Madoff’s Conspirators In the SEC

Overwhelming. Scandalous. Revolting. Superlatives fail to describe the nonchalance with which the Securities and Exchange Commission has dealt with complaints regarding Bernard Madoff. Careless in its investigations, the agency has not only failed to exercise its duty, it contributed the building up of the smuggler’s reputation. The world is upside down!

The report filed this week by the general inspector of the SEC is overwhelming. In 16 years, the agency received at least six complaints which could have led to the discovery of the scam. The unprofessionalism and carelessness leaves one speechless. Investors who entrusted money to Madoff after 1992 must be furious. In that year, the SEC was in possession of alarming signs of the financier’s activities. If it had bothered to check some data, it would have probably discovered the ponzi scheme, as indicated in the report.

And the same story is repeated. Inexperienced and not knowing much about finance, employees of the SEC ignore visible signals, agreeing with the inconsistent answers of smugglers and neglecting to verify the information provided. At one point, two teams were simultaneously investigating Madoff without the knowledge of each other. It was Madoff himself who informed them of the overlap.

We may envy the severity with which the U.S. court has punished the greatest financial smugglers in modern history. But those who believe, like the Canadian federal minister Jim Flaherty, that we will be better protected by one sole authority have received a painful evidence to the contrary.

Madoff’s case shows that it is also more dangerous to close an investigation than to not investigate at all. Madoff had begun to cite the SEC’s closed investigation to strengthen his credibility! The agency had checked his operations and had found no fraud. What do you want more as a guarantee? The argument had convinced many to invest with him.

Mary Shapiro, who took control of the SEC in January, says she has already greatly enhanced surveillance. But the agency must have an examination of conscience. If it has not been enlightened by Madoff’s game, it is because of lack of skill and investigative methods within the agency. It must now also realize that its employees, officers included, were so dazzled by Madoff that they were unable to question him properly. They lost sight of their mandate. When financial market agents are more concerned with the susceptibilities of a fat cat, instead of protecting investors, they are worthless.