SEC flaws exposed by Madoff scandal

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SEC flaws exposed by Madoff scandal
By Joanna Chung in New York
Published: February 13 2009 02:00 | Last updated: February 13 2009 02:00
Much of the blame for missing Bernard Madoff's alleged $50bn "Ponzi" scheme has been attached to the US Securities and Exchange Commission's enforcement division - and, in particular, to Linda Thomsen, its director, who announced her departure this week.

Ms Thomsen was among the SEC officials excoriated by legislators during hearings over why they had failed to investigate apparently credible tips received about Mr Madoff for nearly a decade.

However, responsibility might belong elsewhere in the organisation.

"The responsibility for enforcement should ultimately be placed on the chairman and the commissioners," said Joel Seligman, president of the University of Rochester and a SEC historian. It was clear that "some of the commissioners wanted a less aggressive enforcement staff", he said.

In recent years, the SEC has been seen as increasingly toothless, particularly under Christopher Cox, the Republican chairman who stepped down last month.

A "penalty pilot" scheme required the 1,100 enforcement staff to gain approval from the five-member commission in cases involving civil monetary penalties for public companies - a procedure widely criticised for introducing delays.

Meanwhile, the formal orders of investigation needed to initiate cases were often subject to review at a meeting of the commissioners, which could take weeks.

Mary Schapiro, the new SEC chairman, last week ended the "penalty pilot" programme and said the agency would revert to a policy of written approval of investigations, or approval by a single commissioner acting on behalf of the rest.

The move towards more aggressive enforcement was further underscored by other SEC officials who spoke last week at a conference in Washington that set out its agenda for the coming year.

George Curtis, deputy director of enforcement, said staff were looking for ways to move cases more quickly. ''We don't feel we have to turn every stone over,'' he said, adding there would be better tracking of complaints, tips and referrals.

Luis Aguilar, a Democratic SEC commissioner, wanted to go further and give more decision-making power to the enforcement director and heads of regional offices. He also said the SEC should have the authority to prosecute criminal violations - as federal prosecutors do.

The Madoff scandal has highlighted a host of problems at the SEC, including a lack of resources and a lack of oversight of hedge funds.

Ms Thomsen recently told Congress that resources had "not kept pace with the rapid expansion in the securities market". Harvey Pitt, former SEC chairman, called for structural changes, including to the "fatally flawed" way companies were inspected. Referring to the SEC Office of Compliance, Inspections and Examinations, he said: "It is not realistic to expect the SEC to . . . examine every regulated entity every year, with sufficient dexterity, market knowledge or skill."

Only about 10 per cent of investment advisers are examined every three years. The SEC never examined Mr Madoff's advisory division, which was at the centre of the alleged fraud.

Just 425 staff examine about 11,300 investment advisers - a 50 per cent increase since 2002 - in addition to mutual funds. "The growth in adviser registrants outstripped the staff's ability to examine every firm on a regular basis," said Lori Richards, the head of OCIE, in a recent hearing.

Ms Thomsen's supporters point to the numerous successes under her leadership, including the recent auction rate securities market settlements returning $50bn to investors. But Mr Seligman said: "At the margins some of the vigour was sapped out of enforcement."

Copyright The Financial Times Limited 2009