SEC In Madoff Squeeze:
The $50 billion question on everyone's mind as investigators sift through files and records of Bernard Madoff is how — and for how long — did the 70-year-old money manager and pioneer of electronic trading get away with the largest Ponzi scheme in history? What better agency to answer that question than the one required to regulate firms like Madoff's — the SEC. Already in the hot seat over failing to watch the credit agencies who were assigning AAA ratings to junky mortgage assets as well as for approving 30 and 40 to 1 leverage at Wall Street's investment banks, the end result of this investigation could be that the SEC becomes a relic of regulation past. Joel Seligman, an SEC historian and president of the University of Rochester, was quoted in The Wall Street Journal calling the Madoff case a “debacle for the SEC,” and added that it “has a lot to answer for.”
Oddly, Madoff opened himself up to possible discovery in September 2006 when he registered his investment management firm, Bernard L. Madoff Investment Securities, as an RIA with the SEC. Before that, he was operating the outfit as kind of a hedge fund. (He also operated a broker/dealer, which, so far, seems to be a real business.) The newly registered RIA should have been examined by the SEC within 12 months of its registration, but there is no indication the SEC ever did. Of course, there were warning signs for regulators along the way. As far back as 1992, two accountants who had collected money on behalf of Madoff from Florida residents — with guaranteed returns of 13.5 percent to 20 percent — were sued by the SEC. Madoff claimed not to know the men had raised the money illegally.
The number of individuals and institutions affected by Madoff's scheme is likely to increase with each passing day — besides wealthy investors, Madoff managed pension and charity money — but so will the web of accountability. Madoff was a trusted and respected elder of Wall Street, a man described as both a “pioneer” and a “legend.” He is a former chairman of the NASDAQ Stock Market. He was an advisor to the SEC on market issues and frequent commentator at the agency's round-table discussions. But many peers of his had openly questioned the validity of his status for years, pointing to his unflappably smooth 1 percent and 2 percent monthly returns year in and year out. A whistleblower investigation was started and stopped by the SEC in 2007 without a case being brought. Other money managers now say they avoided Madoff's firm because it was too much of a “black box,” that no one ever saw his trades in the marketplace — despite the multi-billion dollar fund's size — and that there were too many unanswered questions. With potentially $50 billion lost — far more than the $32 million obliterated by Enron — the public and Congress will be expecting a lot of those questions to be answered by the SEC.