Saturday, September 5, 2009

Burying the Bernie Investigation

The SEC's inspector general released the full 477-page version of his report on how the SEC missed red flags on Bernie Madoff on Friday. The release came after 5 p.m. EDT, just ahead of the Labor Day weekend.

There was plenty to hide. WSJ reports:

On May 21, 2003, an unnamed hedge-fund manager sent an email to an SEC examiner laying out concerns that Mr. Madoff's self-described trading strategy didn't add up. The manager said the strategy wasn't duplicated by anyone else in the market, Mr. Madoff's accounts were in cash at month end, and there was "always replacement capital." These could be "indicia of a Ponzi scheme," he wrote.

However, the SEC didn't open an examination until December 2003, and an agency memo said the focus would be on front-running, a potentially abusive trading practice. The memo didn't raise questions cited by the hedge-fund manager, such as why there was an apparent lack of volume in the market to reflect Mr. Madoff's supposed trading strategy.

Senior examiner John McCarthy told the inspector general that it wasn't a mistake to focus solely on front-running "because that's where my area, my team's area of expertise led," according to the report...

One anonymous complaint directed the SEC to a "scandal of major proportion" by the Madoff firm and said assets of a specific investor "have been 'co-mingled' with funds controlled by the Madoff firm. The SEC called Mr. Madoff's lawyer and had him ask Mr. Madoff if he managed money for that investor. When the lawyer said Madoff didn't, the complaint wasn't pursued further. The IG report concludes that "accepting the word of a registrant who is alleged to be engaged in a specific instance of fraud is an inadequate investigation."

1 comment:

  1. ...McCarthy told the inspector general that it wasn't a mistake to focus solely on front-running "because that's where my area, my team's area of expertise led," according to the report...

    I'm reminded of the old joke about the drunk who loses his keys in a dark alley but searches for them 20 yards away because the lighting was better there.

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