The Madoff Scandal Continues to Haunt the SEC

The Madoff scandal continued to take center stage this week. The Inspector General of the SEC, H. David Kotz, testified before the Financial Services Committee of the House of Representatives. In his testimony, Mr. Kotz promised a full and swift inquiry into the allegations that the SEC failed to properly investigate Mr. Madoff years ago.

Mr. Kotz began by reiterating the three-part directive he received from SEC Chairman Cox regarding the Madoff matter. First, investigate the reasons that the SEC found allegations of possible misconduct by Mr. Madoff not credible. Second, examine the internal policies that govern when allegations of fraudulent activity should be brought to the Commission. Third, analyze contacts between the staff and the Madoff family and firm to determine their possible impact on the staff investigation.

The internal inquiry, which has already commenced, will however, be broader than what Mr. Cox requested, the Inspector General promised. Specifically, Mr. Kotz stated that “It is our opinion that the matters that must be analyzed regarding the SEC and Bernard Madoff may go beyond the specific issues that SEC Chairman Cox has asked us to investigate. We believe that in addition … our oversight efforts must include an evaluation of broader issues regarding the overall operations of the Division of Enforcement and OCIE (Office of Compliance Inspections and Examinations) that would bear on the specific questions we are examining, and provide overarching and comprehensive recommendations to ensure that the Commission fulfills its mission of protecting investors, facilitating capital formation and maintaining fair, orderly and efficient markets.”

Mr. Kotz went on to identify seven specific areas that will be covered by his investigation: 1) The SEC’s response to complaints it received regarding the activities of Bernard Madoff; 2) Allegations that there were conflicts of interest involving the staff and the Madoff family; 3) The examinations and inspections of the Madoff firm; 4) The extent to which the reputation and status of Mr. Madoff may have impacted any inquiry; 6) The complaint handling procedures of the Division of Enforcement; 7) The OCIE examination and inspection procedures; and 7) The relationship between different divisions and offices within the Commission and whether there is sufficient intra-agency collaboration and communication among those sections. This inquiry may illuminate much more than what happened with the Madoff case. Potentially, the inquiry could result in an overall and reform of the way in which the Division of Enforcement conducts law enforcement investigations.

While Mr. Kotz was testifying, prosecutors were back in court in the criminal case pending against Mr. Madoff requesting that his bail be revoked. According to a report published by, prosecutors claim that Mr. Madoff violated an asset freeze order by mailing $1 million of valuables to relatives. Counsel for Mr. Madoff denied that there was any violation of the order or the terms of the bail and downplayed the events, claiming that Mr. Madoff’s actions were innocent and involved heirlooms which are being returned to the government. The Court asked each side to file a brief.

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2008 Year in Review–Securities Litigation and Enforcement.

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