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Inspector General’s Madoff Report

SEC’s Madoff Investigation = Stunning Failure

As has been widely reported, the Inspector General has released a 450 page report on the SEC’s stunning failure to uncover the Bernard Madoff Ponzi scheme.  Below I have republished some of the more interesting items from the summary portion of the report (emphasis mine).  While we have heard many of the details before, the description of the “egregious” incompetence is still almost unbelievable.

To access the whole report, please see OIG Madoff Report.  Chairman Shapiro’s comments, reprinted below, can be found here.


Selected sections of the Inspector General’s summary

The OIG investigation did find, however, that the SEC received more than ample information in the form of detailed and substantive complaints over the years to warrant a thorough and comprehensive examination and/or investigation of Bernard Madoff and BMIS for operating a Ponzi scheme, and that despite three examinations and two investigations being conducted, a thorough and competent investigation or examination was never performed. The OIG found that between June 1992 and December 2008 when Madoff confessed, the SEC received six [arguably 8] substantive complaints that raised significant red flags concerning Madoff’s hedge fund operations and should have led to questions about whether Madoff was actually engaged in trading. Finally, the SEC was also aware of two articles regarding Madoff’s investment operations that appeared in reputable publications in 2001 and questioned Madoff’s unusually consistent returns.


One effort was made to verify Madoff’s trading with an independent third-party, but even after they received a very suspicious response, there was no follow-up. The Assistant Director sent a document request to a financial institution that Madoff claimed he used to clear his trades, requesting records for trading done by or on behalf of particular Madoff feeder funds during a specific time period. Shortly thereafter, the financial institution responded, stating there was no transaction activity in Madoff’s account for that period. Yet, the response did not raise a red flag for the Assistant Director, who merely assumed that Madoff must have “executed trades through the foreign broker-dealer.” The examiners did not recall ever being shown the response from the financial institution, and no further follow-up actions were taken.


At a crucial point in their investigation, the Enforcement staff was informed by a senior-level official from the NASD that they were not sufficiently prepared to take Madoff’s testimony, but they ignored his advice. On May 17, 2006, two days before they were scheduled to take Madoff’s testimony, the Enforcement staff attorney contacted the Vice President and Deputy Director of the NASD Amex Regulation Division to discuss Madoff’s options trading. The NASD official told the OIG that he answered “extremely basic questions” from the Enforcement staff about options trading. He also testified that, by the end of the call, he felt the Enforcement staff did not understand enough about the subject matter to take Madoff’s testimony. The NASD official also recalled telling the Enforcement staff that they “needed to do a little bit more homework before they were ready to talk to [Madoff],” but that they were intent on taking Madoff’s testimony as scheduled. He testified that when he and a colleague who was also on the call hung up, “we were both, sort of, shaking our heads, saying that, you know, it really seemed like some of these [options trading] strategies were over their heads.” Notwithstanding the advice, the Enforcement staff did not postpone Madoff’s testimony.


During his testimony, Madoff also told the Enforcement investigators that the trades for all of his advisory accounts were cleared through his account at DTC. He testified further that his advisory account positions were segregated at DTC and gave the Enforcement staff his DTC account number. During an interview with the OIG, Madoff stated that he had thought he was caught after his testimony about the DTC account, noting that when they asked for the DTC account number, “I thought it was the end game, over. Monday morning they’ll call DTC and this will be over . . . and it never happened.” Madoff further said that when Enforcement did not follow up with DTC, he “was astonished.”

This was perhaps the most egregious failure in the Enforcement investigation of Madoff; that they never verified Madoff’s purported trading with any independent third parties. As a senior-level SEC examiner noted, “clearly if someone … has a Ponzi and, they’re stealing money, they’re not going to hesitate to lie or create records” and, consequently, the “only way to verify” whether the alleged Ponzi operator is actually trading would be to obtain “some independent third-party verification” like “DTC.”

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 OIG summary concludes that:

As the foregoing demonstrates, despite numerous credible and detailed complaints, the SEC never properly examined or investigated Madoff’s trading and never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme. Had these efforts been made with appropriate follow-up at any time beginning in June of 1992 until December 2008, the SEC could have uncovered the Ponzi scheme well before Madoff confessed.

The OIG’s matter of fact concluding statement that “the SEC could have uncovered” the fraud rings hollow, especially for the people who lost life savings needlessly.


Chairman Shapiro’s Statement

Statement by SEC Chairman:
Statement on the Inspector General’s Report Regarding the Bernard Madoff Fraud
Chairman Mary L. Schapiro
U.S. Securities and Exchange Commission
Washington, D.C.
September 4, 2009

Today we are releasing the Inspector General’s 450-page report regarding the Bernard Madoff fraud and the many missed opportunities to discover it.

As I stated earlier this week, it is a failure that we continue to regret, and one that has led us to reform in many ways how we regulate markets and protect investors.

In the coming weeks we will continue to closely review the full report and learn every lesson we can to help build upon the many reforms we have already put into place since January.

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A list of the SEC’s many reforms undertaken is available at

The Inspector General’s report is available at

SEC Chairman Schapiro’s September 2 statement is available at



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