Financial wizard Bernie Madoff didn't just fool investors. He also conned the nation's top securities regulators, who investigated his business last year and apparently missed the fact he was running a $50 billion Ponzi scheme.

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WASHINGTON — Financial wizard Bernie Madoff didn’t just fool investors. He also conned the nation’s top securities regulators, who investigated his business last year and apparently missed the fact he was running a $50 billion Ponzi scheme.

It wasn’t the first time the Securities and Exchange Commission (SEC) overlooked clear warning signs of possible fraud.

“I can’t comprehend how a well-run investigation would have missed a fraud of this magnitude,” said Lynn Turner, a former SEC chief accountant.

Another expert agreed. “The fact 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?

SEC Chairman Christopher Cox called “deeply troubling” what he has learned about the investigations.

“The commission has learned that credible and specific allegations regarding Mr. Madoff’s financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of SEC staff but were never recommended to the commission for action,” Cox said in a statement Tuesday. He said he has asked his inspector general to review the agency’s conduct.

Securities-law experts point to Madoff’s written assertion to the SEC that he had 23 clients.

Demonstrably false, the experts say. Look at the dozens of well-heeled victims strewed across the financial landscape. They include a charity of movie director Steven Spielberg; the family charitable foundation for U.S. Sen. Frank Lautenberg, D-N.J.; and a trust tied to real-estate magnate Mortimer Zuckerman.

“One would think this would not have required a great deal of investigation,” said Stanley Grossman, a veteran securities lawyer who expects to represent many of the victims in the Madoff case.

Was the government’s watchdog over Wall Street a lap dog? The SEC, chief federal regulator protecting investors, has faced such charges before.

Its oversight of the Wall Street investment houses — rotting within from piled-up securities tied to subprime mortgages — drew significant criticism. A review by the SEC inspector general determined the agency’s monitoring of the five biggest Wall Street firms, which included Bear Stearns, was lacking.

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 Tuesday 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 said he 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, telling the staff they should investigate Madoff because it was impossible for the kind of profit he was making to have been gained legally.

But the office has itself been accused in the past of brushing off a whistle-blower’s legitimate complaints, in a case that led the office director resigning 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.

Madoff moved easily among Wall Street, Capitol Hill and SEC headquarters as the former head of the Nasdaq, and along the way he made political campaign donations and hired lobbyists. His high profile contributed to his credibility with investors.

Madoff may have avoided scrutiny, regulatory experts said, in part because he simultaneously operated a legitimate, regulated and high-profile business as one of the largest middlemen between the buyers and sellers of stock. In that role, he helped to create Nasdaq, the first electronic stock exchange, and advised the SEC on electronic trading issues.

He was a large campaign contributor and a familiar of senior regulators.

“Bernie had a good reputation at the SEC with a lot of highly placed people as an innovator as somebody who speaks his mind and knows what’s going on in the industry. I think he was seen as a valuable resource to the commission in its deliberations on things like market data,” said Donald Langevoort, a Georgetown University law professor who specializes in securities regulation and served with Madoff on an SEC advisory committee.

At the same time, Madoff’s separate investment business operated on the outskirts of regulation, during a period when the government has intentionally allowed private, unregulated transactions.

Private investment pools, such as hedge funds, are subject to limited oversight, and Madoff constructed his investment business to avoid most of it.

The SEC said Madoff did not register with it as an investment adviser until September 2006.

Finally, experts say the Madoff case may simply point to the inherent limits of regulation.

“The SEC going back to its formation, and the Justice Department going back to its formation, are never adequate to crime at its time. It’s simplistic to look back and say that this was the SEC’s fault,” said a former SEC chairman, Arthur Levitt, who knew Madoff when both worked on Wall Street and consulted with him while at the SEC.

“A very skillful criminal can almost always outfox the regulator or the overseer.” Levitt said.

Some experts said the SEC’s criteria made sense and that the fraud Madoff allegedly constructed was successful in part because it avoided the appearance of risk.

It avoided the scrutiny of investors and regulators by claiming to engage in vanilla trading and reporting steady but unspectacular returns.

Material from The Washington Post and Bloomberg News was used in this report.