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Madoff ‘got away lucky’ in ’06, watchdog reveals

Top Securities and Exchange Commission officials were in the dark that staff were probing Bernard Madoff until the former financier was arrested in December, a federal watchdog said Friday.
Madoff Scandal
Bernard Madoff told the SEC Inspector General David Kotz that he feared investigators had uncovered his massive Ponzi scheme in May 2006. However, Madoff was not arrested until he confessed to relatives in December 2008.Louis Lanzano / AP
/ Source: news services

Top Securities and Exchange Commission officials were in the dark that staff were probing Bernard Madoff until the former financier was arrested in December for running a $65 billion Ponzi scheme, a federal watchdog said in a report released on Friday.

The report, expanding on a blistering summary released Wednesday, underscores the disconnect between top officials and more junior employees who often lacked the skills to pursue tips against Madoff.

Former Chairmen Christopher Cox, William Donaldson and Arthur Levitt, former director of enforcement Linda Thomsen and former director of examinations and compliance, Lori Richards, were "generally unaware" of the SEC's probes of Madoff, according to the 477-page report released late on Friday before a three-day holiday weekend.

And while SEC Inspector General David Kotz found these top officials did not act inappropriately, he said Madoff used his stature in the financial industry and mentioned the names of prominent SEC officials to intimidate the agency's examiners.

Kotz has accused the SEC of never conducting a competent probe of Madoff despite complaints dating back to 1992.

Sea of red flags
The document paints in excruciating detail how the SEC probes of Madoff were bungled over 16 years — with disputes among agency inspection staffers over the findings, lack of communication among SEC offices in various cities, and repeated failures to act on credible, specific complaints that formed a sea of red flags.

Among the disclosures: At one point during an agency investigation in May 2006, Madoff feared that he had been caught.

"I thought it was the end game, over," Madoff was quoted as saying when SEC investigators queried him about what account he was using to clear certain trades.

He said he felt very fortunate when there was no follow-up call to check on the account number he had given the investigators.

"After all this, I got away lucky," he told Kotz in a prison interview, though added he thought it was just a matter of time before he would eventually be caught.

That "narrow escape" in 2006, enabled by the SEC enforcement staff neglecting to verify Madoff's account at a securities industry clearinghouse for trades, allowed his fraudulent scheme to flourish for another 2 1/2 years, the report says.

Madoff, who pleaded guilty in March, is serving a 150-year sentence in federal prison in North Carolina for a Ponzi scheme that could be the biggest in U.S. history. It destroyed thousands of people's life savings, wrecked charities and gave investors' already shaken confidence in the financial system yet another big jolt.

Among his criticisms, Kotz said SEC compliance managers and examiners assigned to a 2003 investigation of Madoff lacked "any particular expertise or experience."

'Appropriate action'
Kotz, who interviewed 122 people, recommended that current SEC Chairman Mary Schapiro take "appropriate action" to address failures by employees who still work at the agency.

Five probes over 16 years failed to snare Madoff. Kotz said SEC staffers were sometimes suspicious of the whistleblower, in addition to being inexperienced.

The SEC enforcement staff "almost immediately caught Madoff in lies and misrepresentations but failed to follow up on inconsistencies" and rejected whistleblowers' offers to provide additional evidence, the report says.

One of the examiners quoted described Madoff as "charismatic" and "charming" — "except when he was angry with us."

Kotz said Doria Bachenheimer, who was an assistant director of enforcement, had never conducted a Ponzi scheme investigation at the time. She then involved Meaghan Cheung, an enforcement branch chief, and relatively junior enforcement attorney Simona Suh, both of whom had never investigated a Ponzi scheme, the report said.

Cheung and Bachenheimer have since left the SEC. Suh is currently an SEC branch chief. E-mails to Bachenheimer and Suh seeking comment were not immediately returned. Attempts to locate Cheung were not successful.

Revelations in December of the SEC's failure to uncover Madoff's massive scheme touched off one of the most painful scandals in the agency's 75-year history.

"It is a failure that we continue to regret, and one that has led us to reform in many ways how we regulate markets and protect investors," Schapiro said in a statement Friday. "In the coming weeks we will continue to closely review the full report and learn every lesson we can to help build upon the many reforms we have already put into place since January."

Schapiro, appointed by President Barack Obama, took over in January. Enforcement efforts have been strengthened, and the agency has started a number of initiatives meant to protect investors in the wake of the financial crisis, officials say.

Kotz's probe found no evidence of improper ties between agency officials and Madoff, nor of senior SEC officials trying to influence the agency's investigations of his business.

The report also revealed that an SEC official who later would marry Madoff's niece told investigators this year that if he had carefully reviewed a complaint about Madoff's business, he would have investigated more extensively.

Eric Swanson was an SEC attorney and inspections official during the 2003-04 exam.

Swanson told a colleague in April 2004 that the inspection of Madoff's business was ongoing, after the exam team had stopped working on it, according to the report. It said Swanson recently explained that an inspection would be considered ongoing even if it were put on hold.

Kotz's investigation found no evidence that the relationship between Swanson and Madoff's niece, Shana, who married in 2007, influenced the SEC exams of Madoff.

Swanson testified in the inquiry that he wasn't closely involved in the 2003-04 Madoff exam after Mark Donohue became an assistant director of the SEC inspections division in February 2004 and that he never discussed the exam with Shana Madoff.

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