Dodd: No Rules, Just Oversight To Prevent Investor Fraud

There are no regulations under consideration that might prevent someone from taking advantage of investors as Bernand Madoff is accused of doing, even though there are some good ideas in the works, Senate Banking Chairman Christopher Dodd said today. Speaking after a hearing on investment securities fraud, Dodd pointed out that the SEC and the Financial Industry Regulatory Authority will be reporting to the committee every three months on what steps they are taking to prevent scams. The hedge fund manager is accused of running a Ponzi scheme that fleeced investors of at least $50 billion. Dodd said suggestions from John Coffee, a law professor at Columbia University, were particularly helpful, most notably the proposal to ensure that the custodian of a fund management company be an independent third party. Madoff acted as his company's custodian. Coffee proposed that funds use an auditing company registered with the Public Company Accounting Oversight Board. Bernard L. Madoff Investment Securities used an auditing firm with only three employees, including a secretary.

Still, at today's hearing, more questions were posed to SEC officials than were answered by them about how Madoff might have been able to deceive financial regulators for so long, despite repeated warnings from industry insiders. For example, derivatives expert Harry Markopolos provided the SEC with a detailed 19-page analysis on how Madoff was a fraud not only in 2005, but in 1999. Markopolos was absent from the hearing due to the flu. "The sheer magnitude of warnings" made it difficult to understand why the SEC could not have stopped Madoff earlier, said Sen. Robert Menendez, D-N.J. SEC officials were unwilling to offer details about what they had done to follow up on Markopolos' report, and about speculation on Wall Street over the years that the investment returns reported by Madoff were too good to be true. "This is an ongoing criminal investigation...and none of us want to get in the way of a fraud coming to justice," said Linda Chatman Thomsen, director of the enforcement division at the SEC. Sen. Mike Johanns, R-Neb., said that eventually the SEC would have to give a detailed analysis on why it failed to uncover Madoff, despite the numerous red flags raised. "I'll pay close attention to the investigation, and ask the same questions again. ... I'll accept your answer today, but there will be a day when the investigation is over," Johanns said.

Presented by

Cyra Master

Cyra Master is a W.E.B. Du Bois fellow at the Atlantic. Previously, she was an editor at the nonprofit Center for Law and Social Policy and was a reporter for the New Hampshire Eagle Tribune. She is a graduate of Emerson College.

Why Is Google Making Human Skin?

Hidden away on Google’s campus, doctors at a world-class life sciences lab are trying to change the way people think about their health.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register with Disqus.

Please note that The Atlantic's account system is separate from our commenting system. To log in or register with The Atlantic, use the Sign In button at the top of every page.

blog comments powered by Disqus


Why Is Google Making Skin?

Hidden away on Google’s campus, doctors are changing the way people think about health.


How to Build a Tornado

A Canadian inventor believes his tornado machine could solve the world's energy crisis.


A New York City Minute, Frozen in Time

This short film takes you on a whirling tour of the Big Apple


What Happened to the Milky Way?

Light pollution has taken away our ability to see the stars. Can we save the night sky?


The Pentagon's $1.5 Trillion Mistake

The F-35 fighter jet was supposed to do everything. Instead, it can barely do anything.

More in Business

Just In