Blogs and Stories
How the SEC Got in Bed with the Madoffs. Literally.
Susan Walsh / AP
Inside the twisted loyalties and conflicts that kept Wall Street’s top cop from catching one of the biggest Ponzi schemes in history.
Since the story of Bernard Madoff’s massive Ponzi scheme broke, a recurring theme has been shock over how Wall Street’s top cop—the Securities and Exchange Commission—missed so many red flags. Knowing more about who did the SEC’s investigations makes it all less surprising.
In 1999 and then again in 2004, Eric Swanson, an assistant director in the inspections division of the SEC, was part of the team that examined Madoff’s brokerage firm. During those exams, the SEC team said it found almost nothing wrong, certainly not the fraud that the firm’s chief executive, Bernard Madoff admitted to last Thursday evening, as he sat in the FBI’s New York offices with his one wrist handcuffed to a chair and the other holding a telephone he used to contact his attorney, the famed white-collar lawyer Ira Lee Sorkin.
Madoff sat in the FBI’s New York offices with one wrist handcuffed to a chair and the other holding a telephone he used to contact his attorney.
Swanson doesn’t lead the SEC office in charge of such inspections; Lori Richards has that job. But he is noteworthy for another reason: Swanson married Madoff’s niece, Shana, in 2007, and knew members of the Madoff family well. Shana was the Madoff firm’s compliance counsel, one of the people in charge of making sure the firm played by the rules. The two had met at industry conferences.
In 2006, while at the SEC, Swanson sat on a panel sponsored by the Securities Traders Association, a leading market trade group that deals with regulators and the government over policy issue. Also on that panel was Robert Colby, the head of market regulation at the SEC, and Mark Madoff, Bernard’s son, who worked at the firm as well. Adding another level of intrigue, Swanson’s future and current father in law, Peter Madofff, is in charge of compliance for the Madoff operations. Swanson is now the general counsel for a company called BATs, which is an electronic trading company. As most people on Wall Street know, Bernard Madoff is one of the fathers of the electronic trading business, having been one of the founders of the Nasdaq stock market.
After I broke the story of Shana Madoff's relationship with Eric Swanson Monday night on CNBC, the criticism of the SEC's handling of the case and its conflicts heated up. The following day, SEC chairman Chris Cox launched an internal investigation on how the SEC dropped the ball, despite numerous "credible and specific allegations regarding Mr. Madoff's financial wrongdoing, going back to at least 1999, (that) were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action."
I doubt an in-house investigation will do much to satisfy the SEC critics given the size and scope of the scandal and the Swanson-Madoff family connection, which has been a particular source of tension among the many investors who lost big money from the Madoff scam. If you live in New York, you don’t have to look far to find victims. A friend of mine is a member of the exclusive Glen Oaks country club in Long Island, which was one of the pools of wealth the Madoff operations focused on. He told me at least 100 of the club’s approximately 200 members lost money, “I know of at least 10 people who lost $20 to $30 million each,” he said.
He also told me that while Madoff himself may be Public Enemy No. 1, the SEC is a close second. What they can’t understand is how securities regulators ignored at least one letter calling Madoff’s operations a “Ponzi Scheme,” and a slew of red flags –including nearly two decades of uninterrupted positive returns, and an auditor who worked out of a tiny one-man shop in upstate New York. And that’s why, in their view, Eric Swanson’s relationship with Shana Madoff and her family is so significant, and why in my view, the SEC must be replaced by an agency where such ties are disclosed or eliminated.
John Talks Joe
Lloyd Grove is editor at large for The Daily Beast. He is also a frequent contributor to New York magazine and was a contributing editor for Condé Nast Portfolio. He wrote a gossip column for the New York Daily News from 2003 to 2006. Prior to that, he wrote the Reliable Source column for the Washington Post, where he spent 23 years covering politics, the media, and other subjects.
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Jacob Bernstein is a senior reporter at The Daily Beast. Previously, he was a features writer at WWD and W Magazine. He has also written for New York magazine, Paper, and The Huffington Post.
Geithner's Stock Plummeting
Jeff Madrick is a contributor to the New York Review of Books and a former economics columnist for the New York Times. He is editor of Challenge Magazine, visiting professor of humanities at Cooper Union, and senior fellow at the New School's Schwartz Center for Economic Policy Analysis. He is the author of Taking America, The End of Affluence (Random House) and The Case for Big Government.
The Best Job No One Wants
Charles Gasparino is CNBC's On-Air Editor and appears as a daily member of CNBC's ensemble. He is a columnist for the Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His forthcoming book about the financial crisis, The Sellout, is scheduled to be published later in 2009.
Wall Street's Grinch Speaks
Charles Gasparino is CNBC's On-Air Editor and appears as a daily member of CNBC's ensemble. He is a columnist for the Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His forthcoming book about the financial crisis, The Sellout, is scheduled to be published later in 2009.
Wall Street Will Walk
Charles Gasparino is CNBC's On-Air Editor and appears as a daily member of CNBC's ensemble. He is a columnist for the Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His forthcoming book about the financial crisis, The Sellout, is scheduled to be published later in 2009.
You say the SEC "literally" got in bed with the Madoffs, which piqued my interest. How many of the SEC members could you possibly fit into a bed. even a king-size one, and yet after a three page story, I can't find ANY mention of ANY kind of furniture at all, much less beds.
Does anyone at The Daily Beast know what the word "literally" means?
Charlie, what have you got? Are you going to shoot for the capitalism?
"I have to say upfront, I have no reason to believe either Shana Madoff, her dad, Peter Madoff, or Swanson himself did anything wrong."
Well...except that you only said it on the second page of your hatchet job, Charlie.
I'm not an apologist for the Madoff clan, I simply recognize a hack who's trying to push his own personal aggrandizement.
To HarlDelos:
Did you read the article? Do you know that "in bed" is a euphemism for sex? Swanson from the SEC, who was part of the team that looked into Madoff's firm was married (and presumably having sexual relations) with Bernie Madoff's niece. So, in case it is not clear enough, the guy from the SEC who should have been blowing the whistle on Madoff was married into his family; that would be the "in the bed" reference, and yes, it is literal. You are a nitwit.
Having watched Charlie's verbosity on CNBC, I am not surprised that his first blog would be three pages. Keep it simple Charlie.
It is time to fire Christopher Cox, forgive Elliott Spitzer and turn him loose on these crooks again.
I think this is just the tip of the iceberg and it is going to be shoved under the rug.
Big fan of Gasparino and have decide to leave this comment a little unrelated to the article at hand -- here goes...
We've been rainstorming and thinking out of the box to resuscitate the real estate market and the economy --
Let's say that there are 1 million homes on the foreclosure market and let's say that there are at total 4 million homes for sale currently -- homes that in this market really can't be sold!These home are also bringing values of all homes down. Let's say that typical market absorption of homes for sale is about 1 million per year (that's in good market conditions). Whatever the factual numbers are (real estate pros are invited to fill in verified answers), here are some "outside the box" ideas to correct the real estate market.
Isolate Foreclosures (aka -- get foreclosures off the market--this may help heal market)
Banks, etc. have probably already written off foreclosures. Who owns them now? -- local governments for back taxes? Let's say federal governments in concert with local governments obtain the properties and do the following:
Lottery:
1/3 of the properties offered at lottery. (Sell 10,000, $100 lottery tickets for typical $250,000 home -- generating $1,000,000 (hope my math is right!) . Winner of lottery gets $250k home plus $250k in cash -- portion of which can be used to fix up home. Governments share remaining $500,000 per property in lottery proceeds to offset bank, corporate and real estate bailout programs.
Award those who have served the country:
1/3 of the properties repaired/remodeled using wpa type jobs program -- then award/grant properties to fine men and women in the social services, armed services, teaching fields as well as spouses and children whose parents died in the line of service for the country -- from fire or police personnel to those in the armed services.
Raze properties that are unsafe:
Possibly 1/3 of the properties possibly should be demolished (since many of the foreclosures are unsafe and in state of disrepair). Government holds land in tax exempt status until real estate market returns then in a controlled fashion, sells at deep discount or gives land to (veterans, armed services personnel, widowed spouses of armed services personnel, teachers, police and firemen, victims of disasters and others).
Adopt a House
Volunteer program where local governments/communities adopt homes that have been foreclosed upon then they remodel, repair in some instances on volunteer basis or using grants from oil companies, banks and hedge fund managers (disgorging some of those profits!) and restore these homes to victims of predatory lending and to those who have lost their homes because of medical bills, handicapped and others.
I enjoy Charlie and all the men and women on msnbc. As a small business owner I am audited every year by my business insurance carriers, the state unemployment commission and twice by the IRS in the last fifteen years. My question is, where was the fabled IRS in all this? Why wasn't this guy audited by someone,sometime over all those years?
HarlDelos: Read again! Eric Swanson of the SEC inspection group that visiting Maddoff's operation, married Madoff's neice. While there would by no pictures of the furniture involved, presumably the two consumated the marriage! I think that's enough to qualify for "literally" in my book...
Great story. Thanks for the independent reporting.
So apparently the Beast's editorial policy is that other posters may call each other names so long as no one calls Gasbagrino a hack?
I stopped by this site for the first time today; won't be coming back.
Oops, my mistake. Apparently my first comment was still being moderated when I made the second post.
My unqualified apologies to the Beast.
It's spelled Blagojevich, not Blogojivich.
The SEC is too busy playing politics and chasing after Mark Cuban to perform their duties properly. They don't need an increase in budget or staff. Government at all levels is too large, too expensive, woefully inefficient, arrogant, intrusive, and downright dangerous.
Charlie,
I know Shana Madoff very, very well. First in 1999 she was married to Scott and was pregnant with her daughter. She did not know Eric. 2004 she was serious with a gentleman with the initials RS. In fact the article everyone is talking about with her in Narsciso Rodriguez clothing is taken in his apartment. At that time her brother was dying of cancer. She did not meet eric until 2006.
Eric is such an honest man. I never got the feeling he liked Bernie. He would not come out and say that b/c he is a gentleman, but he never sang his praises either. Bernie was not happy when they were engaged....For him to brag about it is crazy....That should have been a red flag. He really hurt Shana at that time. If shana did anything wrong, it is that she blindly trusted him like all the investors. She too has lost everything. People on the inside who know Shana, Peter, Andy and Mark know that they are suffering as well-financially and also have terrible guilt about the investors. But I do know that they found out about Bernie like we did (except for Mark and Andy). I implore you to talk to people who know the 2 of them personally and look at the timeline better to get a sense of what is true and what does not make sense. If Eric investigated them in 1999 and 2004 there was no conflict. I know that as fact. This ponzi scheme is out of arrogance of Bernard Madoff whom I have met dozens of times and could never have the decency to properly say hello. This was a scheme of arrogance. Look for people who know the 2 of them before you assume they did the wrong thing.
DBSmith
Too the contrary, Gasparino has gotten to the essence of clubbiness in industries and its interference with effective regulation. Anyone who listens to him on CNBC recognizes that he is a great industry reporter who penetrates down to the real stuff. But I will call him a name here, too, if it makes you feel better, DB: "Extraordinary Business Journalist".
Congratulations to Daily Beast for bringing him on. Looks like you have a great eye for quality. Remember, if you don't offend somebody out there, you're not doing anything!
There are plenty of laws and regulations in place. Where was the NASD? There are plenty of laws in place. There are even plenty of procedures to handle it all. The problem is budget and direction. There has been little to no oversight for eight years. There was some thought that some one was looking, but with the Bush Administration this evaporated. Whether by design or stupidity, no one is enforcing SOX, Gramm-Leach-Bliley, or any of the hundreds of pages of regulations set forth by SEC, NSAD, NFA, and other NGOs. There has been an attitude that it is somehow against the free market to examine the books, really examine the books of the companies that claimed to be making a strong economy, while all the time they were feathering their own nests.
If find it alarming that you want to take this back to the drawing board and draw up new laws rather than apply the ones we have now. They are not toothless, they are unused. Use them. If we don't we will be made sucker of again.
BTW, this is the second time in Bush's Administration that we have had this type of financial meltdown. We also had one under Bush 41, and Reagan. Oh yes, and Nixon.
As you said in your article, deregulation does not work.
You got it, Charlie. Do any of you really think the SEC has done its job? We just broke some kind of Ponzi record! And do you remember all the accounting shenanigans of 5 years ago? Fire them all.
Check out how the revolving door really works. Judd Bagley has the discovery for the FFH lawsuit. The emails between a hedge fund and a reporter show market manipulation and who is mentioned within their emails? None other than a former SEC lawyer named Richard Sauer.. the email quotes can be read at deepcapture.com.Why the name deepcapture?The owner of the site was referring to a captured regulator specifically the SEC.You can also see the incompetence documented of the SEC at investigatethesec.com run by Dave Patch who after years of banging on the SEC door, it was opened by Mr. Kotz.4 of the top SEC officials resigned after Grassley demanded a look... Charlie, you didn't think that was a big deal ... Nazareth, the IG who was worth less than a wart on frog's behind.. guess he figured he had better resign cause his incompetence was exposed...
What about the meetings where the Banks get more leverage? The decision makers kinda in a doofus manner.. "Well, ok.. why not?"How much lobbying went on before the decision to melt the commissioner's brains?
I'm watching CC on tv right now.. He spent his first year going around touting that the SEC was the gold standard of enforcement...What a farce.He wouldn't even stop naked short selling and removed the uptick rule.Donaldson's commission grandfathered the fails... "Rob the bank, don't do it again and you get to keep the money."At least CC rescinded that loophole.Arthur Levitt.. friend Bernie for 35 years.. Snake mascarading a sheep and using his friendship to bilk more people into investing.
Investigate the meeting that led to the grandfather clause and who was lobbying the SEC for the insane concept. Let's just see who was around then... Briagliano, Nazareth, Mark Madoff.One word, one rule...can screw up the whole market.Rules that worked for 70 years got gutted.. why? because Wall Street lobbied Congress.
Who was responsible for the notorious insertion of the word "locate" rather than "borrow", in Reg SHO? Where are the minutes to the meeting? Who was in attendance?Where are they now?
How about a 5 year wait until a regulator can go to work for someone he should be regulating.Go back and see where the commissioners, enforcement personnel from the SEC have landed after leaving the SEC..Where did the guy go who fired Gary Aguirre.
To make you even more disgusted.. Shelby refused to schedule hearings so Specter and Grassley had to take it up in the Judiciary Committee.Then Grassley's aide moved over to position at SEC Commission.Smell... hell yes it smells.
Schumer.... BWAAAA. Let's see if how they voted on regulation issues coincided with the amount of special interest money they received in contributions.There are sites online that show the connection.
Bernie was broke, but still sending money to campaigns and lobbying groups.They all ought to have to give the money back.
Charlie Gasparino should be commended for pointing out the connection between Swanson and Madoff's niece. While the two should certainly be presumed innocent of any wrongdoing at this point, considering the massive amount of money lost, no stone should be left unturned in identifying/investigating the role of any individual or practice that may have contributed to this debacle!
Before you rush to put prosecutors in charge of policing "securities," believing that would be an effective solution, investigate how often cronyism plays a part in the politicking among prosecutors and others.
isn't it time to give mr ponzi a break? when you master a sceme on this scale shouldn't you at least be able to leave your name on it? otherwise, what is the use?
When is this loser Christopher Cox going to be held accountable? He has cost the US Markets Trillions of dollars by taking away the uptick rule, and not enforcing naked shorting.
Now he has really been caught with his pants down, screwing the rich & connected.
Just like you Charlie, the regulators and the media are in bed with Wall Street CROOKS and that's the PROBLEM!
Somebody has to say something about ethos in all this.
Were we always this bad?
I know in my experience, ethical CEO's seem rarer than the other variety. Just why do the Have to earn all those billions? I forget.....Apparently the outstanding Harvard Business School class of 1949 didn't feel that way, nor had no incessant desire for outlandish compensation (David Callahan, Kindred Spirits), so why is it exactly that it is so important to us now????
Could it be capitalism gone too far??? The commercialization of everything, including standards of behavior????
I hate it like chewing nails, but I am on the edge of favoring a little more graduation of income tax, and raising the capital gains tax to that of normal income to cure the excesses. Is it any coincidence, that the key mechanism of the mortgage meltdown was the securitization of loans (interest is regular income) to CDO's--can be bought and sold for Capital Gains!
This is not just one event. It's a larger event.
Thank you.
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