Congress questions SEC competence as Madoff investigation begins

Testifying before a the House Committee on Financial Services on January 5, SEC inspector-general David Kotz revealed an official investigation was opened on December 16 into "allegations made to the SEC regarding Mr Madoff going back to at least 1999 and the reasons these allegations were found not to be credible".

In an occasionally tetchy hearing, congressmen appeared frustrated by Kotz's inability to answer questions over the veracity of allegations that the Commission failed to follow up on as many as 29 tip-offs about Madoff's potentially fraudulent activity. Kotz replied that the investigation into the matter is barely under way.

"Madoff's firm was unusual in that it performed custodian, trade clearing and statement-generation functions in addition to managing client funds. When the key regulator is totally asleep while whistleblowers are trying to alert them, as it was with this case, why weren't there checks and balances to alert other regulators?" asked Representative Carolyn Maloney.

"It's pretty pathetic when whistleblowers issue warnings and when [a regulated firm] has an investment system that they won't explain to anyone, and an auditor no one has ever heard of, that this isn't raising concerns with the regulator," she added.

Under the plans laid out by Kotz, the investigation will "trace the path of these complaints through the Commission reviewing what, if any, investigative or other work was conducted with respect to the allegations".

Additionally, conflicts of interest between SEC officials and members of the Madoff family, the extent to which Madoff's public reputation affected investigations of his activities and whether the investigations that did take place missed red flags that could have uncovered the fraud, will also be areas of focus.

Kotz's assurances that the investigation would be "independent and as hard-hitting as necessary" did little to impress congressional leaders, who speculated that the inexperience of young SEC attorneys might have contributed to the failure of several SEC investigations into Madoff to turn up evidence of wrongdoing. One congressman suggested that the market participants that identified Madoff's purported "split strike conversion" strategy as a fallacy would be better equipped to spot future market abuses than career SEC investigators.

See also: Madoff fraud puts focus on due diligence