Inspector General H. David Kotz testified before a House panel examining the Madoff affair and the agency's failure to act despite receiving complaints over a decade.
In prepared testimony for the Monday afternoon hearing, Kotz said his office's probe will go beyond specific issues that SEC Chairman Christopher Cox asked him to investigate. He said that it also will examine the operations of the SEC's enforcement and inspection divisions and will make recommendations.
The Securities and Exchange Commission received complaints about Madoff's investment methods going back to at least 1999. Lawmakers tried to learn why the regulatory agency failed to detect the alleged investment fraud.
At the start of the hearing, Democrat Paul Kanjorski of Pennsylvania questioned whether congressional appropriations had given the agency sufficient resources to do the job. From 1995 to 2007, Congress was under Republican control.
"Clearly, our regulatory system ... failed miserably and we must rebuild it now," said Kanjorski.
Rep. Spencer Bachus, R-Ala., pointed to regulatory gaps rather than the level of congressional appropriations as the reason for the Madoff scandal.
Bachus called for Congress to create a regulatory structure "for the 21st century."
The SEC chairman, Christopher Cox, has said credible and specific allegations regarding Madoff's wrongdoing were repeatedly brought to the attention of SEC staff. Cox said he was concerned by the apparent multiple failures to thoroughly investigate the allegations or at any point to seek formal authority from the commission to pursue them.
Kanjorski said in an interview Sunday, "I hope this doesn't turn out to be a 'gotcha' hearing." Rather, he said, lawmakers will be asking, "Where were the failures? Where were the holes?"
He said Cox's statements on staff failures were a surprising indictment of his own agency.
"Why didn't they have a working group saying, 'OK guys, what are you hearing out there? What are people on the street complaining about?'"
The lawmaker said existing regulation of the financial industry is divided among different agencies that fail to communicate with each other. For instance, he said banks were among the Madoff investors and they are not regulated by the SEC. Kanjorski said he wants to learn whether banking regulators also received warnings.
Lawmakers also will question Stephen Harbeck, president of the Securities Investor Protection Corp.
The SIPC attempts to help investors recoup their money. It was created by Congress in 1970 to protect investors when a brokerage firm fails and cash and securities are missing from accounts. Funds can be used to satisfy the remaining claims of each customer up to a maximum of $500,000. The figure includes a maximum of up to $100,000 on claims for cash.
Burned Madoff investors could be hoping for a bailout that may not come. SIPC doesn't have enough money to pay out all the claims that are sure to come from one of the biggest fraud cases to ever hit Wall Street. Securities attorneys say the organization has a reputation of being tough to squeeze money from.
Allan Goldstein was set to tell the panel he lost his entire life savings with Madoff and had to cash in his life insurance policies to cover his mortgage.
"Everything I worked for over a 50-year career is gone," Goldstein said in an e-mail message from his attorney's firm. He said he had no reason to question the steady returns of 8 percent to 12 percent a year that Madoff's firm told him he was earning.
The SIPC mailed out 8,000 claims forms Friday. The bankruptcy court overseeing the liquidation set an initial deadline of March 4 for claims to be filed. Any forms received between March 4 and July 2 will be subject to delayed processing and possibly less-than-favorable satisfaction of terms.
Forms and instructions are also available on the SIPC's Web site.
Trustee Irving Picard will oversee the liquidation of assets from Madoff's investment firm as the SIPC attempts to help investors recoup their money. Aside from recovering money through the liquidation of Madoff's investment firm and the SIPC, investors could get some money back if some of Madoff's personal assets are sold. Last week, Madoff provided a list of his personal assets to the Securities and Exchange Commission. Details of the asset list were not disclosed.
Madoff's personal wealth is said to be substantial. He had mansions in the Hamptons and Palm Beach, Florida, a penthouse in Manhattan and a handful of luxury yachts. His firm operated proprietary stock trading desks in New York and London that were supposedly investing the family's vast fortune.