How Pathetic Was the SEC's "Investigation" of Bernie Madoff?

Stephen Dubner is right. This New York Times story on the SEC's jaw-dropping inability to uncover the in-plain-sight frauds of Bernie Madoff is downright terrifying. Like watching a movie scene where you know a horrific ending is imminent as the ominous strings crescendo, the story gives me both goosebumps and an animalistic desire to scream heedless warnings at my screen. Except it's less "Don't answer the phone!"/"The axe is right behind you!" and more "Pick up the phone!"/"The false trading documents are right in front of you!" Here are the scariest paragraphs:


"Madoff carefully controlled to whom they spoke at the firm," the S.E.C.'s independent watchdog said in the report released on Wednesday.

When one of Mr. Madoff's employees was talking to investigators in 2005, an aide to Mr. Madoff broke up the conversation, explaining that it was time for lunch -- at 3 in the afternoon.

The incident was one of several recounted by the agency's inspector general, H. David Kotz, in a report that concludes numerous "red flags" were missed by the agency from at least 1992, not just because of inexperience and incompetence, but because investigators failed to follow incriminating evidence in plain sight and were cowed by Mr. Madoff, who had an inflated reputation on Wall Street.

The report details six substantive complaints against Mr. Madoff received by the agency, which were followed by three investigations and two examinations. Yet the agency never verified Mr. Madoff's trading through a third party. Time and again, it was noted that the volume of his purported options trades were implausible. When the enforcement staff received a report showing that Mr. Madoff indeed had no options positions on a certain date, the agency simply did not take any further steps.

In fact, the string of lapses was capped by a staff lawyer receiving the highest performance rating from the agency, in part for her "ability to understand and analyze the complex issues of the Madoff investigation."

Perversely, Mr. Madoff used the S.E.C.'s inquiries as a selling point to reassure investors that the government had looked over his operations and found no problem.

It was not Mr. Madoff's cleverness that enabled him to fleece thousands of investors out of billions of dollars for years, Mr. Kotz said. It was the fact that, "despite numerous credible and detailed complaints," the S.E.C. never took "the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme."

Perhaps the most egregious lapse was the repeated failure of investigators to verify the trades that Mr. Madoff claimed to be making over the years, bringing in steady profits that turned out to be, quite literally, too good to be true, the inspector general found.

"A simple inquiry to one of several third parties could have immediately revealed the fact that Madoff was not trading in the volume he was claiming," the report said.