Perjury Charges Being Considered :SEC Officials Believe Madoff Lied to Them During Past Examinations

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Perjury Charges Being Considered
SEC Officials Believe Madoff Lied to Them During Past ExaminationsArticle

WASHINGTON -- Lawmakers expressed frustration at regulators' explanations for failing to catch Bernard L. Madoff's alleged multibillion-dollar fraud but drew little blood because officials declined to discuss details of the case.

Linda Thomsen, chief of the Securities and Exchange Commission's enforcement division, suggested in Tuesday's hearing at the Senate Banking Committee that federal prosecutors may pursue charges against Mr. Madoff over what they believe were his lies to SEC officials during past examinations.



Linda Thomsen of the SEC, at Tuesday's hearing, said that 'some of the conduct in the prior investigation may itself have amounted to crimes.'
Ms. Thomsen declined multiple times to comment specifically on the SEC investigation or its past examinations of Mr. Madoff's firm, citing the current inquiry.

"We want to be sure to preserve the integrity of any criminal investigation," she told the committee. She said that "some of the conduct in the prior investigation may itself have amounted to crimes," such as "violations of perjury" laws.

In 2006, the SEC discovered Mr. Madoff misled the agency about the number of investors he was managing and the nature of the strategy he used, among other problems, according to SEC documents. Mr. Madoff voluntarily testified, according to SEC documents. The agency required Mr. Madoff to register his firm as an investment-advisory business but didn't pursue the case further.

An SEC spokesman declined to comment beyond Ms. Thomsen's testimony. The U.S. attorney's office declined to comment.

Columbia Law Professor John Coffee testified on Tuesday that he believed several false statements fell "within the scope of federal law."

At the hearing, representatives of the SEC and the interim chief executive of the Financial Industry Regulatory Authority defended missing the fraud that is believed to have spanned more than three decades. Finra's Stephen Luparello said the brokerage industry's self-regulatory body wasn't aware that the Madoff firm was managing money for investors. The firm "always represented itself to us as a wholesale market-making firm. We were never recipients of red flags that led us to have skepticism about that," he said.

Sen. Bob Corker (R., Tenn.) responded, "That seems hard to digest." Sen. Christopher Dodd (D., Conn.), chairman of the committee, called the alleged Madoff fraud "a regulatory failure of historic proportions."

The SEC officials said the agency should address weaknesses in the rules that permitted Mr. Madoff to operate without much skepticism. They singled out a rule that allows an investment adviser to keep money and securities at an affiliated brokerage firm or entity, instead of a wholly independent body that would safeguard the assets. The SEC said more than 1,000 investment advisers entrust the custody of their accounts to an affiliate.

"It gives the possibility for fraud. That is one of the changes I hope the commission will strongly consider in the days ahead," said Lori Richards, head of the SEC's inspections group. The SEC greeted a new leader on Tuesday, when Mary Schapiro, Finra's former chief executive, was sworn in as SEC chairman.

SEC officials said they were understaffed to deal with the fast-growing investment-advisory business and tried to conduct examinations as frequently as they could. They said current forms don't require all of the information that might be useful in conducting a review.

Several senators questioned the quality of the SEC's exams and its handling of complaints, especially the 20-plus page report from Harry Markopolos, a former industry executive, who in 2005 suggested the Madoff firm was a giant Ponzi scheme.

"Those of us in the enforcement division want to bring cases. We want to get every Ponzi schemer, every market manipulator," Ms. Thomsen said. "It is a sad truth that sometimes they get away with things for some period of time. I hate that."

In testimony before the Senate, Stephen P. Harbeck, president of Securities Investor Protection Corp., said Irving Picard, the court-appointed trustee for the Madoff firm, has collected $91.8 million of the $830 million in liquid assets found at the firm. He also said the Madoff brokerage firm owed customers $600 million of stock that it didn't have on hand.

The SIPC and the SEC are discussing how to treat customers' claims, Mr. Harbeck said, adding that the trustee could begin satisfying "simple, straightforward claims as early as February."

Write to Kara Scannell at kara.scannell@wsj.com

Printed in The Wall Street Journal, page C2