Thanks to a reader, here’s testimony from today’s hearing (embargoed until 2:00 so if you’re on Central time, avert your eyes):
The Madoff Investigation
It is with this background in mind that I wish to discuss our planned
efforts to investigate matters related to Bernard Madoff and affiliated
entities. On the late evening of December 16, 2008, SEC Chairman
Christopher Cox contacted me and asked my office to undertake an
investigation into allegations made to the SEC regarding Mr. Madoff, going
back to at least 1999, and the reasons that these allegations were found to
be not credible. The Chairman also asked that we investigate the SEC¹s
internal policies that govern when allegations of fraudulent activity should
be brought to the Commission, whether those policies were followed, and
whether improvements to those policies are necessary. In addition, he
requested that the investigation include all staff contact and relationships
with the Madoff family and firm, and any impact such relationships had on
staff decisions regarding the firm.
Early on December 17, 2008, we opened an official investigation into the
Madoff matter. Since then, we have been working at a rapid pace to begin
this important work. On December 18, 2008, we issued a document
preservation notice to the entire Commission informing them that the Office
of Inspector General has initiated an investigation regarding all Commission
examinations, investigations or inquiries involving Bernard L. Madoff
Investment Securities, LLC, and any related individuals or entities. We
formally requested that each employee and contractor in the Commission
preserve all electronically-stored information and paper records related to
Bernard L. Madoff Investment Securities, LLC in their original format.
Over the next few days, we met with senior officials from the Commission¹s
Division of Enforcement and the Office of Compliance Inspections and
Examinations, known as ³OCIE,² to ensure their cooperation in our
investigation and our ability to gain access to their files and records. We
also met with the Chairman¹s office to seek information and documentation
relevant to the investigation.
On December 24, 2008, we sent comprehensive document requests to both the
Division of Enforcement and OCIE specifying the documents and records we
required to be produced for the investigation. We requested that all
responsive documents be provided to our Office by January 16, 2009. In
addition, we made several formal expedited requests to the SEC¹s Office of
Information Technology for searches of the e-mails of former and current
employees and contractors for information relevant to the investigation,
both at headquarters and the New York and Boston Regional Offices, and have
already received and are in the process of reviewing these e-mails.
We have also already begun efforts to obtain additional resources to assist
the Office in undertaking this investigation. We are securing additional
office space and administrative assistance and hope to add four new
investigators to our Office¹s current investigative team.
We have also begun identifying the particular issues that need to be
investigated and are reviewing and updating daily the list of witnesses that
we plan to interview. We intend to begin conducting these interviews
immediately and, for example, have already scheduled a meeting with Harry
Markopoulos for later this month for an in-depth interview on the record.
We have also already met and spoken with numerous individuals informally as
part of our initial investigative efforts.
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 to conducting a
thorough and comprehensive investigation of the specific complaints that
were allegedly brought to the SEC¹s attention regarding Mr. Madoff and the
reasons for the SEC¹s apparent failure to act upon these complaints, as well
as the staff¹s contact and relationships with the Madoff family and firm and
their impact on Commission decisions regarding Mr. Madoff, our oversight
efforts must include an evaluation of broader issues regarding the overall
operations of the Division of Enforcement and OCIE 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.
At this early stage, I thought it would be useful to identify the specific
issues related to Bernard Madoff that, as a preliminary matter, we intend to
investigate or review. Obviously, as the investigative efforts are just
beginning, I am not in a position to provide any conclusions or findings
with regard to the allegations that have been raised and do not wish to make
any preliminary judgments before we have had a chance to analyze all the
information. In addition, as underlying evidence relevant to the work of
the Office of Inspector General could also be relevant to the pending
criminal or SEC investigations into possible violations of the securities
laws, I am being mindful not to comment on anything that may affect or
interfere with those investigations.
The following are specific issues that we currently intend to investigate:
(a) The SEC¹s response to complaints it received regarding the
activities of Bernard Madoff, including any complaints sent to the Division
of Enforcement, OCIE, the Office of Risk Assessment and/or the Office of
Investor Education and Advocacy. We plan to trace the path of these
complaints through the Commission from inception, reviewing what, if any,
investigative or other work was conducted with respect to these allegations,
and analyze whether the complaints were handled in accordance with
Commission policies and procedures and whether further work should have been
conducted;
(b) Allegations of conflicts of interest regarding relationships
between any SEC officials or staff and members of the Madoff family,
including examining the role a former SEC official who allegedly had a
personal relationship with a Madoff family member may have played in the
examination or other work conducted by the SEC with respect to Bernard
Madoff or related entities, and whether such role or such relationship in
any way affected the manner in which the SEC conducted its regulatory
oversight of Bernard Madoff and any related entities;
(c) The conduct of examinations and/or inspections of Bernard Madoff
Investment Securities LLC by the SEC and an analysis of whether there were
³red flags² that were overlooked by SEC examiners and inspectors (which may
have been identified by other entities conducting due diligence), that could
have led to a more comprehensive examination and inspection, including a
review of whether the SEC violated its own policies and procedures by not
conducting timely reviews or examinations of Bernard Madoff¹s activities and
filings; and
(d) The extent to which the reputation and status of Bernard Madoff
and the fact that he served on SEC Advisory Committees, participated on
securities industry boards and panels, and had social and professional
relationships with SEC officials, may have affected Commission decisions
regarding investigations, examinations and inspections of his firm.
In addition to these specific issues and depending upon the information that
we learn during the course of our investigation, we plan to consider
analyzing the following broader issues, as appropriate:
(a) The complaint handling procedures of the Division of Enforcement,
including a review of how complaints are processed, internal incentives that
may affect the decision whether to take action with respect to a complaint,
an analysis of which complaints are brought to the Commissioners¹ and
Chairman¹s attention, and whether tangible and specific complaints are being
reviewed and followed-up on appropriately;
(b) The OCIE examination and inspection procedures, including an
analysis of what policies and procedures were then and are currently in
place, whether these policies and procedures are being followed and/or
whether there are gaps in these policies and procedures relating to
operations involving voluntary private investment pools, such as hedge
funds, because they are subject to limited oversight by the SEC, and whether
any such gaps may lead to fraudulent activities not being detected; and
(c) The relationships between different divisions and offices within
the Commission and whether there is sufficient intra-agency collaboration
and communication between the Agency components to ensure comprehensive
oversight of regulated entities.
Obviously, this is an ambitious investigative agenda, but I firmly believe
that the circumstances surrounding the Bernard Madoff matter may very well
dictate a more expansive analysis of Commission operations. Moreover, it is
my view that at the end of these investigative efforts, there needs to be
more than just the potential identification of individuals who may have
engaged in inappropriate behavior or potentially failed to follow-up
appropriately on complaints, but rather an attempt to provide the Commission
with concrete and specific recommendations as appropriate to ensure that the
SEC has sufficient systems and resources to enable it to respond
appropriately and effectively to complaints and detect fraud through its
examinations and inspections.
Of course, even with a limited staff and with many of our
auditors and investigators already engaged in ongoing matters, some of which
should simply not be halted even in the face of a significant priority such
as this one, I understand that it is critical that our investigative efforts
be conducted expeditiously. I fully understand that it is crucial for the
Commission, the Congress and the investing public that answers be given to
the very serious questions regarding the SEC¹s earlier efforts relating to
Mr. Madoff in a prompt and swift manner. For this reason, as I mentioned, I
am mobilizing additional resources to ensure that our Office makes every
possible effort to conclude our investigations and reviews as soon as
possible. We are considering preparing reports on a ³rolling basis²
assuming that we can identify discrete issues that may be resolved
separately and expeditiously so that some conclusions may be provided very
shortly.
Finally, I can assure you that our investigation and review will be
independent and as hard-hitting as necessary.