Securities and Exchange Commission Historical Society

Regulating the Regulators: The Executive Branch and the SEC, 1981-2008

George W. Bush Administration

Missing Madoff

“[Madoff] somehow managed to slip under the radar of five different Chairmen of the SEC.”

- May 5, 2011 Interview with Michael Halloran

In early December 2008, Bernard Madoff confessed to his family that he had operated a Ponzi scheme through the investment advisory side of Bernard L. Madoff Securities LLC.  The family lawyer called his contact at the SEC New York Regional Office to inform the SEC about what Madoff had done, and that Madoff himself estimated the losses to be $50 billion.  At the other end of the line, the contact asked, “That’s billion?  With a B?”  A report a year later from the SEC Office of Investigation of the agency’s failure to uncover Madoff’s Ponzi scheme detailed a list of complaints sent into the SEC beginning in the early 1990s and continuing into the 2000s of an unregistered investment company offering “100% safe investment with high and extremely consistent rates of return over significant periods of time.”70

Unlike many Ponzi schemes, Madoff seemed to offer to his investors no risk.  “This wasn’t thrill.  This wasn’t the outsized returns.  In fact, he was selling the scam on, ‘We want safe and steady.  Those risk takers, let them fall off the cliff.  You are not like that, are you?’  Playing on ego, playing on somebody’s sense that I am in control, I know what I am doing.”  But questions could have been raised.  “Madoff’s pitch was that he had this very complicated computer-assisted hedging strategy.  But the accounts statements that the investors received looked like something from high school computer class in the ‘70s, perforated paper, green and white rows.  It almost speaks for itself when you get a document like that.  Investors couldn’t check even feeder funds.  Lack of an auditor, lack of a custodian.  These are the types of red flags that potentially put an investor on notice and puts their principal at risk.”71

The SEC floundered for an explanation.  The watchdog of the nation’s financial markets appeared to be asleep, incompetent or both.  “There was a lot of hand-wringing about what happened and who did what.  What I was always certain of is that everyone involved in that matter was acting on good faith.  Through a combination of insufficient resources and maybe due to a lack of industry knowledge, we missed it.”72  That the Madoff scandal occurred during a worldwide financial crisis only increased public fear and anger.  For the first time since its founding in 1934, the SEC faced critics questioning whether the agency had outlived its effectiveness.  Was the SEC still capable of serving as the investor’s advocate?

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