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Why Didn't SEC Look Closer At Madoff?
The Bernie Madoff fiasco is looking more and more like a serious regulatory failure by the Securities and Exchange Commission.
The Washington Post confirms that, despite several complaints dating back to 1999, the SEC never examined Madoff's investment advisory business. And it pieces together a preliminary explanation for why that might have been the case.
First, Madoff appears to have had a cozy relationship with regulators. After helping to create the NASDAQ, which was the first electronic stock exchange, he went on to advise the SEC on electronic trading.
In this video from a roundtable discussion held last year about the future of the stock market, he brags: "I'm very close to regulators. In fact my niece just married one." (It's at the 1-hour, 51-minute mark.)
In addition, Madoff's investment business was organized as a private investment pool, which is subject to limited oversight by regulators*. And, says the Post, "Madoff constructed his investment business to avoid most of it."
But part of the problem may be the way the SEC is set up -- including a lack of resources. Reports the Post:
The SEC does not have the resources to examine investment advisers on a regular schedule. Instead, the agency prioritizes examinations of companies based on their risk profile, which is basically a process of judging books by their covers. People familiar with the process said the SEC tends to focus on high-risk investment strategies, such as trading in derivatives.Lori A. Richards, director of the SEC's Office of Compliance Inspections and Examinations, said that only 10 percent of the 11,300 investment advisers registered with the SEC are examined on a regular basis -- those with high-risk characteristics. They are examined every three years. Others might be examined randomly or where there is cause, Richards said.
From 1998 to 2002, the SEC aimed to examine every adviser at least once every five years and to examine newly registered advisers during their first year, but a 50 percent increase in the number of advisers since 2002 ended that practice, Richards said.
Still, there were warning flags that the SEC should have caught, some experts told the Post:
The brokerage arm of Madoff's firm had generated consistent complaints going back to 1999 for its unusually consistent returns, and had been reviewed by the SEC several times (but had largely been given a clean bill of health).
In addition, Friehling and Horowitz, the firm acting as Madoff's outside auditor had only three employees, one of whom was a secretary and another of whom was a 78-year old living in Florida. Only a few auditing firms have the resources to audit a company managing $17 billion on assets -- which is what Madoff had reported to the SEC -- and Friehling and Horowitz was certainly not among them.
There are still more questions than answers though -- not least about exactly what Madoff's alleged scam consisted of. We'll keep you posted as things become clearer.
* This sentence originally, and incorrectly, stated that Madoff's investment business was organized as a hedge fund. In fact, as the New York Times reported Friday:
Mr. Madoff was not running an actual hedge fund, but instead managing accounts for investors inside his own securities firm. The difference, though seemingly minor, is crucial. Hedge funds typically hold their portfolios at banks and brokerage firms like JPMorgan Chase and Goldman Sachs. Outside auditors can check with those banks and brokerage firms to make sure the funds exist. But because he had his own securities firm, Mr. Madoff kept custody over his clients' accounts and processed all their stock trades himself.
So that distinction helps further explain why Madoff escaped scrutiny for so long.
Josh
Zachary
The answer is clear from the photo. Madoff had a face your trust. Those twinkly eyes. The smile. The cheeks like Santa.
That's all the investors had to go on - cuz no one is minding the regulatory shop!
December 16, 2008 3:17 PM | Reply | Permalink
Correction: "a face you could trust."
December 16, 2008 3:17 PM | Reply | Permalink
"The cheeks like Santa."
He probably wishes he WAS on the North Pole right now.
So would that make the SEC his little elves?
December 17, 2008 11:16 AM | Reply | Permalink
They had I believe the head of the SEC on NPR the other day, and they were just kind of shrugging and saying, well, the resources the SEC has are such that we only check on people's books once every five years, and even when we do check we probably wouldn't notice anything if the auditee really wanted to hide it. Can't we expect better than this?
December 16, 2008 4:02 PM | Reply | Permalink
bushco looted every agency, every dept... for the war on terrah = the outsourcing to cronies. We are now reaping the whirlwind!
December 16, 2008 4:50 PM | Reply | Permalink
deregulation unleashes the magic of free enterprise, bitches!
December 16, 2008 5:15 PM | Reply | Permalink
These no-bid, book-cooking CEO's of Bushco aren't capitalists, they are monopolists in free-enterprise clothing.
To them, deregulation is just a code word for "a time to steal and cheat and monger."
December 17, 2008 11:46 AM | Reply | Permalink
According to The Trusted Professional, David Friehling is a recent past president of the Rockland chapter of the NYS Society of CPAs.
His wife's name is Robin Horowitz Friehling so the Horowitz in Friehling & Horowitz is probably her father who retired to Florida.
Friehling is also vice-president of the Rockland Jewish center which might be a problem for Friehling if he hooked anyone there up with Bernie.
December 16, 2008 4:42 PM | Reply | Permalink
"if he hooked anyone there up with Bernie."
IF?
...can there be any doubt.
December 17, 2008 12:19 PM | Reply | Permalink
This is pretty funny.
Per The Trusted Advisor:
Life Lessons from an Accountant
By David G. Friehling, Rockland Chapter President (NYSCPA)
"...Then our son arrived home for the holidays. He warned me before he came home that he was having trouble reconciling his checkbook. Since I now also have access to his account online, it was easy to spend Christmas Day straightening out his checkbook. To tell the truth, this was a bit of a break from the more complex financial issues I usually spend my time on. There were no surprises. The differences could all be found on the bank statement – items my son had not recorded in his checkbook..."
December 16, 2008 5:36 PM | Reply | Permalink
This is pretty funny.
Per The Trusted Advisor:
Life Lessons from an Accountant
By David G. Friehling, Rockland Chapter President (NYSCPA)
"...Then our son arrived home for the holidays. He warned me before he came home that he was having trouble reconciling his checkbook. Since I now also have access to his account online, it was easy to spend Christmas Day straightening out his checkbook. To tell the truth, this was a bit of a break from the more complex financial issues I usually spend my time on. There were no surprises. The differences could all be found on the bank statement – items my son had not recorded in his checkbook..."
December 16, 2008 5:37 PM | Reply | Permalink
Madoff is a fitting coda to the bush years. A con man for the con-servatives.
December 16, 2008 6:13 PM | Reply | Permalink
Typical cult behavior. Monkey see, monkey do. Lemmings.
Notice the way he says "regulator" and everyone knows they're supposed to grunt disapproval on cue. That's how they all know what brilliant investors they're in the company of. The regulator of course being the bogy man preventing them from attaining vast wealth for nothing other than their incredible intuition and money management skills. :rolleyes:
Then, as it turns out, they're actually a bunch of schleps being conned and seduced by the moronically simplistic rhetoric of laissez faire which always has populist appeal for it's Utopian and anti-authoritarian bent.
Gee, who knew?
About the same intellectual wattage as grunting in disdain of the rival city's sports team, teenagers discussing the merits or various cigarette brands, or banishing satan from dustbunnies underneath beds. We don't expect couch potato sports fans to be millionaires, nor dopey hipster teenagers, nor religious fundies.
Yet how many people bought into the notion they could become wealthy by attending a seminar or two, learning a few buzzowrds and when to grunt or cheer on cue?
First financial tip everyone should learn: it's impossible for everyone to be above average and anyone randomly soliciting your money under the premise you're special is inherently false.
December 16, 2008 7:07 PM | Reply | Permalink
The SEC was not the only regulatory body that was obligated to oversee and scrutinize Madoff's securities activities. As a long time registered broker-dealer, Madoff was also subject to FINRA (formerly NASD) oversight for several years. As a FINRA member, Madoff was subject to routine "books and records" examinations (typically at least every two years), including inspections of its trading practices, order tickets, customer statements, large account holdings, complaints, etc. I just don't understand how FINRA repeatedly missed the fraud at this firm.
December 16, 2008 10:13 PM | Reply | Permalink
These cases should become capital crimes.
December 16, 2008 10:30 PM | Reply | Permalink
Well, they WERE capitol investment crimes...
Betcha he gets a slap on the wrist, or he'll join Kenny Lay on one of those Dubai Palm Fronds that's sinking due to global warming.
Geez, the billionaires just can't get a break these days.
December 17, 2008 12:15 PM | Reply | Permalink
This is not the most interesting piece of this video. In the original video, Madoff states that "as trading became automated, and fees were cut way down, brokerages and hedge funds like mine had to find another way to make money, and one of those ways was taking on more risk."
If Madoff was running a Ponzi scheme, why would he publicly say that he was making high-risk investments? According to this "Ponzi scheme" narrative, Madoff's investors were assured that the special algorithms Madoff was using gave him an edge that reduced risk.
It seems obvious to me that Madoff simply lost the money making risky bets in a very choppy market -- no different than AIG, Bear Stearns, or a hundred other smaller players.
Also, keep in mind as you read the stories about Madoff's investors that many of them probably borrowed money to invest with Madoff -- i.e. the money they lost wasn't theirs to begin with. If he was guaranteeing 12 percent returns per year you can bet that such was the case.
Don't get me wrong -- I know there were many victims. But this story of the scam artist and the innocent millionaire investor victims is a little too neat.
December 16, 2008 11:02 PM | Reply | Permalink
And the SEC Commisioners' jobs were to...
Actually, the only job those clowns had was to cash their big fat paychecks...
Nothing else has been required of those... and other commissions for many years now. It is their reward for supporting the other clowns in office...
who we will continue to send back to Washington because "they are better than those other crooks." IMHO
December 16, 2008 11:40 PM | Reply | Permalink
Kudos to "Mrs. Panstreppon" (after the H.H. Munro character?) who routinely comes up with interesting and cogent points.
The Madoff saga is compelling for several reasons: (a) fraud is endlessly fascinating for what it reveals of the bad side of human nature; (b) it pops the bubble of a number of puffed-up "investment advisors" who are revealed to be rubes and second-rate hustlers themselves, who simply raised funds and then parked the funds trustingly with Madoff (often, apparently, without their clients knowledge) -- thus demonstrating that (c) even though many financial advisors are highly paid, they are no more deserving than people who stand in front of Home Depot.
December 17, 2008 12:10 AM | Reply | Permalink
You pose a question "why" and after a plethora of words and rehash of old news from print media, you add nothing new. The distinction you cite as your conclusion does not advance any greater understanding.
December 17, 2008 10:41 AM | Reply | Permalink
One wonders, if the markets had not collapsed, would Madoff have made off with even more investors' cash?
Was it the economic downturn that uncovered this mnother-of-all-Ponzi-scheme? Or was the end we now witness inevitable, even in good economic times?
Obama's being lauded, rightfully, for promising $10 billion in early childhood education, even as blue-dogs and Republicans grouse about it being an astronomical figure.
Madoff's 50 Bil bilking makes those Obama early education numbers seem much less daunting, wouldn't you say? And this 700 BILLION $ bailout is also gioing to make other big-ticket billion-dollar purchases and programs seem even less monumental.
A billion is the new million.
December 17, 2008 11:12 AM | Reply | Permalink
Seems sort of callous, but none of his investors were complaining while all believed they were reaping unbelievale returns on their money .... greed ruled on this one! As for Madoff, the corrupt protect the corrupt, we know Cox wasn't minding the shop .... Wall Street is a total mess.
December 17, 2008 3:23 PM | Reply | Permalink