The Madoff scandal, which caught the SEC and savy institutional investors flat-footed, is increasing the pressure for more oversight and regulation within investment management and hedge fund industries. It is expected that Congress will be busy with this and other matters regarding regulation of the capital markets. In fact, Senator Chuck Grassley from Iowa recently announced his intention to require hedge fund registration at the SEC level.
In addition to Grassley, two more members of Congress are calling on greater oversight in the wake of the Madoff scandal. Specifically Congressman Paul E. Kanjorski from Pennsylvania and Congressman Spencer Bachus from Alabama are calling on the House Financial Services Committee to hold hearings on the Madoff scanal. I have reprinted the two notices below. We will continue to provide information on possible hedge fund registration as it comes forward. Related hedge fund law and registration articles include:
- Hedge Fund Registration Exemption
- Goldstein v. SEC
- SEC Testimony regarding Hedge Funds
- What licenses do you need to start a hedge fund?
12/17/08: Kanjorski Announces Examination of $50 Billion Madoff Swindle
Review by Capital Markets Subcommittee Will Inform Efforts to Restructure U.S. Financial Services Regulation
WASHINGTON – Congressman Paul E. Kanjorski (PA-11), the Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, today announced that he will convene a congressional inquiry in early January to examine the $50 billion investment swindle allegedly committed by Mr. Bernard L. Madoff. The proceedings of the Capital Markets Subcommittee will help to guide the work of the House Financial Services Committee in undertaking the most substantial rewrite of the laws governing the U.S. financial markets since the Great Depression.
“The news reports in recent days that Mr. Madoff stands at the center of a $50 billion Ponzi scheme are deeply disturbing. Unfortunately, these events have only further weakened already-battered investor confidence in our securities markets, and they have raised even more troubling questions about the effectiveness of our regulatory system,” said Chairman Kanjorski. “These matters therefore demand expeditious and careful review by the Capital Markets Subcommittee. I have consistently stressed the need for pursuing comprehensive regulatory reform since 2000, and I have held hearings on the need to address this important issue. But, before we act on legislation in the 111th Congress to restructure the regulatory system for the financial services industry and enhance investor protection, we need to understand how Mr. Madoff organized his many business operations and how he perpetrated these frauds.”
Chairman Kanjorski added, “We must also understand why the U.S. Securities and Exchange Commission, other regulators, and additional participants in the securities markets failed to detect these substantial evasions before innocent investors and charitable organizations were substantially harmed. The answers to these questions will inform the work of the House Financial Services Committee as it works next year to craft a strong, effective, modern regulatory system for the financial services industry.”
The examination of the Madoff swindle will take place as soon as possible in January, once the 111th Congress begins its work. The new Congress is scheduled to convene on January 6, 2009.
CONGRESSMAN BACHUS URGES HEARING ON MADOFF ALEGATIONS
WASHINGTON – Congressman Spencer Bachus (AL-6), Ranking Member of the House Financial Services Committee, urged Chairman Barney Frank in a letter today to convene hearings on the alleged $50 billion Ponzi scheme committed by Bernard Madoff, a former Chairman of the Board of the NASDAQ Stock Market.
Ranking Member Bachus said, “Obviously there was a failure of regulatory oversight. Every day brings more news as to the devastating impact of this fraud on charities, private foundations, and government entities as well as individual and corporate investors.”
Ranking Member Bachus’ letter requests Committee hearings to “thoroughly investigate Mr. Madoff’s conduct and the broader implications for securities market oversight and enforcement.”
On December 11, 2008, the Federal Bureau of Investigation arrested Mr. Madoff and the Securities and Exchange Commission (SEC) charged him and his investment firm, Bernard L. Madoff Investment Securities LLC, for allegedly perpetrating a massive securities fraud on advisory clients of his firm. Among the allegations in the complaint are that Mr. Madoff “had for years been paying returns to certain investors out of the principal received from other, different, investors,” and engaged in an elaborate pattern of deception to keep his scheme from investors, the public, and regulators. On December 16th, SEC Chairman Christopher Cox announced an investigation by the SEC’s Inspector General into the agency’s handling of the Madoff case, which he described as being characterized by “apparent multiple failures over at least a decade to adequately pursue these allegations or at any point to notify the Commission of them.”
Text of the letter follows.
December 17, 2008
The Honorable Barney Frank
Committee on Financial Services
U.S. House of Representatives
2129 Rayburn House Office Building
Washington, DC 20515
Dear Chairman Frank:
Last week’s startling revelations about the alleged $50 billion “giant Ponzi scheme” orchestrated by Bernard Madoff, a prominent member of the securities industry for more than 45 years, exposes serious shortcomings in securities regulation and oversight that require the Committee’s immediate attention.
The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) were reportedly unaware of Mr. Madoff’s deceptions, which only came to light after Mr. Madoff revealed the scheme to two of his senior employees last week. This episode raises serious questions about the SEC’s ability to fulfill its mission to protect investors and abide by its motto to be the “investor’s advocate,” and prompts concerns about the capabilities of self-regulatory organizations to supplement government oversight. Every day brings more news of the devastating impact of this alleged fraud on charities, private foundations, banks, broker-dealers and government entities as well as individual and corporate investors.
Accordingly, I am writing to request that the Committee hold hearings, as soon as practicable in the 111th Congress, to thoroughly investigate Mr. Madoff’s conduct and the broader implications for securities market oversight and enforcement. These hearings should specifically examine the adequacy of the SEC’s and FINRA’s examination programs, as well as the compliance program at Mr. Madoff’s firm, and should include testimony from Mr. Madoff, the SEC, FINRA, the Securities Investor Protection Corporation, Mr. Madoff’s accounting firm and his victims.
Thank you for the consideration of my request.