24/7 Wall St.

Case No. OIG-509 from the SEC Office of the Inspector General, also known as “Investigation of Failure of the SEC To Uncover Bernard Madoff’s Ponzi Scheme”, is good reading. The public may think the most important part of the document is the section which says that no one at the SEC did anything wrong by aiding and abetting Madoff’s behavior. The section with those exonerations is followed by the statement: “The OIG investigation did find, however, that the SEC received more than ample information in the form of detailed and substantive complaints over the years to warrant a thorough and comprehensive examination and/or investigation of Bernard Madoff and BMIS for operating a Ponzi scheme, and that despite three examinations and two investigations being conducted, a thorough and competent investigation or examination was never performed.”

In other words, no one at the SEC did anything really wrong, at least not wrong enough to cause anyone to be fired. The fact that $50 billion went missing in a scheme that operated for decades seems not to matter much.

The investigative report covers a number of years when Madoff’s activity, in one form or another, was brought to the attention of people who worked for the SEC. Almost every page in the report covers a missed opportunity. The best part of the narrative is when Madoff explains to one SEC investigative team that is questioning him that he has just furnished the same information to another SEC team working out of another city. The two groups operated simultaneously but without knowing it and could easily have met each other in the waiting room at Madoff’s offices.

A reader of the final summary of the investigation would have to be impressed by two things. The first was that the most frequent excuse for not looking into complaints about Madoff is that, in almost every case, the SEC staff was too busy doing other things. In one incident, an SEC employee said that the necessary work “takes a ton of time”. The other astonishing thing is how gullible the SEC staff could be. At one point in a brief investigation into Madoff’s activities, an examiner noted: Madoff told them that Christopher Cox was going to be the next Chairman of the SEC a few weeks prior to Cox being officially named. He also told them that Madoff himself “was on the short list” to be the next Chairman of the SEC.

Based on the poor performance of the SEC, Madoff should have been appointed its Chairman. He knew how sophisticated financial frauds worked. He knew how Ponzi schemers could evade detection. He was, in short, the single best qualified person in the world to investigate himself.

Douglas A. McIntyre