Falling down on the job Inspector general’s report outlines how incompetent oversight led to Madoff scandal

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Falling down on the job
Inspector general’s report outlines how incompetent oversight led to Madoff scandal

Sunday, Sept. 6, 2009 | 2:05 a.m.

It has been known since Bernard’s Madoff’s fraudulent financial empire collapsed in December that the Securities and Exchange Commission had been negligent in its responsibility to oversee Madoff’s business.

Just how negligent was not known until Wednesday, when SEC Inspector General H. David Kotz released a 22-page summary of a 450-page report his office produced on the Madoff scandal.

Gross incompetence, repeated over and over by the SEC, is what Kotz revealed. More “embarrassing details,” in the words of The New York Times, may be revealed once the full report becomes public.

Imagine being a federal investigator and being, in equal parts, wowed and cowed by the person you are investigating. That is what happened during periods dating to 1992 when the SEC went through the motions of investigating complaints about Madoff.

The report says investigators were charmed by Madoff’s gift for storytelling and intimidated by his big reputation on Wall Street. They did not follow through even after uncovering evidence that Madoff was running a Ponzi scheme rather than a legitimate trading and investment business.

Higher-ups at the SEC were lax in checking on the investigators’ work to ensure they had asked the right questions of Madoff and had demanded and received the right documents from him. The result was that Madoff got away with defrauding his investors to the tune of $50 billion.

SEC executives were so removed from their supervisory responsibilities that one investigator received the SEC’s highest performance rating partly because of her “ability to understand and analyze the complex issues of the Madoff investigation.”

It has fallen to SEC Chairwoman Mary Schapiro, appointed in January by President Barack Obama, to reform the agency following the Madoff scandal. She has improved training, given complaints such as those received about Madoff a higher priority and recruited more qualified employees.

This is a good start on a big and critical job. Our economy depends in large part on investors having faith in the SEC’s ability to competently oversee the financial markets.