Bernie Madoff Heads To Court While The SEC Gets Grilled on the Hill
Monday, January 05, 2009SUSIE GHARIB: Bernard Madoff was back in a New York courtroom today as prosecutors asked to revoke his bail, claiming the disgraced financier is a flight risk. The judge is expected to rule on that request later this week. Meanwhile in Washington, a congressional committee asked questions today about why government regulators failed to catch Madoff's alleged $50 billion Ponzi scheme. Stephane Dhue is standing by with more on this story. Stephanie?
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Susie, lawmakers want to know how the Securities and Exchange Commission missed that many warnings that Madoff's investments were too good to be true. There were the consistent 8 to 12 percent profits, warnings from outsiders and the use of an obscure auditor. All should have been red flags. Yet the SEC examined Madoff's books eight times in 16 years and didn't uncover the fraud. Lawmakers like Georgia Democrat David Scott want to know why.
REP. DAVID SCOTT, (D) GEORGIA: Why did investigators never use subpoena powers to obtain truthful information? Instead, they only relied upon information voluntarily produced by Mr. Madoff. That's sort of like asking a thief if he's stealing. Well, the thief is going to tell you no, I'm not stealing.
DHUE: SEC's Inspector General David Kotz promises to get to the bottom of what went wrong. Specifically, he's looking at how the agency handled complaints against Madoff, allegations of conflicts of interest, including relationships between Madoff and SEC officials and an analysis of its inspections of the firm. While the investigation is just two weeks old, Kotz promises the issues will be dealt with quickly.
DAVID KOTZ, INSPECTOR GENERAL, U.S. SECURITIES & EXCHANGE COMMISSION: We're looking to try to issue reports on a rolling basis, so that if we can identify a particular, discrete issue, we can have a report on that issue without waiting for something that is, you know, 500 pages that comes years from now.
DHUE: While many Democrats on the panel are calling for increased regulations and resources, Republicans like Ron Paul say that would be a mistake.
REP. RON PAUL, (R) TEXAS: This circumstance, I think, really makes my point that the approach is completely wrong, that the regulatory agencies pre-empting people from doing bad things just doesn't work. There are millions and millions and millions of transactions. You can't -- you can't do it. All they do is give a false sense of security.
DHUE: There's a big question whether investors will be able to recoup much money. Sip-ic (ph) is supposed to provide up to half a million dollars in insurance per investor, but the agency has less than $4 billion on hand. A lot will depend on how much can be recovered from Madoff. So far, less than a billion dollars has been found in his firm. Susie?
GHARIB: It doesn't sound like Madoff's victims are going to get much money Stephanie. What else can they do? What are the other options?
DHUE: The first option is really to file a claim with the trustee because we don't know how much money was there. They might get some funds from the Sip-ic, although lawyers say it is notoriously difficult to get money from them and they may want to consult a lawyer. There are a number of class actions cases being filed.
GHARIB: Another question though a lot of investors are asking, I'm sure you've heard this, is that what can be done to prevent a massive fraud like this. And you said in your report that lawmakers are saying it is not because there weren't enough regulations. It's just enforcing them. So what do you do in the future?
DHUE: Well, clearly some people need to go to jail although that never seems to be all that much of a deterrent and certainly doesn't get money back for investors. There is a real concern that the SEC staff is underpaid and doesn't have the incentive to go after someone like Madoff. A natural career path is from the agency to Wall Street. So that is something that is likely to be addressed.
GHARIB: I have been hearing a lot that the Obama administration is going to make massive changes with the SEC. Is that what you are hearing? Should we expect that?
DHUE: Well, some people are calling for the SEC to be abolished all together and Obama sent a signal that the SEC and the CFTC which regulates commodities, that those two could be merged when he picked Mary Schapiro for the SEC post and he picked Gary Gensler for the CFTC post and he announced them on the very same day.
GHARIB: We'll see what happens. Thanks Stephanie for updating us. Appreciate it. DHUE: Thank you.
GHARIB: Stephanie Dhue reporting from our Washington bureau.
