Securities and Exchange Commission Chairman Christopher Cox has ordered a probe by the SEC's inspector general, saying the agency's staff had never brought the Madoff matter to the attention of commissioners.
WASHINGTON — Securities and Exchange Commission chairman Christopher Cox said Tuesday his agency repeatedly failed for at least a decade to pursue allegations of wrongdoing by Wall Street figure Bernard L. Madoff, the alleged perpetrator of a $50 billion Ponzi scheme.
Cox ordered a probe by the SEC's inspector general, saying the agency's staff had never brought the Madoff matter to the attention of commissioners.
Since the SEC staff never recommended that the commission open a formal investigation, subpoena power was not used to obtain information and the staff relied on information voluntarily produced by Madoff and his firm.
"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 said in a statement.
In a forceful condemnation of the SEC staff, Cox said there had been credible and specific allegations regarding Madoff's financial wrongdoing going back to at least 1999.
The SEC chairman's criticism of his own agency marks only the latest instance in which federal regulators have overlooked clear warning signs of possible fraud.
Its oversight of the Wall Street investment houses drew significant criticism. A review by the SEC inspector general determined that the agency's monitoring of the five biggest Wall Street firms, which included Bear Stearns, was lacking.
Cox's statement on Madoff was a stunning declaration in a scandal that has produced a series of dramatic developments.
Shock waves from the Madoff affair have radiated around the globe as the number of prestigious charitable foundations, big international banks and individual investors said to have fallen victim to an unprecedented fraud has grown. U.S. investigators are laboring to deconstruct the scheme.
The SEC chairman alleged that Madoff kept several sets of books and false documents, and provided false information involving his advisory activities to investors and to regulators.
Cox also ordered the removal from the ongoing investigation of any SEC staff members who have had contact with Madoff or his family.
Since Madoff's arrest on Thursday, the SEC has been under increasing pressure to explain why it didn't uncover the prominent Wall Street figure's criminal activity years ago.
Hours before Cox denounced his own staff, a former SEC chief accountant, Lynn Turner, said that "I can't comprehend how a well-run investigation would have missed a fraud of this magnitude."
Another expert agreed. "The fact that that this could go on for so long with someone who was known to the agency raises questions of the effectiveness of our regulatory scheme," said Charles Elson, the director of the Weinberg Center for Corporate Governance at the University of Delaware.
The SEC's enforcement division looked into Madoff's business in 2007. The agency did not refer the matter to commissioners for legal action. What did the investigators find and why didn't they look harder? Until Tuesday night, the SEC had refused to say anything beyond a brief statement it issued Friday revealing the 2007 probe.
Cox himself has come in for strong criticism.
In March, a few days before Bear Stearns nearly collapsed into bankruptcy, Cox told reporters the agency was closely monitoring the five firms and had "a good deal of comfort" in their capital levels. Then as federal officials orchestrated the rescue, Bear Stearns was bought by rival JPMorgan Chase with a $29 billion government backstop.
The chairman of the Senate Banking panel that oversees the SEC, Sen. Jack Reed, D-R.I., said in an interview Tuesday that the Madoff affair "illustrates the lack of credible enforcement over several years by the SEC." He criticized the agency's "lack of a strong commitment to be vigilant."
Cox responds that his agency has taken decisive actions in response to the market turmoil, including an unprecedented temporary ban this fall on short-selling of stocks of financial companies. The SEC also has procured billions of dollars in settlements with big investment banks that have agreed to buy back auction-rate securities from investors hurt by the collapse of that market in February.
Auction rate securities are debt instruments, typically issued by a municipality, in which the yield is reset on each payment date via a Dutch auction, a method of selling in which the price is reduced until a buyer is found.
In the Madoff case, a securities executive, Harry Markopolos, complained to the SEC's Boston office in May 1999. Markopolos told the SEC staff they should investigate Madoff because he felt it was impossible for the kind of profit he was making to have been gained legally.
But the SEC's Boston office has itself been accused in the past of brushing off a whistle-blower's legitimate complaints, in a case that led the head of that office to resign in 2003. The whistle-blower, Peter Scannell, eventually persuaded state regulators and the SEC to act against mutual fund giant Putnam Investments, where Scannell worked.
"It's flabbergasting that nobody can nail the bums in the SEC who turn their back on and/or aid and abet people who defraud investors," Scannell said in a telephone interview Monday.