Operational Risk – Madoff fraud exposes SEC failings

Christopher Cox

The SEC has charged Madoff with fraud and with violating three US investment laws in a massive fraud said to be between US$17 and $50 billion. Madoff’s firm was registered with the SEC in 2006 and no investigation was carried out then when the SEC took over the supervision of financial advisors.

On Wednesday, SEC Chairman Christopher Cox announced that he had instructed the SEC’s Inspector General to conduct an investigation into why Madoff had been allowed to continue for so long despite industry misgivings. 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 to the Commission for action.  I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them.”

Cox has instructed that the investigation should not only focus on the failure to investigate Madoff, but also the internal policies of regarding the handling of allegations, whether those policies were followed, and whether improvements to those policies are necessary. The investigation will also include all SEC staff contact and relationships with the Madoff family and firm, and any impact on decisions made by SEC staff regarding the firm. SEC staff that had any substantial contact with Madoff in the past will not be allowed to work on the investigation.

Not a good note to end the year – and there won’t be much of a holiday for those at the SEC!