Maddoff and the SEC

January 11, 2009 at 11:44 pm 2 comments

      I am back!  While I took a nice and relaxing holiday break, the news certainly didn’t, so I have a lot to catch up on.  Are you ready for the latest question? 

      Does Bernard Maddoff spell the end of the SEC?

      Assuming that this question looks like Latin to you (as it did to me when first assigned!), let’s back up a bit.

      Mr. Maddoff has been running an (complex) financial investment firm, Bernard L. Maddoff Investment Securities LLC, since the 1960s.  According to the Wall Street Journal, his firm is a “successful market maker” – meaning it is a middleman and creates trades of stocks and securities.  But he was also advising people on their investments and managing them, a business he managed to hide for quite a while from the SEC – the Securites and Exchange Commission – which was supposed to keep tabs on such businesses.

       In 1970, he began what is known as a Ponzi scheme – paying old investors with money from new investments.  A scheme like this obviously needs a constant stream of new investors to continue, and Mr. Maddoff is coy and savvy.  He offered steady but modest gains, and built up a reputation as a trusted manager that handled the investments of many famous and wealthy people.  His business was obviously much more complex than this brief overview, including third-party funds that invested their client’s money with him, and overseas transactions, but the point I’m getting to is that Maddoff ran this Ponzi scheme for nearly forty years, and lost $50 billion in the process.  (A number that I can’t even begin to imagine!)

       Over the years, the SEC investigated Maddoff’s business roughly every other year on a variety of charges.  Sometimes they would see that he hadn’t been agreeing with the law on a few minor points (i.e., if you handle the investments of more than 14 people you are required to register your business with the SEC; Maddoff had 16 clients at that point and hadn’t registered), but always let Maddoff off the hook, and he always promised to comply with whatever rules he’d been ignoring. 

       In 1999, the former chief investiment officer of Maddof’s rival firm, Mr. Markopolos, began warning the SEC that Maddoff’s investments simply didn’t add up and this could be a giant Ponzi scheme.  In 2005, he wrote a letter elaborating on this and offering two fraudulant scenarious that would explain Maddoff’s records.  The second scenario, a Ponzi scheme, was “highly likely”.  (WSJ)  The SEC investigated, and didn’t find much to be concerned with.

       Need I say that America isn’t too happy with them right now? 

       And it gets even more complicated – Maddoff had some SEC ties.  He had once served on an SEC advisory board.  He was a big donator to Democrats who sponsored tighter regulation, a move probably intended to throw suspicion even farther from himself.  And his niece (who may be the one mentioned that works at his firm) is married to someone on the SEC  

      Hmmmm.  This Commission is also taking a lot of heat for the credit crisis, not regulating the Wall Street titans that have since toppled.  Now, not only have they proved that they can’t uncover sour deals in complex negotiations such as the ones that were happening on Wall Street, they can’t even uncover one of history’s most basic frauds, the Ponzi scheme.  As the Wall Street Journal says concisely, “Concern that the SEC lacks the expertise to keep up with fraudsters is the latest criticism of the agency… With Congress likely to take a hard look at how to structure oversight of financial markets, the SEC is struggling to maintain its clout.”

      Bernard Maddoff may spell the end of the SEC – or at least, the end of what it is today.  It will most likely lose power over the coming months to other offices, such as the U.S. Treasury.

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2 Comments Add your own

  • 1. Mr. Leonard  |  January 12, 2009 at 4:39 am

    Hi Megan! Jessina told me I might be interested in your blog so I checked it out. Very impressive! You did a great job of researching the Madoff Mess. I doubt that the SEC will be eradicated despite their abject failure to catch Madoff, whose operations should have been a huge red flag waving in the SEC’s face. Once a governement agency gets set up, they seem impossible to close down, no matter how strong the justification for doing so is. I sure so hope that we eventually get some new leadership there and suffecient funding for them to pursue the bad guys as Madoff as wellas the SEC’s failure to cathc him, has really hurt the reputation of our country with foreign investors on whom we depend to buy our debt that finances a good portion our government’s operations. This disaster makes us look like a banana republic! I am not much of a fan of government regulation but I am afraid the reaction to this debacle will be to increase regulations too much which will actually end up not killing off the SEC but giving it more power! I bet your Dad has some excellent thoughts on all of this – did he assign the subject?

    Reply
  • 2. meowkats4  |  January 13, 2009 at 6:33 pm

    Well, my saying for Madoff goes.. Madoff “made off” with the money! The people who were scammed are not getting it back.

    I don’t know much about the SEC, but many government departments need to be looked into. I pray and hope Obama will do what he said check programs line by line and get rid of the ones that don’t work. Lets hope he does more then check line by line. Hey, this could mean more jobs? Not more government?????

    Reply

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