09.02.09

Catch Me If You Can

Bernie Madoff bragged he might lead the SEC, fumed when investigators asked for documents-and was aghast at the agency's ineptitude. Allan Dodds Frank dissects the inspector general's report.

Wall Street legend Bernie Madoff repeatedly lied to inexperienced SEC investigators, fed them documents that probably were false, and browbeat them into submission with temper tantrums, according to SEC Inspector General H. David Kotz. Madoff, in one memorable assertion in 2005, even told investigators he was on “the short list” to be the next chairman of the SEC.

“Madoff further said that when ‘Enforcement did not follow up with the DTC,’ he ‘was astonished.’”

In a 22-page summary of a not-yet-public 450-page investigation, the SEC inspector general discloses that Madoff said he could not believe the ineptitude at the SEC that enabled him to baffle them with lies for nearly two decades and a half-dozen feeble SEC attempts at investigation.

Not only did the SEC investigators often focus on the wrong issues, Madoff encouraged them to continue down those paths, including examining whether his securities firm’s handling of stock trades for other brokers allowed him to “front run”—use non-public information about trades his firm was executing to profit at the expense of customers.

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During a 2005 examination, with Madoff allegedly answering questions from a team staffed by the SEC’s Northeast regional office in Boston, one team member told Kotz: “…throughout the examination, Bernard Madoff would drop the names of high-up people in the SEC.” Madoff told the team that Christopher Cox was going to be the next chairman of the SEC, a few weeks before Cox was officially named. He also told team members that he himself “was on the short list” to be the next chairman of the SEC.

In his report, the inspector general says: “When the NERO examiners would seek documents Madoff did not wish to provide, Madoff became very angry, with an examiner recalling that Madoff’s ‘veins were popping out of his neck’ and he was repeatedly saying, ‘What are you looking for?...Front running. Aren’t you looking for front running,’ and ‘his voice level got increasingly loud.’

“Throughout the examination, the NERO examiners ‘had a real difficult time dealing with’ Madoff as he was described as growing ‘increasingly agitated’ during the examination, and attempting to dictate to the examiners what to focus on in the examination and what documents they could review. Yet, when the NERO examiners reported back to their assistant director about the pushback they received from Madoff, they received no support and were actively discouraged from forcing the issue.”

Madoff also made sure SEC investigators were stumped in their lackadaisical efforts to question his employees in his New York office. The inspector general again:

“When the examiners began their on-site examination of Madoff, they learned Bernard Madoff would be their primary contact and Madoff carefully controlled to whom they spoke at the firm. On one occasion, when a Madoff employee was speaking to the NERO examiners at Madoff’s firm, after a couple of minutes, another Madoff employee rushed in to escort her from the conversation, claiming she was urgently needed. When the examiners later asked Madoff the reason for the urgency, Madoff told them her lunch had just arrived, even though it was 3 o’clock in the afternoon.”

Even when the SEC tried to verify Madoff’s trading with a financial institution that he used to clear his trades, the bank responded by stating there was no transaction activity in Madoff’s account. Yet the SEC did not follow up—even when, over the years, various SEC officials caught Madoff lying, the inspector general concludes. In fact, some letters requesting records from third parties were never sent because actually getting documents to examine would have entailed too much work.

The “most egregious failure” by SEC enforcement, Kotz says, was accepting Madoff’s explanation that his investment advisory accounts were cleared through the Depositary Trust Corporation, a claim bolstered by his provision of his account number.

And as Madoff told the inspector general’s investigators (who interviewed him in prison), “he had thought he was caught after his testimony about the DTC account, noting that when they asked for the DTC account number, ‘I thought it was the end game, over. Monday morning they’ll call DTC and this will be over...and it never happened. Madoff further said that when 'Enforcement did not follow up with the DTC,' he ‘was astonished.’”

The SEC, it seems, ignored a cardinal rule of investigating potential criminals: Verify, through an independent third party, the alleged trading records.

The summary, which details how the SEC first mishandled the case in 1992 and, beginning eight years later, ignored whistleblower Harry Markopolos, leaves many questions unanswered. It will be fascinating, for instance, to see in the final report how the inspector general documents his claim that Madoff never attempted nor succeeded in trying to corrupt any official at the SEC.

Allan Dodds Frank is a business investigative correspondent who specializes in white collar crime. He also is president of the Overseas Press Club of America.