Madoff Whistle-Blower Blasts SEC For "Investigative Ineptitude"

(RTTNews) - A top whistle-blower in the Bernie Madoff scandal outlined scathing accusations against the U.S. Securities and Exchange Commission Wednesday, accusing the SEC of blatantly ignoring his detailed warnings of the now-infamous $50 billion Ponzi scheme. Appearing before a Congressional panel investigating the alleged scheme, Harry Markopolos said that the SEC has "investigative ineptitude."

Markopoulos has become a prominent figure in the case after he wrote a letter to the SEC in 2000, alerting the commission of a possible Ponzi scheme at Madoff Investment Securities.

He alleges that despite nearly 10 years of communication with the regulatory body, the SEC did not take action, and only one official understood the alleged Ponzi scheme and "the threat it posed to the public."

"Because nothing was done, I became fearful for the safety of my family until the SEC finally acknowledged, after Madoff had been arrested, that it had received credible evidence of Madoff's Ponzi scheme several years earlier," Markopolos said in his written testimony.

He had specific criticism for some SEC employees, including Meaghan Cheung, the agency's New York branch chief. Markopolos contacted Cheung in November 2007 to try and alert her to Madoff's scheme, but was promptly rebuffed. "Her arrogance was highly unprofessional, given my understanding of her responsibility and mandate," Markopolos said.

"My experiences with other SEC officials proved to be a systemic disappointment and lead me to conclude that the SEC securities lawyers, if only through their investigative ineptitude and financial illiteracy, colluded to maintain large frauds such as the one to which Madoff later confessed," he added.

A group of top U.S. Securities and Exchange Commission officials also appeared Wednesday. The officials promised that reform would take place within the organization, in the midst of a rash of fraud cases that have cast a cloud over the agency.

The officials, including Division of Enforcement Director Linda Thomsen, Director of Division of Investor Management Andrew J. Donohue, Director of Division of Trading and Markets Erik Sirri, Acting General Counsel Andy Vollmer, and Director of Office of Compliance Inspections and Examinations Lori A. Richards, and the Financial Industry Regulatory Authority's Interim Chief Executive Officer Stephen Luparello, released a joint statement. They will be answering questions from the committee later in the day.

The officials are "thinking expansively and creatively about changes that could reduce opportunities for fraud, as American investors deserve the best possible protection from ponzi schemes and other frauds," they said in prepared testimony. The SEC officials defended the actions of the organization, and noted the limited resources with which they are able to attack every tip. However, they added that restructuring will likely be taking place in light of the Madoff scandal.

"We assure the Subcommittee that the Commission and its staff take the alleged Madoff fraud very seriously," the SEC officials said in the prepared statement. "The losses incurred by investors as the result of Mr. Madoff's alleged fraud are tragic, and we appreciate the impact of those losses on the lives of investors."

Although they noted that Madoff's activities are under ongoing investigation by criminal authorities and the SEC's enforcement division, the officials could not provide any specific information to lawmakers for fear that they would "jeopardize the process of holding the perpetrators accountable."

As they stated at the first hearing on January 5th, the SEC officials admitted their organization "does not have the resources to fully investigate all tips and complaints received."

However, "in light of recent events, the Commission has made it a priority to improve the handling of complaints, tips and referrals to make optimal use of resources," the officials added.

Although the officials could not give details about the Madoff case, suggestions for how the SEC can improve their operations were included.

"Among the issues being considered are the examination frequencies for investment advisers, the existence of unregistered advisers and funds, the different regulatory structures surrounding brokers and advisers, the existence of unregulated products, and the need to strengthen the custody and audit requirements for regulated firms," the SEC officials said.

However, the ideas are "subject to refinement as more analysis is conducted and more facts are learned," the officials added.

In addition, they are looking for "ways to improve the assessment of risk — and at the adequacy of information required to be filed by registered firms and used to assess risks and whether the risk assessment process would be improved with routine access to additional information."

Specifically, the SEC is "targeting firms for examinations of their custody of assets, and expanding our efforts to examine advisers and brokers in a coordinated approach to reduce the opportunities for firms to shift activities to areas where they are not subject to regulatory oversight."


Source: tradingmarkets.com