The SEC has released its Office of Inspector General Executive Summary on why the SEC failed to discover Bernie Madoff made off with so much money over so many years when so many people complained to the SEC that Bernie Madoff was making off with their money.
The OIG concludes that the investigators got right up to the edge of discovering what Madoff was doing but then failed to ask that one last question that would have put them over the edge.
Not surprisingly, the OIG itself reprises the methods of the Madoff investigators and gets right up to the edge of finding out why the SEC failed to uncover Madoff's crimes, but then fails to ask the one last question that would put them over the edge of finding out why they failed to find Madoff.
The SEC's OIG web page can be found here. The Report, Case No. OIG-509, Investigation of Failure of the SEC To Uncover Bernard Madoff's Ponzi Scheme, can be found here and there is currently a link to the report on the OIG's main page.
Auditing someone is a fairly simple matter. At its simplest, all you have to do is check what the target says they are doing and then go out into the world and see if they are in fact doing it. You ask an independent third party to verify.
For example, Madoff reported he held $2.5 billion in S&P 100 index options in one of his feeder funds when in fact he held only $18 to $24 million. All they had to do was ask the NASD what the truth was.
The OIG reports, in part, that, [from p.20-21] -
Our investigation did find that the Enforcement staff made attempts to seek information from independent third-parties; however, they failed to follow up on these requests. On May 16, 2006, three days before Madoff's testimony, the Enforcement staff reached out to the Director of the Market Regulation Department at the NASD and asked her to check a certain date on which Madoff had purportedly held S&P 100 index option positions. She reported back that they had found no reports of such option positions for that day. Yet, the Enforcement staff failed to make any further inquiry regarding this remarkable finding. The Enforcement staff also failed to scrutinize information obtained in the NERO cause examination when the examination staff had attempted to verify Madoffs claims of trading OTC options with a financial institution and found that "no relevant transaction activity occurred during the period" requested. Finally, although the Enforcement staff attorney attempted to obtain documentation from U.S. affiliates of European counter-parties and one of Madoffs purported counter-parties was in the process of drafting a consent letter asking Madoffs permission to send the Enforcement staff the docunents from its European account, the inexplicable decision was made not to send the letter and to abandon this effort. Had any of these efforts been pursued by the Enforcement staff, they would have uncovered Madoff's Ponzi scheme.
The SEC OIG never reports that it ever investigated why the Enforcement staff failed to follow up on its "remarkable" findings. All the OIG had to do was ask the investigators why they failed to ask the NASD. Shortly after this, the Enforcement staff ended the Madoff investigation.
After a later complaint, the Enforcement staff just asked Madoff's lawyer about the complaining party. The lawyer gave them a false response, saying that the complaining party had never been one of Madoff's investors. It turns out the complaining party had been one of Madoff's largest investors. This subsequent investigation was a total failure because there was not even a scintilla of an investigation carried out. Nothing...
Mindbogglingly enough, from p. 21 of the OIG Report,
Shortly after the Madoff Enforcement investigation was effectively concluded, the staff attorney on the investigation received the highest performance rating available at the SEC, in part, for her "ability to understand and analyze the complex issues of the Madoff investigation."
It should come as no surprise that the Report concludes,
As the foregoing demonstrates, despite numerous credible and detailed complaints, the SEC never properly examined or investigated Madofi's trading and never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme. Had these efforts been made with appropriate follow-up at any time beginning in June of 1992 until December 2008, the SEC could have uncovered the Ponzi scheme well before Madoff confessed.
What makes all this so maddening is the Report's Introduction. There it is stated that there was no wrongdoing on anyone's part.
"We also did not find that senior officials at the SEC directly attempted to influence examinations or investigations of Madoff or the Madoff firm, nor was there evidence any senior SEC official interfered with the staffs ability to perform its work."
This is simply not true. At page 15-16 of the Report,
When the examiners reported that they had caught Madoff in lies, the Assistant Director minimized their concerns, stating "it could [just] be a matter of semantics." The examiners' request to visit Madoff feeder funds was denied, and they were informed that the time for the Madoff examination had expired. The explanation given was that "field work cannot go on indefinitely because people have a hunch or they're following things."
The Assistant Director was told that Madoff was lying. Period. There is no way around this. The Assistant Director was told Madoff was lying and in response moved to protect Madoff. But here the OIG seemed to stop its investigation. Nowhere is there any mention of what the Assistant Director answered when the OIG asked, "What the hell were you doing, you dumb ass?"
One has to conclude the OIG never questioned the Assistant Director, just like the Enforcement team never asked the NASD if Madoff actually had $2.5 billion in one of his feeder funds.
The SEC has apparently learned nothing from the Madoff affair and the culture of "See no evil, hear no evil" has permeated the whole SEC, including the OIG. If there is any other reasonable interpretation of this report, please let me know.
Now, who is going to investigate the SEC OIG, for failing to investigate the root causes of the Madoff failures?