A US financial watchdog chief said his agency repeatedly failed for at least a decade to pursue allegations of wrongdoing by Wall Street figure Bernard Madoff, the alleged perpetrator of a $50bn (€35.63bn) pyramid scheme.
Securities and Exchange Commission chairman Christopher Cox ordered an investigation by the SEC’s inspector general, saying the agency’s staff had never brought the Madoff matter to the attention of commissioners.
Since the SEC staff never recommended that the commission open a formal investigation, subpoena power was not used to obtain information and the staff relied on information voluntarily produced by Madoff and his firm.
“I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them,” Mr Cox said.
In a forceful condemnation of the SEC staff, Mr Cox said there had been credible and specific allegations regarding Madoff’s financial wrongdoing going back to at least 1999.
The SEC chairman’s criticism of his own agency marks only the latest instance in which US regulators have overlooked clear warning signs of possible fraud.
Its oversight of the Wall Street investment houses drew significant criticism. A review by the SEC inspector general determined that the agency’s monitoring of the five biggest Wall Street firms, which included Bear Stearns, was lacking.
Mr Cox’s statement on Madoff was a stunning declaration in a scandal that has produced a series of dramatic developments.
Shock waves from the Madoff affair have radiated around the globe as the number of prestigious charitable foundations, big international banks and individual investors said to have fallen victim to an unprecedented fraud has grown. US investigators are labouring to deconstruct the scheme.
The SEC chairman alleged that Madoff kept several sets of books and false documents, and provided false information involving his advisory activities to investors and to regulators.
Stephen Harbeck, chief executive of the Securities Investor Protection Corporation, said that there are different sets of books that investigators are sorting through – one set tracks the losses at the firm’s investment advisory arm, while another is what investors were shown.
Mr Harbeck is helping to oversee the liquidation of the firm, Bernard L Madoff Investment Securities.
Mr Cox also ordered the removal from the ongoing investigation of any SEC staff members who have had contact with Madoff or his family.
Madoff remains free on $10m (€7.13m) bail.
Since his arrest on Thursday, the SEC has been under increasing pressure to explain why it did not uncover the prominent Wall Street figure’s alleged criminal activity years ago.
Hours before Mr Cox denounced his own staff, a former SEC chief accountant, Lynn Turner, said: “I can’t comprehend how a well-run investigation would have missed a fraud of this magnitude.”
In the Madoff case, a securities executive, Harry Markopolos, complained to the SEC’s Boston office in May 1999. Mr Markopolos told the SEC staff they should investigate Madoff because he felt it was impossible for the kind of profit he was making to have been gained legally.
But the SEC’s Boston office has itself been accused in the past of brushing off a whistle-blower’s legitimate complaints, in a case that led the head of that office to resign in 2003.
Several major banks have confirmed their exposure to the alleged scam running into hundreds of millions of pounds, including Spain’s Santander, plus Britain’s HSBC and Royal Bank of Scotland.