SEC apologists say Madoff outsmarted cops

Commentary: SEC apologists say Madoff outsmarted cops
By David Weidner, MarketWatch
Last update: 12:18 p.m. EST Jan. 15, 2009
NEW YORK (MarketWatch) -- Forget Willie Sutton, Goldfinger, Al Capone and the Joker. Meet the biggest evil genius of them all: Bernie "The Smirk" Madoff.
No wonder he's laughing. No jail can hold him.
You might not agree, given the simplicity of his crime, but some people believe Madoff belongs in that pantheon of evildoers because he was so bold and brazen that he outwitted regulators.
Yes, that's right. There are a few voices out there suggesting that Bernie the Smirk was so smart, and so diabolically evil, that the Securities and Exchange Commission had little chance of catching him.

The commission itself and some former investigators have been mumbling excuses about why Bernie beat the SEC, but their case was probably best articulated by one of business journalism's leading voices, Fortune magazine's Allan Sloan. Read Sloan's column.
Sloan argues that the commission is far more geared to catching the small crooks than the big ones, a fact that Sloan labels unfortunately true, because few people have the guts to pull off the big crimes.
"If a big fund is engaged in a big fraud," Sloan concludes, "the SEC's unlikely to find it without an outside tip. Or maybe even with one. That's how things worked with Madoff. And how they work in the real world. And how they'll probably always work."
Faulty logic
There are a few flaws in that argument. First, every month the SEC, the Financial Industry Regulatory Authority, and the regulatory arm of the New York Stock Exchange announce dozens of settlements, censures and fines related to fraud.
In January, for instance, NYSE regulators said they censured and imposed a three-year ban on Gregory Gray, a stockbroker in Chicago who had made unauthorized trades in his clients' accounts.
In a separate announcement, the regulators fined Schonfeld Securities LLC for making trades for the purpose of making its books look bigger than they really were. Schonfeld was fined $900,000.
OK, these are a couple of small-time violations that aren't really Madoff-level stuff. But did Madoff start out with billions in fraudulent holdings? No. Small-time crooks grow up to be big-time crooks, and there are lots of chances along the way to catch them.

Madoff forged documents to throw agents off the trail? Please. If you've ever had the pleasure of an Internal Revenue Service audit, you know how thorough the government can be when it wants to ensure taxpayers are contributing their fair share.
Second, even if we accept Sloan may be right about the SEC's not being geared to catch megafrauds, there's no reason regulators can't shift their focus.
Today, the SEC and its 1,100 enforcement agents hand out a lot of parking tickets: minor rules violations that have tenuous ties to the SEC's main objective of protecting investors. Madoff got a few of those himself. Remember, he got in trouble for not registering as an investment adviser in 2006.
"The SEC clearly has limited resources," said Fred Lipman, a securities lawyer with Blank Rome LP. "But they don't properly allocate and prioritize their resources.
"How many resources does it want to devote to rulemaking, technical interpretations, and how much does it want to put into finding into Ponzi schemes, Enrons and WorldComs?" Lipman asked.
Finally, there is absolutely no excuse for law enforcers' failing to nab a bad guy when they've been handed evidence. There were more than a dozen tips about Madoff during the last couple of decades.
Red flag: Madoff didn't use an independent custodian. Red flag: Madoff made 10% returns that couldn't be replicated using his purported methods. Red flag: Madoff used a three-man accounting firm. Red flag: the SEC repeatedly received letters suggesting Madoff was running a Ponzi scheme.
Had Madoff Investment Securities invested in companies that manufactured red flags, it wouldn't be in the shape it's in today.
So, should we just write off the SEC's ineptitude to The Smirk's ability to think big? Isn't that the way the world works?
If we're that jaded, then The Smirk gave us what we deserve.

David Weidner covers Wall Street for MarketWatch.
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