Congress blasts agency over Madoff 'fraud' blunders

House of Representatives members accused America’s Securities and Exchange Commission of impeding their probe into how the agency failed to uncover the alleged £35bn (€39.2bn) fraud perpetrated by Bernard Madoff.

The clash between politicians and high-ranking SEC officials came at a hearing after the whistleblower in the case, Harry Markopolos, said he had feared for his safety and would turn over new evidence to the agency showing the alleged Ponzi -pyramid – scheme mastermind had not acted alone.

Mr Markopolos, a former securities industry executive and fraud investigator, said he had discovered a dozen additional funds that funnelled money to Madoff “hiding in the weeds” in Europe.

Managers of investment “feeder” funds that relayed money to Madoff wilfully turned a blind eye to his improprieties because they were paid generous fees, Mr Markopolos said.

He plans to present his findings to the SEC’s inspector general today. If proven, they would substantiate the assertions of many analysts that the alleged fraud was far too large for Madoff to have conducted alone.

Mr Markopolos brought his allegations to the SEC about improprieties in Madoff’s business starting in 2000. He and his investigators raised 29 specific red flags regarding Madoff’s operations to SEC staff in Boston, New York and Washington.

Thousands of victims – from Hollywood celebrities to international charities - who lost money investing in Madoff’s fund, have been identified.

Madoff, a prominent Wall Street figure who had been chairman of the Nasdaq stock market, was arrested in December after allegedly confessing to his sons that he had fleeced investors in what the authorities say may be the largest ever pyramid scheme

Mr Markopolos also planned to provide information on what he called a “mini-Madoff”, another Ponzi scheme he said he’s uncovered that may have defrauded investors of as much as $1bn (€778m).

In loud, angry exchanges, politicians threatened to issue subpoenas to SEC officials to compel their testimony.

Rep Paul Kanjorski, the House Financial Services subcommittee’s chairman, vented frustration after the SEC’s acting general counsel said the five officials appearing before the panel could not answer questions about the Madoff case because it was under investigation.

The five SEC commissioners voted earlier to assert a privilege in not having officials answer questions from Congress.

Mr Kanjorski accused the agency of impeding the panel’s investigation, calling it an “abuse of authority”.

It was a blistering escalation of criticism of the SEC, which has been blasted by politicians and investor advocates over its failure to discover Madoff’s alleged Ponzi scheme despite the credible allegations brought to it by Mr Markopolos over a decade.

Against the backdrop of the worst financial crisis since the 1930s, members of both political parties are calling for a shake-up of the agency.

Linda Thomsen, the agency’s enforcement director, said the SEC took the Madoff case very seriously, but there were confidential areas related to the investigation that could not be discussed publicly.

The SEC officials said the agency was looking at possible changes in the wake of the scandal, including more frequent examinations of investment advisers and improving its process for assessing risk.

US president Barack Obama’s new SEC chief, Mary Schapiro, has pledged to revitalise the agency’s enforcement efforts.

Ms Schapiro told Mr Kanjorski and Rep Scott Garrett of New Jersey, the panel’s senior Republican, in a letter last night that the hearing “cannot have been satisfactory for you” and offered to set up a meeting to discuss information that could be provided without compromising the investigation of Madoff.

“There needs to be a full accounting, both of Mr Madoff’s activities and of why we did not detect the fraud, which we truly regret,” Ms Schapiro wrote.

Mr Markopolos told Congress members that because of the SEC’s failure to act on his information on Madoff, “I became fearful for the safety of my family”.

“The SEC is ... captive to the industry it regulates and is afraid” to bring big cases against prominent individuals, he said.

While the SEC was incompetent, the securities industry’s self-policing organisation, the Financial Industry Regulatory Authority, was “very corrupt”, Mr Markopolos claimed.

That organisation was headed until December by Ms Schapiro, who has said Madoff carried out the scheme through his investment business and FINRA was empowered to inspect only the brokerage operation.

In New York yesterday, a trustee liquidating Madoff’s investment firm told a federal judge that nearly £660m (€740m) in cash and securities had been recovered for investors.

European investors who feared they lost millions investing with Madoff have a chance to recoup some or all of their money from the banks that marketed the stricken funds, according to lawyers in Europe who are preparing a possible US-style class-action lawsuit.