International Law

SEC Officials Grilled on Madoff Shortcomings

Image via Wikipedia

What can we reasonably expect from our regulators? Cristina McEachern, writing at Advanced Trading, writes about the recent Senate hearings about the Madoff fraud.

"While the risk assessment process is a key area to deter and catch potential fraud, following up on tips and complaints received by the Commission was also a big topic seeing as many complaints were filed with the SEC regarding Madoff's operations.

Thomsen testified that the SEC receives "hundreds of thousands of tips each year," and they obviously do not have the resources to fully investigate all of them.

Senator Dodd focused on the complaint lodged by Harry Markopolos in 2005 entitled, "The World's Largest Hedge Fund is a Fraud," a 19-page step by step outline of potential fraud by Madoff and asked why such a seemingly straightforward, strong piece of information did not lead to an investigation.

The SEC's Thomsen said that many of the tips the SEC receives are "written in language similar to the language in Mr. Markopolos'," and that they are not evidence in and of themselves.

But she could not comment specifically on the path of the Markopolos tip once it reached the SEC and who saw it or what action if any was taken.

When asked how exactly complaints are prioritized and what would signal a high priority complaint Thomsen said it was important to pursue the complaints that are the most "fruitful."

She explained that the SEC looks at several angles such as the gravity of the allegations with more serious misconduct more likely to get heavy scrutiny.

The more specific the information provided in a complaint would also make it more likely to be pursued."

The regulator responds to complaints, complaints which are so detailed and numerous it means that the fraud has run its course.

The fraud has run its course means that a significant number of individuals have lost money.

The regulator cannot prevent fraud; it shuts down the fraud after numerous complaints have been made.  The residual left in the criminal's estate goes to pay the regulator and is not returned in any significant amount to the victims.

The only serious questions is why we would think otherwise?  Why do we continue to pretend that regulators are designed to prevent fraud as opposed to cleaning up the mess, quickly and quietly so as to prevent too many people wondering if fraud is greater than first thought.

Full post as published by Misleading Advertising Law on February 02, 2009 (boomark / email).