The Securities and Exchange Commission's inspector general on Wednesday released a scathing report finding that the agency failed to follow up on detailed complaints and missed exposing the biggest fraud in the history of the agency, a $50 billion Ponzi scheme perpetrated by Bernard Madoff.
"Despite numerous credible and detailed complaints, the SEC never properly examined or investigated Madoff's trading and never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme," the SEC Inspector General David Kotz said in the report.
Kotz found evidence of a failure to follow up on three examinations and six complaints in a "competent" way.
Specifically, the report explained that the majority of a 2005 investigation was performed by a staff attorney who had recently graduated from law school and only joined the SEC 19 months before she was assigned the Madoff investigation. The attorney had never before been the lead staff attorney on any investigation, the report said.
The report describes an SEC culture where different agency offices failed to communicate effectively and, in one case, a discovery by staffers of Madoff "lies and misrepresentations" were ignored.
The inspector general's report sharply criticized the SEC investigators for general incompetence, saying that "a thorough and competent investigation or examination was never performed."
Madoff is serving a 150-year sentence imposed on June 29 after he pled guilty in March to federal charges based in part on the SEC investigation. He also has been stripped of all his personal property.
SEC Chairwoman Mary Schapiro said the findings in the report "reinforce" her view that changes the agency has undertaken since the Madoff scandal will help the agency better detect fraud.
She added that the agency has streamlined its enforcement procedures and put in more experienced staff members on the frontlines.
Madoff, who was arrested in December and charged with securities fraud, oversaw a fund that managed capital for high net-worth individuals, hedge funds, banks and other institutions. Many high-profile figures, including economist Henry Kaufman and actor Kevin Bacon, are reported to have lost money in the Ponzi scheme.
Kotz was instructed by SEC Chairman Christopher Cox on Dec. 16 to investigate how the SEC's compliance, inspections and examinations division handled criticism of the fund that it has received over the years.
According to the report, the SEC found that SEC Assistant Director Eric Swanson's romantic relationship with Madoff's niece, Shana Madoff, did not influence the conduct of the agency's examination of Madoff and his firm. (Swanson has since left the SEC, and he and Shana Madoff are now married.)
"The Office of the inspector general did not find evidence that any SEC personnel who worked on an SEC examination or investigation of Bernard Madoff Investment Securities had any financial or other inappropriate connection with Bernard Madoff or the Madoff family that influenced the conduct of their examination or investigatory work," the report said.
However, the first complaint against Madoff was brought to the agency in 1992. It related to allegations that an unregistered investment company was offering "100%" safe investments with high and extremely consistent rates of return over significant periods of time, according to the report.
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