Watchdog: SEC Screwed Up on Madoff

In a stinging new report, the inspector general for the Securities and Exchange Commission (SEC)reveals how the agency's "inexperienced" attorneys missed Bernard L. Madoff's colossal scam and believed Madoff's answers to their questions even when they were "seemingly implausible." Yet Inspector General David Kotz did not find any evidence of corruption at the agency - citing incompetence instead.

Kotz concludes that the agency's repeated investigations and clearing of Madoff served to increase Madoff's credibility with investors who believed that if the SEC had found no wrongdoing then Madoff's business had to be clean.

The report describes how Madoff tightly controlled who spoke to SEC investigators. In one meeting, a Madoff employee was yanked out of the room because she was "urgently needed." Later Madoff told SEC investigators the woman had to go to lunch.

Read SEC Inspector General's Full Report

The report also notes that Madoff repeatedly intimidated SEC attorneys noting his relationships with the higher-ups at the agency even going so far as to say "that Madoff himself 'was on the short list' to be the next Chairman of the SEC." However, when SEC attorneys reported Madoff's repeated pushbacks to their superiors "they received no support."

Senator Charles Grassley, ranking member of the Senate Finance Committee reacted to the report: "The SEC's utter failure to follow up aggressively on detailed and specific information about Madoff's fraud is further evidence of a culture of deference toward the Wall Street elite at the SEC."

The report says that the agency's investigative efforts of Madoff were so uncoordinated that two SEC offices were running two investigations of Madoff at the same time and only discovered this when Madoff "informed one of the examination teams that the other examination team had already received the information they were seeking from him."

The inspector general notes that "at no time did the SEC ever verify Madoff's trading through an independent third-party." The report also notes that SEC attorneys investigated too narrowly and never "seemed to have considered the possibility that Madoff could have taken the money."

Of particular concern was whether or not the relationship between Madoff's niece Shana Madoff and SEC Enforcement attorney Eric Swanson had contributed to the SEC lack of oversight. Kotz concludes that there was no evidence of improper interference into the SEC's Madoff investigations by Swanson or any other staffer with ties to Madoff.

Read more coverage of Bernard Madoff on CBSNews.com:

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The SEC investigated Madoff five times over 16 years and failed to detect the Ponzi scheme. Notably, even when SEC enforcement attorneys were handed a step by step roadmap of the Madoff scam by securities expert Harry Markopolos, they did not uncover the fraud that left thousands bankrupt overnight.

But Markopolos was not the only one. This anonymous letter was sent to SEC Chairman Christopher Cox not once, but twice noting, "It may be of interest to you that to know that Mr. Bernard Madoff keeps two (2) sets of records. The most interesting of which is always on his person." CBS News was the first to report on this letter back in February, 2009 noting at least seven other complaints made to the SEC regarding Madoff since 2001.

The SEC only released the executive summary of Kotz's full report. Sources tell CBS News that the rest of the report is still under review by members of the Commission, Justice Department and the SEC's Enforcement Division.

Simona Suh, one of the SEC attorneys who signed the agency's "closing document" that cleared Madoff by saying the "staff found no evidence of fraud," still works for the commission.

But two top SEC officials who had oversight of multiple Madoff investigations have already left the commission. SEC Enforcement Director Linda Thomsen left the agency in early 2009. Lori Richards, head of the SEC Office of Compliance Inspections and Examinations stepped down in early July. Richards had recused herself from the Madoff investigation for having attended a Madoff family wedding.

Kotz's investigative team interviewed over a hundred people including a three hour sit down interview with Madoff himself when he was in jail in Manhattan. They also scrutinized millions of emails and hired a consultant who could advise on how to retrieve deleted emails from the SEC's email system.

Kotz also hired an outside firm that specializes in examining broker dealers to see if the fraud should have been obvious to SEC enforcement attorneys.

Two more reports related to Madoff and the SEC are expected from Kotz at a later date but unlike today's report they will be forward looking reports examining what needs to change in order to prevent these kinds of failures in the future.