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SECer: Agency "In A State Of Complete Panic" Over Madoff Revelations
The revelation that Bernard Madoff -- who himself had in the past served as an adviser to the SEC on electronic trading -- was running an alleged "$50 billion ponzi scheme" has rocked the SEC to its core, according to a current long-serving member of the commission's enforcement division.
"This has put the agency into a state of complete panic," the SECer told TPMmuckraker in an interview.
The source said that one associate director in the enforcement division had in recent days ordered junior staff to review every case that's been closed over the last few years, to ensure that violations weren't missed -- as they appear to have been in the 2006 investigation of Madoff. "There's a real paranoia around here," the source added.
That paranoia -- or at least extreme concern -- apparently extends to commission officials in Washington. The source said that since the Madoff allegations came to light last week, SEC brass had sent out numerous emails warning staffers not to destroy documents relating to the case -- which is being investigated both by SEC enforcement and by the FBI. There have also been several warnings not to speak with the press, the source added.
Separate from the SEC and FBI investigations, SEC chair Chris Cox announced last week that he has has asked the commission's inspector general to probe how the SEC failed to uncover catch Madoff after receiving several complaints going back to 1999.
Josh
Zachary
Further evidence that robust enforcement of regulation helps rather than hinders competition and economic growth.
December 21, 2008 10:08 AM | Reply | Permalink
Until one of the roots of the problem is solved, this will just go on and on and on... in every area of Washington.
Political appointments have been based on paybacks and cronyism for many years, and lack of actual accountability is endemic in our elite government...
Both are destroying this democracy of ours... and it looks as though it has little chance of changing...
We, however will most likely see a big dog and pony show, followed by praises for a good job by OUR team (whichever team it is)... until it repeats itself later...
December 21, 2008 11:19 AM | Reply | Permalink
It would be in the best interest of the Democrat Party to throughly drill the point home to the public, especially those who's retirements have been wiped clean, that the republican mantra has always been to get the government off the backs of business and this current financial meltdown is the crowning point of their achievement to do just that.
December 21, 2008 11:49 AM | Reply | Permalink
You are so right, they need to hammer this like "tax and spend"
December 21, 2008 5:42 PM | Reply | Permalink
In my former agency, aircraft inspectors who pushed a little too hard were told their zeal might cost them something if they kept at it; maybe a forced reassignment to an undesirable location, maybe a firing and a reinstatement battle they'd fight basically alone.
When the controllers at PHL said something about the miraculous and dangerous new departure procedures being used to push up volume at the airport to the media, the official FAA response was that if they thought it was unsafe, maybe they should work elsewhere.
Until somebody dies or loses $50B and it is reported in the Washington Post, no enforcement action is justified if it's a Republican appointee at the wheel.
December 21, 2008 12:14 PM | Reply | Permalink
Is there any chance that there are other frauds yet to be uncovered by a newly motivated SEC?
I suppose these will be revealed in the course of the current investigation into the SEC - I hope.
December 21, 2008 12:21 PM | Reply | Permalink
Zachary--
Great stuff here, thank you. Somehow I just discovered this blog despite spending many hours each day looking for and writing about the same subject matter at Securities Docket.
Anyway, I appreciate the info in this post and many of the others, and will be checking here regularly now.
Bruce Carton
December 21, 2008 12:22 PM | Reply | Permalink
TPM is a great site. Welcome, Bruce Carton.
December 22, 2008 12:46 AM | Reply | Permalink
Ha, ha! After serving as the handmaidens of sociopathic greed for decades, now they feel a little "paranoid." As well they should. But I am afraid that the horse ran away from the barn a long time ago. Glad I have no money, such that I might be tempted to invest it in this vipers' casino. Remember, the house always wins.
December 21, 2008 2:15 PM | Reply | Permalink
IT REALLY HAS TO DO WITH WHERE KICKBACKS COULD BE MADE EFFECTIVE
Before Madoff sees the inside of a jail cell, he will open doors into the Wall Street underbelly that has seen little light of day.
From New York to Geneva, corruption is rampant and complex on Wall Street, including the process of accumulation of this much cash..
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http://pacificgatepost.blogspot.com/2008/12/is-madoff-really-anomaly.html
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MADOFF AND HIS METHODS are not so unique.
December 21, 2008 2:22 PM | Reply | Permalink
It looks to me that rather than us selling Democracy to the Arabs they have sold their corrupt method of government and doing business to us..
The Arab nations are built on corruption and bribery and have been for years..It is a normal way of doing business and running a government..Have you noticed that bribery and corruption have been creeping into our corporations and government lately..
If big corporations find that they have to use bribery and corruption in the Arab countries in order to do business don’t you think they will bring this method home and try to use it here in our socalled Democracy..
I think in Neocon no regulation Capitalism that we have at present is a great breeding ground to use methods that they find to work in the
Arab Countries..
Therefore rather than us selling Democracy to the Arabs they have sold us their method of doing things which is bribery and corruption..Have you noticed it..I have..
December 21, 2008 3:25 PM | Reply | Permalink
Why do you feel the need to drag out your Arab bigotry in order to explain American coruption? You feel that American political & corporate corruption are a new phenomenon? If so I question your grasp of American history.
I am by no means suggesting that there is corruption in the Arab world, there is corruption everywhere, but I'm sickened by your post which is a pitiful attempt to mitigate responsability and avoid reality. The "Arabs made us do it"... Are you serious?
And we wonder why our country has been in decline and bereft of good ideas...
December 21, 2008 4:28 PM | Reply | Permalink
You know the evil ones sit in rooms with admen and figure out the best twist.
Twenty years ago they would have blamed the crash on communists.
December 22, 2008 7:35 AM | Reply | Permalink
"Is there any chance that there are other frauds yet to be uncovered by a newly motivated SEC?"
The SEC IS part of the fraud! The clowns holding these positions were given the job of "Regulating and Investigating" and they collected millions of our dollars over a period of years to do just that. Instead, they fraudulently took our hard earned money and did NOTHING! Isn't that fraud?
December 21, 2008 3:38 PM | Reply | Permalink
The SEC and Treasury should be working around the clock to investigate whether Madoff colluded with other financial institutions and whether there is massive fraud in the financial markets yet to be detected.
The options market could not have absorbed the volume of trading Bernie claimed he was doing. He didn't conduct a regularly scheduled selloff of his equity position at a profit and he didn't buy treasury bills at $20 billion a clip.
On paper, Madoff competed with Goldman Sachs. Ask Secretary Paulson for a copy of the memo on Bernie's operations prepared by the GS research department when he was chairman.
(I am beginning to wonder if Secretary Paulson created TALF ( the Term Asset-backed Securities Loan Facility) to bail out other bankrupt hedge funds.)
Check out FINRA's very useful tool,the BrokerCheck. Search brokerage firms for "Madoff" and click "View Full Report" in the right hand corner.
Bernard L. Madoff Investments Securities was sanctioned and fined $25k on 8/27/08 by FINRA for not disclosing information about short sales. In February 2008, BMIS was fined $25k for not disclosing customer limits.
Someone at FINRA was keeping an eye on Bernie's business in 2008. Why? Other than being sanctioned for non-disclosure in 2005, Bernie's FINRA record has been clean since 1963.
Walter Noel's hedge fund, Fairchild Greenwich, invested $7 billion with Bernie. According to the fund's financial statements audited by PriceWaterhouseCooper, Bank of America was custodian of the funds but the bank apparently gave the $7 billion to Bernie.
This is so wrong on so many levels. No one even knows whether $7 billion ever made it into Bernie's bank account in the first place.
According to a 12/18/05 SEC complaint, Bernie's firm had two bank accounts at JPMorgan Chase and three at Bank of America Mellon. What about his personal accounts and his personal holdings in London?
A lot of people can be persuaded to look the other way for a few million dollars including the staff at the SEC.
BTW, anyone hear from Chuck "Unchain Wall Street" Schumer lately? He pushed to get Mukasey appointed and the next thing you know, Frank Dipascali lawyers up with his son. All getting a bit incestuous, I'd say.
December 21, 2008 3:58 PM | Reply | Permalink
Hope I'm wrong, but with the nomination of Mary Schapiro, who has run FINRA (formerly the NASD) since 2006 and has been with FINRA since 1996, Obama seems to have signaled that there will be more of the same and not real change at the SEC.
For those of you who are unfamiliar with FINRA, it is a self-regulatory organized mandated by the SEC to oversee the brokerage industry. During Schapiro's time there, FINRA would have conducted multiple examinations of Madoff's broker-dealer. It, too, repeatedly missed Madoff's fraud. Instead, Schapiro and her organization appointed one of Madoff's sons to the board of FINRA's National Adjudicatory Council, which was set up to review disciplinary actions taken by FINRA.
Sorry to say, but as long as the same industry insiders are in charge of the securities industry, and in Schapiro's case are promoted, I don't expect things to be a whole lot different under Obama.
December 21, 2008 4:06 PM | Reply | Permalink
Summary of investigation:
Investigator: We find that leaders at the SEC failed to take reports of fraud seriously.
Leaders at SEC: We reject the investigator's findings.
December 21, 2008 4:58 PM | Reply | Permalink
No....
Summary of investigation:
SEC OIG: We find that leaders at the SEC failed to take reports of fraud seriously.
Brenda Murray: We reject the investigator's findings.
It will be kinda like the response to the Pequot matter. Why are those disgraced people still there?
December 21, 2008 6:07 PM | Reply | Permalink
Wait - you mean those Wall Street billionaires are nothing but a bunch of crooks and leeches who contribute nothing to society?
Wow, didn't see that coming. [/sarcasm]
December 21, 2008 6:33 PM | Reply | Permalink
They are shocked, totally shocked!
And we are being conned, totally conned, again!
Bush/Cheney -Nuremburg '09
plus Paulson
December 21, 2008 7:09 PM | Reply | Permalink
Oh my goodness. Unbridled Capitalism caused rich people to become greedy. I would have done something if I only had known.
COX
December 22, 2008 7:38 AM | Reply | Permalink
Why is Madoff not in jail? Did he post bond with some of the money he took from others?
December 22, 2008 10:25 AM | Reply | Permalink
Yeah. See if some drug dealer would get away with that. Lawyers are in prison for taking drug money--the fruit from the tainted tree--as retainers.
December 22, 2008 1:20 PM | Reply | Permalink
It's not Arab bigotry. The Arab world (and other countries too) runs on the concept of "baksheesh," which is bribery to grease the wheels. However, since nothing can be done without paying off a laundry list of people, this is one reason why nothing much is accomplished in the Arab world unless you are rich. The U.S. is turning into a similar third world country thanks to banksters and a bribed Congress. By the way, I went to the SEC website and asked how its overseers get the job and it turns out they are appointed by the president of the U.S. to a five-year term, though in-coming presidents can throw them out. So Bush appointed Chris Cox.
December 22, 2008 12:12 PM | Reply | Permalink
People are talking a lot about Mr. Cox these days, however, consider his predecessor's influence on the credit markets crisis of 2007-08.
As Chairman from February 2003 to June 2005, Mr. Donaldson presided over the meeting at the SEC on April 28, 2004, that was held at the request of the major Wall Street investment houses, including Goldman Sachs, then headed by future Treasury Secretary Henry M. Paulson, Jr.. The firms requested that the SEC release them from the so-called "net capital rule", or responsibility to hold capital reserves in their brokerage units. The complaint that was put forth by the investment banks was of increasingly onerous regulatory requirements -- in this case, not U.S. regulator oversight, but European Union regulation of the foreign operations of US investment groups. As at other agencies during the George W. Bush administration, the deregulatory request was received favorably by the SEC. The Commissioners voted unanimously to change the regulation.
In the immediate lead-up to the decision, EU regulators also acceded to US pressure, and agreed not to scrutinize foreign firms' reserve holdings if the SEC agreed to do so instead. A 1999 law, however, put the parent holding company of each of the big American brokerages beyond SEC oversight. In order for the agreement to go ahead, the investment banks lobbied for a decision that would allow "voluntary" inspection of their parent and subsidiary holdings by the SEC.
Yet in the amendment taken up by the Commission, the SEC stepped back from direct oversight of the performance of the firms and adequacy of their reserve holdings. Instead, the Commission deferred to the investment houses, and decided to rely on the firms' own computer models for determining the riskiness of investments, "essentially outsourcing the job of monitoring risk to the banks themselves."
The only briefing the Commission received that criticized the regulatory change proposed for adoption came from Leonard D. Bole, an information technology consultant, who found the risk models used by investors no better in 2004 than during the 1998 failure and bailout of the hedge fund, Long-Term Capital Management. The SEC's oversight arm took no action to contact Mr. Bole to follow up on the briefing that he submitted.
According to one of the SEC Commissioners of the period, Harvey J. Goldschmid, "the 2004 rule making gave us the ability to get information that would have been critical to sensible monitoring, and yet the S.E.C. didn't oversee well enough." Many of these failures to follow through on oversight responsibility are further documented in SEC Office of the Inspector General reports.
Preceded by Harvey Pitt serving from 2001-2003 who supposedly instituted a policy of "real time enforcement" to make the SEC's enforcement efforts more effective, and led the SEC in the adoption of dozens of rules to implement the Sarbanes-Oxley Act. Pitt's tenure was highly controversial. In what USA Today called "a stunning end to his tumultous reign", Pitt resigned on November 5, 2002 (election day) citing "the turmoil surrounding my chairmanship" in his letter to the President. Pitt came under much criticism from Democrats for being allegedly too close to the accounting industry and subverting efforts to tighten regulation in the wake of the Enron scandal and other cases of corporate malfeasance.
Preceded by Arthur Levitt Jr. from 1993 to 2001.
Preceded by Richard C. Breeden 1989 – 1993
December 23, 2008 5:01 PM | Reply | Permalink