SEC chief Cox says allegations failed to draw scrutiny for nearly a decade

By Ronald D. Orol and Simon Kennedy

December 17, 2008

WASHINGTON (MarketWatch) -- A key lawmaker announced plans Wednesday to investigate investment manager Bernard Madoff, arrested on allegations that he ran a $50 billion Ponzi scheme, as well as the Securities and Exchange Commission for failing to identify the problem sooner.

"The news reports in recent days that Mr. Madoff stands at the center of a $50 billion Ponzi scheme are deeply disturbing," House Capital Markets subcommittee chairman Paul Kanjorski said.

"We must also understand why the U.S. Securities and Exchange Commission, other regulators, and additional participants in the securities markets failed to detect these substantial evasions before innocent investors and charitable organizations were substantially harmed," said Kanjorski, D-Pa., in a press release.

Kanjorski's investigation, due to kick off early next month, comes after SEC Chairman Chris Cox announced that he had ordered the agency's inspector general to investigate past allegations against Madoff and why they were found not to be credible. The probe will also look at all staff contacts and relationships with the Madoff family and firm and whether they had any impact on decisions by SEC staff.

Kanjorski believes his investigation will provide useful information that he said he plans to pass on to the House Financial Services Committee as it crafts a new regulatory structure for the financial services industry.

Specifically, he hopes to learn how Madoff organized his business operations to avoid detection by regulators. "Unfortunately, these events have only further weakened already-battered investor confidence in our securities markets, and they have raised even more troubling questions about the effectiveness of our regulatory system," Kanjorski said.

House Financial Services Committee chairman Barney Frank, D-Mass., has said he plans in January to begin work on legislation that would require hedge fund and other investment managers to register with the agency and open up their books to periodic examinations.

Consideration of this measure, would take place at the same time as the committee also takes up a new regulatory structure and new reporting requirements for complex -- and controversial -- derivatives investment structures, such as mortgage-backed securities, credit default swaps and cash-settled equity securities.

In a statement late Tuesday, Cox admitted that the nation's top securities regulator had failed to act on warnings about Madoff stretching back nearly a decade.

An initial probe into how Madoff's alleged fraud remained undetected revealed "multiple failures" by the SEC to thoroughly investigate the former Nasdaq chairman and his firm, Cox said.

The commission "has learned that credible and specific allegations regarding Mr Madoff's financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of SEC staff, but were never recommended ... for action," Cox said.

Inspector general to scrutinize SEC, Madoff

Cox also ordered a full review to investigate the past allegations against Madoff and why they were not found to be credible. The probe, to be led by the regulator's inspector general, will also look at all staff contact and relationships with the Madoff family and firm and whether they had any impact on decisions by SEC staff.

Separately, The Wall Street Journal reported that the SEC's investigation is expected to include the relationship between Madoff's niece Shana Madoff and Eric Swanson, a former SEC official who spent 10 years at the regulator before leaving in 2006.

Swanson married Shana Madoff in 2007 after leaving the SEC, the Journal reported. Neither person is named in the SEC statement.

A spokesman for Swanson acknowledged he helped supervise a compliance team that made an inquiry about Madoff, the Journal reported. But a second representative of Swanson's said his relationship with Shana Madoff began years after the regulatory scrutiny in which he was involved, the newspaper added.

Regarding the investigation of Madoff himself, Cox said that he appeared to have kept several sets of books and false documents and also provided false information involving his advisory activities to investors and to regulators.