The executive summary of the SEC Inspector General’s Report on the failed Madoff investigations was released by the Commission, along with comments by Chairman Schapiro. The detailed summary traces the unsuccessful investigative efforts of the SEC enforcement staff from 1992 through the present, pointing frequently to the fact that the staff was inexperienced and failed to follow-up. The Chairman’s comments emphasize the future, focusing on the many steps taken to improve enforcement. The summary is a good overview of what happened. The Chairman’s comments emphasize represent hope for the future. Neither adequately explains the Madoff failures.

Beginning in 1992, the SEC had multiple opportunities to discover and stop the Madoff operation, according to the summary. In that year, the SEC, while investigating Madoff associate Avellino & Bienes, “actually suspected the investment company was operating a Ponzi scheme,” but failed to take any steps to explore the question. While trade records were sought from DTC which would have revealed the fraud, in the end the documents were secured from Mr. Madoff. Nothing was found.

In May 2000, March 2001, May 2003 and April 2004 the SEC got more opportunities as it received complaints about the Madoff operation. More complaints arrived in October 2005 and December 2006. Some raised concerns about Mr. Madoff’s supposed trading, while others questioned the purported returns. Some, such as the May 2000 statements of Harry Markopolos, contained a sophisticated analysis of Madoff’s claimed trading and the reasons it could not be true. Nothing was found.

The reason the SEC did not discover the fraud in many instances is the same as in the beginning: a simple failure to follow-up, according to the summary. In 2001 for example Barron’s published an article by Erin Arvedlund entitled “Don’t Ask, Don’t Tell: Bernie Madoff is so secretive, he even asks his investors to keep mum.” The then-director of OCIE, after reviewing the article, told an Associate Director in the division that the author was “very good” and “This is a great exam for us!” Nothing was done.

In other instances, the investigative focus was wrong. In 2005, for example, the NERO, following a tip about Madoff, began planning an examination. Although the e-mails the office had received about the Madoff operation raised significant questions regarding if there was any trading, the investigation focused only on front running. Nothing was found.

In many instances, the summary points to a lack of experience and expertise by the staff. During the 1992 inquiry it notes that “[t]he relatively inexperienced Enforcement staff failed to appreciate the significance of the analysis in the complaint [that the fund was a Ponzi scheme].” In 2000, following the receipt of information from Mr. Markopolos, it “was clear that the BDO’s Assistant Administrator did not understand the information presented,” according to the summary. In a 2003, review an OCIE “broker-dealer examination team . . . was inexperience.” The team assigned in 2005 to follow-up on information supplied by Mr. Markopolos had “little to no experience.” This inexperience, coupled with a lack of follow-up is a constant theme of the summary.

Chairman Schapiro’s brief statement reiterates recent efforts to improve enforcement. Steps have been taken to streamline procedures and put more experienced staff on the front lines, and new rules have been proposed, the Chairman notes. Already this year the SEC has brought twice as many emergency temporary restraining order actions relating to Ponzi schemes and other frauds compared to last year, the statement notes.

The explanations do not hit the mark. The reason the SEC failed to catch Mr. Madoff is not simply missed steps, inexperience or even a failure to understand the complex theories of Harry Markopolis. Likewise, while the new initiatives by the Commission may improve enforcement, it seems unlikely that they would have changed the results of the Madoff inquiries.

Analysis of the facts in the summary and other available materials suggests the Madoff failures resulted from not taking basic investigative steps. In 1992, for example, the SEC thought Mr. Madoff was running a Ponzi scheme. In the end Ponzi schemes are about stealing investor money with some going to the thief and some used to repay and keep other investors happy, while false claims are made that all funds are safely invested through some trading scheme that yields fabulous too good to be true profits everyone want to hope they get, but do not.

Investigators should have been able to uncover the Ponzi scheme of the ages with some hard work and basic records review and analysis. If Mr. Madoff’s bank records were examined, investigators should have seen that the money coming in from investors was not being spent to buy stock or pay for complex and hard to understand option trading strategies. As the Commission stated in SEC v. DiPascali, Case No. 09 CV 7085 (S.D.N.Y. Filed Aug. 11, 2009), ¶¶ 45-47: “DiPascali knew that when investors sent in funds to BMIS for investment, the funds were deposited or wired into a bank account at JPMorgan Chase . . . He also knew that this account was not in any way reflected on the books and records . . . of BMIS’ broker-dealer operation . . . redemptions were funded by this same 703 Account and . . . there was no affiliated trading account . . . [it] was nothing more than a slush fund.”

If the bank records were compared to the supposed trading records, investigators should have been able to determine that they did not match – the money was not being spent on stock. Investigators could have determined that the cash never went anywhere except either to Mr. Madoff and his henchmen or back to other investors – a Ponzi scheme. The thief would have been caught.

In the end catching Mr. Madoff is like catching other crooks – it is all about hard and unglamorous work such as getting the basic records and reading and analyzing lots of documents and transactions. In the end, it is about following the classic axiom of investigating financial frauds: follow the money.

Here, the hard work was not done. Here, the maxim was not followed. Here, the SEC never caught the thief Bernard Madoff. The reason why is clear.