Dodd: No Rules, Just Oversight To Prevent Investor Fraud

By Cyra Master

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.

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http://www.theatlantic.com/business/archive/2009/01/dodd-no-rules-just-oversight-to-prevent-investor-fraud/184/