Watchdog: Madoff investigation botched

updated 5:34 p.m. ET Sept. 2, 2009

WASHINGTON - The watchdog of the Securities and Exchange Commission has found the agency consistently mishandled its five investigations of Bernard Madoff’s business, despite ample complaints over 16 years about the multibillion-dollar fraud.

But SEC inspector general David Kotz’s report found no evidence of any improper ties between agency officials and Madoff.

Despite speculation that senior SEC officials may have tried to influence the probes, a summary of Kotz’s 450-page report released Wednesday also found no evidence of that.

The SEC enforcement staff, conducting investigations of Madoff’s business, “almost immediately caught (him) in lies and misrepresentations, but failed to follow up on inconsistencies” and rejected whistleblowers’ offers to provide additional evidence, the report says.

Revelations in December of the agency’s failure to uncover Madoff’s massive Ponzi scheme over more than a decade touched off one of the most painful scandals in the agency’s 75-year history.

Kotz’s exhaustive inquiry was intended as an investigation into the SEC’s conduct in the Madoff affair. He plans to issue separate audits that will include recommendations for changes in the agency’s enforcement and inspection operations.

SEC Chairman Mary Schapiro, appointed by President Barack Obama, has brought changes since taking the helm in January. Enforcement efforts have been strengthened and the agency has started a number of initiatives meant to protect investors in the wake of the financial crisis, officials say.

Three high-ranking SEC officials who were lambasted over the Madoff affair at a congressional hearing in February — including the enforcement director and the head of the inspections office — have left the agency.

Kotz’s report “makes clear that the agency missed numerous opportunities to discover the fraud,” Schapiro said in a statement. “It is a failure that we continue to regret, and one that has led us to reform in many ways how we regulate markets and protect investors.”

Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, said that panel has scheduled a hearing for Sept. 10 on Kotz’s report, at which the inspector general is expected to testify. The testimony will “guide us as we continue our work on a bill to modernize financial regulations,” Dodd said in a statement.

Interactive Rich folks, behaving badly A gallery of people with the means to stay out of trouble but still managed to get into it.

Between June 1992 and last December, when Madoff confessed, the SEC received six “substantive complaints that raised significant red flags” regarding Madoff’s operations. But “a thorough and competent investigation or examination was never performed,” the report says.

Many of the SEC staff who conducted the three inspections and two investigations were “inexperienced,” according to the report.

It cites examinations of Madoff’s business done in 2004 and 2005 by the agency’s inspections office. In both exams, the staff “made the surprising discovery” that Madoff’s mysterious investment business was making far more money than his well-known wholesale brokerage operation. “However, no one identified this revelation as a cause for concern,” the report says.

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