Yost contributed to this report.


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