Madoff Chasers Dug for Years

Interesting update on Madoff and the SEC‘s failure to act on the evidence.

Madoff Chasers Dug for Years, to No Avail

Regulators Probed at Least 8 Times Over 16 Years; Congress Starts Review of SEC Today

By KARA SCANNELL, WSJ

Bernard L. Madoff Investment Securities LLC was examined at least eight times in 16 years by the Securities and Exchange Commission and other regulators, who often came armed with suspicions.

SEC officials followed up on emails from a New York hedge fund that described Bernard Madoff’s business practices as "highly unusual." The Financial Industry Regulatory Authority, the industry-run watchdog for brokerage firms, reported in 2007 that parts of the firm appeared to have no customers.

Mr. Madoff was interviewed at least twice by the SEC. But regulators never came close to uncovering the alleged $50 billion Ponzi scheme that investigators now believe began in the 1970s.

The serial regulatory failures will be on display Monday when Congress holds a hearing to probe why the alleged fraud went undetected. Among the key witnesses is SEC Inspector General David Kotz, who was asked last month by the agency’s chairman, Christopher Cox, to investigate the mess.

The situation is even more awkward because SEC examiners seemed to be looking in the right places, yet still were unable to unmask the alleged scheme…

The failure to stop Mr. Madoff also is an embarrassment for Mary Schapiro, the Finra chief who has been nominated by President-elect Barack Obama as the next SEC chairman. Finra was involved in several investigations of Mr. Madoff’s firm, concluding in 2007 that it violated technical rules and failed to report certain transactions in a timely way…

In 1999 and 2000, the SEC sent examiners into Mr. Madoff’s firm to review its trading practices. SEC officials worried the firm wasn’t properly displaying orders to others in the market, violating a trading rule. In response, Mr. Madoff outlined new procedures to address the findings.

Some outsiders were becoming suspicious. Harry Markopolos, an executive then working at a rival company, met with an official at the SEC’s Boston office in 2001 to lay out his concerns about Mr. Madoff’s steady returns. The same month, Barron’s, a Dow Jones & Co. publication, and hedge-fund trade publication MarHedge suggested Mr. Madoff was front running for favored clients.

In 2004, the SEC’s examination staff in Washington opened a limited inspection into whether the firm was front running. After finding no evidence of that, officials transferred the exam to the SEC’s New York office…

In November 2005, SEC investigators in New York met with Mr. Markopolos, who prepared a 21-page report outlining his concerns. His conclusion was that Mr. Madoff’s firm "is the world’s largest Ponzi scheme."

The 2005 review and Mr. Markopolos’s report prompted the SEC to open an enforcement case, a notch more serious in the SEC’s world than the previous examination. "The staff is trying to ascertain whether" the allegation that Mr. Madoff "is operating a Ponzi scheme has any factual basis," according to the SEC case memo…