Thursday, January 15, 2009

Madoff Avoids The Big House; But Not House, Senate Scrutiny

A second judge ruled yesterday that self-confessed Ponzi schemer Bernard Madoff can remain on bail under house arrest, and continue to avoid the Big House. However, as the SEC, FBI and DOJ investigations of Madoff continue – and the SEC Inspector General’s investigation of its past handling of the case continue – the Congressional committees responsible for oversight of the SEC have taken an interest in the Madoff affair and its broader implications for the regulatory framework, in terms of rulemaking as well as the structure and role of regulatory agencies.

As previously reported, the House Financial Services Committee conducted a hearing last week on Assessing the Madoff Ponzi Scheme and the Need for Regulatory Reform. We provide part 1 in a series of highlights from that hearing below, focusing today on highlights from opening statements of members of Congress.

In related action, the Senate Banking Committee sent a related document request to the SEC asking for documents relating to the Madoff affair. UPDATE 1pm: Rachelle Younglai of Reuters reports today that, according to an unnamed committee aide, the Senate Banking Committee will conduct its own hearing on the Madoff affair, as noted in her article: Senate to Probe Madoff Scandal on Jan. 27.

And today, SEC Chairman-Designate Mary L. Schapiro is expected to undergo questioning about the SEC’s and FINRA’s handling of the Madoff case, in addition to her views on a broad range of regulatory issued, as part of her confirmation hearing by the Senate Banking Committee at 10am today. Senator Chris Dodd, chair of the Senate Banking Committee, was quoted in this Washington Post article by AP’s Marcy Gordon as saying: “If confirmed, Ms. Schapiro will inherit a host of issues that require the SEC's immediate attention, including the (Bernard) Madoff fraud and various accounting issues.” UPDATE 1pm: Some early reporting on Schapiro's confirmation hearing can be seen in Obama's SEC Choice Promises Aggressive Action by AP's Marcy Gordon, and SEC Pick Schapiro Pledges to Reinvigorate Enforcement by Bloomberg's Jesse Westbrook.

Highlights from Congressional hearing: Part 1 – Members Opening Statements

Here are some highlights from some (not all) of the opening statements by Members of the House Financial Services Committee at its Jan. 5 hearing re: Madoff. We’ll provide more highlights of witnesses testimony and the Q&A between members of the committee and the witnesses in future posts, and a comprehensive summary will be posted later this week on FEI’s website.

This meeting to discuss the Madoff affair will also be the first of several public proceedings. At future hearings we will hear from senior officials at the Securities and Exchange Commission and from Harry Markopolos, who has asked us to temporarily postpone his testimony so that he can better prepare for our questions… We will need to hear from other financial services regulators, as well. We also need to hear from auditors and their overseers…. Red flags include[d] unrealistically steady investment returns and an auditor the size of a mouse examining a fund the size of an elephant… Perhaps most shocking, after Mr. Madoff misled government examiners and after he was then forced to register as an investment adviser, the Commission did not conduct any subsequent inspections. Moreover, in its prior examinations, the Commission failed to effectively use its subpoena power to obtain any records other than those voluntarily offered. … In the wake of this unprecedented financial crisis, we now know that our securities regulators have not only missed opportunities to protect investors against massive losses from the most complex financial instruments like derivatives, but they have also missed the chance to protect them against the simplest of scams, the Ponzi scheme. Clearly, our regulatory system has failed miserably and we must rebuild it now.” (Rep. Paul Kanjorski, chair of the Capital Markets Subcommittee of the House Financial Services Committee, in Kanjorski’s opening statement)

One thing we do know about Madoff affair… [it is] yet another indication that what is needed is a statutory and regulatory structure for the 21st century, we don’t have that…A word of caution: while the failures are obvious, they do not lead me to conclude at this stage of the inquiry that what are needed are broad new securities mandates on the rest of industry.. .we may have not a lack of regulatory enforcement tools, but a failure to use them (Rep. Spencer Baucus, Ranking Minority Member, House Financial Services Committee.)

There have been arguments previously that investor protection can be defined to people of lower income; when we talked about hedge funds, the main defense was requirement you had to have at least $1 million to invest, the theory was, for others, the principal caveat investor [caveat emptor] applies, but we see here, and also in the Auction Rate Securities market, it is not simply people who have less than $1 million to invest who need to have rules to insure is not reasonable to expect them to be the detectives for fraud..the Madoff situation is an example why regulation done properly is very pro-market, [with] the Madoff damage inflicted on so many people, clearly we have people worried about investing anywhere, this country will not work if people are not [willing] to put money in productive places… we need to put a set of rules in place.. to return to prosperity that a market functioning well can give us. (Rep. Barney Frank, Chair, House Financial Services Committee.)

I don’t think too many people will gather the same answer from this .. that I and others have gotten, since the 1930s, every time a problem like this comes up, we think it’s a lack of regulation… we introduce regulatory agencies like the SEC, like after Enron…[given] this example [Madoff], the approach is completely wrong.. the idea that regulatory agencies preempting people from doing things wrong, doesn’t work.. it promotes [a] false [sense of] security, this is a perfect example, the SEC was involved with Madoff, everybody’s guard let down, creates a moral hazard… Does that mean we should ignore the problem, no, but people commit fraud, and fraud laws are on the books, but just adding on new regulations and spending millions and billions, contributes to … the problem… the principle of fractional reserve banking is a Ponzi scheme, building debt on debt… Also, it is said too often people do what governments do, everybody knows Social Security is .. a Ponzi scheme.. furthering the idea of moral hazard… It’s not the fault of those at the SEC, they have an impossible job, and have to pretend they are doing something to feel relevant…We say we are relevant because we are going to hire more bureaucrats, and appropriate more money, this will not solve more problems.. we need to think about eliminating this regulatory process, actually, we don’t need the SEC at all… [investors should] rely on self reliance, self policing, but the government should not commit fraud either. (Rep. Ron Paul))

Madoff’s victims paid taxes… the government stands to become the ultimate beneficiary of ill gotten gains.. by taxing unreal investments on real people… Forget about the Kevin Bacons and Steven Spielbergs,,, What about people like Allan Goldstein testifying before our committee today. (Rep. Gary Ackerman)

[Former SEC Chairman] Arthur Levitt says the SEC should now be a law enforcement agency, this is a proposal he objected to [previously]… four-fifths of the [SEC’s] commissioners insist on staying on, even though the SEC failed [in its regulation associated with] mortgage-backed bonds, and now on Madoff, you would think all the commissioners would at least offer to President-Elect Obama to resign. (Rep. Brad Sherman)

To those who advocate more regulation, increased budgets, how can it be if the two sons of Madoff did not become aware of this, how then could we call for increased regulation and think some outside regulator would have become aware of it? (Rep. Scott Garrett)

We are dealing with a crook, dealing with an individual who took people’s money and lost it, he deserves to go to jail, and to the degree we can make individuals whole, we need to get that done. … What I am looking to hear, what can we learn from it, has any kind of crime been committed, make sure we shore up our rules, laws, regulations, if it will help prevent it…. If there’s a bank robbery, you don’t get rid of the laws, we figure out how to make them stronger so we don’t have another bank robber. … If we find the SEC was complicit, that person is a crook, but if [there was] not enough training or money… we need to fix that.. if we find new rules and regulations can be put in place so no one else is scandalized again, it is our job to do that…. We can listen, learn, evaluate, so a crook like Madoff can’t get away with it again. (Rep. Gregory Meeks)

The question is: what went wrong… there were red flags presented to the SEC, probably to investors as well, the question is why didn’t the SEC follow up on this… If there’s anything we’ve learned from Madoff, in the global economic crisis like we have now, we need smarter regulation and greater oversight ..[that] doesn’t mean the government checking up on every move of every investor… we need to get to the bottom of this, not only what went wrong in the past, [and] what can be recovered, but also what can be prevented in the future. (Rep Ron Klein)

I know if welfare mothers were able to perpetrate a similar [act], my suspicion is, if the welfare fraud division didn’t [catch them].. they would be dismissed… We make it difficult for welfare mothers to steal, I think we have to make it difficult for people who perpetrate this kind of fraud to do it. (Rep. Al Green)

The confidence in the system as [a] whole is shot; obviously Madoff was a confidence man, gained confidence of investors and regulators..., regulators need the tools, and have to be regulators, they can’t be conned. (Rep. Ed Perlmutter)

Ponzi schemes aren’t new, neither are crooks or scheisters… [former SEC Chairman Arthur] Levitt in [his oped in that day’s] WSJ argues persuasively risk assessment must be central to SEC’s efforts, and effective enforcement that requires a commitment of appropriate resources.. I am interested to hear my colleagues on the other side of the aisle apparently arguing we don’t need more regulations or oversight.. I don’t know what [world they’re living in]... the Madoff scheme is like a cherry on a bad sundae. (Rep. Paul Hodes)

Other Resources on Madoff Scandal
Securities Mosaic has published a number of updates on the Madoff investigation and related regulatory issues, including Spotlights aggregating news articles, law firm memos and blog posts, and its daily Securities Mosaic Blogwatch. Visit for details.

AccountingWeb has also had a series of articles on this subject, at

This is our third blog post following the Madoff affair, and we seem to have caught the attention of – quote – Bernard Madoff’s Blog – unquote. In his Jan. 12 post, Breakfast with Bernie, he references our blog coverage (and thanks, "Bernie," for including us in your blogroll too). We told you about his blog (referred to by CNBC’s Jane Well’s as Fake Bernie’s blog) and we’ve described it in the past as akin to a Saturday Night Live version of a blog ostensibly written by Madoff.

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Edith Orenstein said...

This post was updated at 1pm in two places, to include (1) a link to a Reuters article published today which says Senate Banking will hold its own hearing re: regulators handling of Madoff case on Jan. 27, and (2) to include links to an AP article and Bloomberg article reporting some highlights from today's Senate Banking committee confirmation hearing on SEC Chairman-Designate Mary L. Schapiro.

MIMI said...


MIMI said...