Published November 2, 2009

Madoff stunned by regulator's ineptitude

Simple checks would have exposed Ponzi scheme years earlier

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(NEW YORK) Nobody was more surprised that the Securities and Exchange Commission did not discover Bernard Madoff's enormous Ponzi scheme years ago than Madoff himself.

Masked: Madoff says SEC should have checked basics like his account with Wall St's central clearinghouse

After all, it would have been pretty simple, he said in a transcript of a jailhouse interview that is part of a trove of official exhibits released on Friday by the SEC's inspector-general, H David Kotz.

In the interview, Madoff said that the young investigators who pestered him over incidentals like e-mail messages should have just checked basics like his account with Wall Street's central clearinghouse and his dealings with the firms that were supposedly handling his trades.

'If you're looking at a Ponzi scheme, it's the first thing you do,' he said.

With those simple steps, he added, they could have discovered years earlier that he was running the largest Ponzi scheme in history, a crime that has now dragged the SEC into the worst scandal in its 75-year history. 'It would have been easy for them to see,' he added.

Madoff said he was 'worried every time' examiners showed up. 'That was the nightmare I lived with. I wish they caught me six years ago, eight years ago.'

The new exhibits consist of 6,157 pages of interviews, letters, e-mail messages, telephone records and other background material gathered during Mr Kotz's 10-month investigation of how the SEC handled, and mishandled, numerous tips and warnings it received about Madoff over the years.

His full report, released in September, found that the agency had received six substantive complaints since 1992 - and botched the investigation of every one of them. He found no evidence of any bribery, collusion or deliberate sabotage of those investigations.

In fact, Madoff said in the jailhouse interview that, on two occasions, he was certain it was only a matter of days or even hours before he was caught. The first time, in 2004, he assumed the investigators would check his clearinghouse account. He said he was 'astonished' that they did not, and theorised that they might have decided against doing so because of his stature in the industry.

'I'm very proud of the role I played in the industry,' he said. 'Of course, I destroyed that now.'

In Madoff's second close call in 2006, investigators actually asked for his clearinghouse account number on a Friday afternoon, but then never followed up. He said he expected the following Monday to bring the curtain down on his crimes. Again, nothing happened. He recalled thinking at the time: 'After all this, I got away lucky.'

His investors did not. According to estimates by a court-appointed trustee who is liquidating his estate, Madoff's crime cost thousands of victims at least US$21 billion in cash losses, part of the US$64.8 billion in paper wealth that vanished when his scheme collapsed.

Despite what Madoff described as the chronic ineptitude of the SEC, he said in the interview that he was 'worried every time' examiners showed up.

'That was the nightmare I lived with,' he said, and he told Mr Kotz he had wanted it to end. 'I wish they caught me six years ago, eight years ago.' The newly public documents do not add fresh charges to the official findings, but they do provide a vivid sense of the tensions, confusion and petty squabbles that derailed a half-dozen failed inquiries.

Some interviews describe a culture where understaffed investigations languished for months before sputtering out, unresolved. Others evoke an environment that became openly dismissive of anonymous tips, like some of the early Madoff warnings.

In one e-mail, a senior lawyer in the agency's New York office said he thought 'we should get out of the business of burning resources to chase Ponzi schemes.' He later explained in an interview that he thought investigations of Ponzi schemes should be left to other agencies with criminal jurisdiction. Several young staff members said those views had shaped their own misguided decisions in the Madoff inquiries.

Agency staff members repeatedly relied only on Madoff's own testimony and records - which were lies and fabrications, as it turned out. An examination of customer records after Madoff's arrest in December showed that he had made no trades for his customers for decades.

Madoff said in his interview in June that he thought, after all those futile examinations and investigations over the years, that 'it never entered the SEC's mind that it was a Ponzi scheme.' The SEC declined to comment on the material in the exhibits.

The paperwork gathered from the agency's files also tell a tale of unseasoned, poorly managed people who were uncertain about what to do and unwilling to ask for help. In numerous instances cited in the exhibits, employees would share their doubts about some of Madoff's assertions in notes or e-mail messages, but then never take steps to resolve their suspicions or press for more information.

In a memo from March 2004, several senior SEC staff members reported that 'it seems clear' that Madoff had 'absolute discretion' of the accounts of his clients. Nevertheless, they said, 'Bernard Madoff himself has categorically denied being an investment adviser.'

The investigators later forced Madoff to register as an investment adviser, but never pursued the fact that they had caught him in a blatant lie. Madoff's claims of close relationships with regulators was mentioned in several of the interviews with SEC staff and internal agency e-mail messages released by Mr Kotz.

The exhibits are certain to be carefully scrutinised by lawyers for several Madoff victims who are suing the commission for negligence.

Those lawsuits argue that their losses could have been reduced or prevented if the commission had competently investigated the Madoff firm and pursued warnings about his mysteriously consistent profits. -- NYT