Senate Grills SEC Officials On Madoff
It was a dramatic reminder that not every victim of Bernie Madoff was a Hollywood celebrity or Wall Street tycoon, reports CBS News correspondent Wyatt Andrews.
Dr. Henry Backe, a Connecticut orthopedist, told the Senate Banking Committee his entire staff of 140 doctors, nurses, clerks and technicians lost their pension fund, $33 million worth, invested with Madoff's firm.
"Some of them are single moms," Backe said. "Some of them are close to retirement. Some of them were counting on this money."
Even as Madoff's victims recounted how they were ruined by his scheme, two officials from the Securities and Exchange Commission said they couldn't discuss Madoff or how his Ponzi scheme went undetected - to the frustration of the Senators.
The SEC officials defended their silence by citing internal and criminal investigations and described the agency as dedicated to preventing fraud, but overwhelmed by the sheer volume of investigations, with just 425 examiners tracking hundreds of thousands of tips every year alleging fraud, Andrews reports.
"We simply do not have the resources to investigate them all," said SEC Director of Enforcement Linda Thomsen.
Several senators said the SEC ignored the red flags and botched the Madoff investigation, Andrews reports. For example, a 2005 letter to the SEC from derivatives expert Henry Markopolous - mapping out the Madoff scam - was ignored. The senators also cited a report from SEC investigators complaining Madoff had "misled the examination staff about the nature of the (investment) strategy."
As Congress attempts to get to the bottom of the scandal, Sen. Christopher Dodd, chairman of the Senate Banking Committee, is asking regulators to report frequently to the panel on their progress to improve fraud detection after their failure to discover the multibillion-dollar pyramid scheme allegedly hatched by Madoff.
At a hearing Tuesday, Dodd, the Connecticut Democrat, closely questioned the enforcement director of the Securities and Exchange Commission and another SEC official as well as the interim chief executive of the Financial Industry Regulatory Authority, the securities industry's self-policing organization.
"What's happened here?" Dodd asked. He said he wanted action "very quickly in this area." He asked the regulators to report every three months to the committee on improvements they were making.
Meanwhile, the top cop at the Securities and Exchange Commission told Congress the agency is committed to finding ways to bolster fraud detection after its failure to discover the multibillion-dollar pyramid scheme allegedly hatched by Madoff.
Thomsen, the SEC's enforcement director, said the agency needs to improve its internal processes for pursuing cases.
She said the agency also needs authority to regulate parts of the financial system that escape oversight and more funding to carry out more investigations.
"While we always do our utmost to do more with less, if we had more resources, we could clearly do more," Thomsen said in prepared testimony for a Senate Banking Committee hearing. The hearing is Congress' first opportunity to question federal regulators responsible for inspecting investment firms and taking enforcement action against fraud.
Lori Richards, who heads the SEC's inspections office, said agency officials are thinking "expansively and creatively" about changes that could improve the detection of fraud.
CBS News investigative producer Laura Strickler reports Richards has recused herself from the Madoff investigation.
The SEC confirmed the recusal to CBS News but would not disclose why Richards had chosen to remove herself from the inquiry. An SEC spokesperson would not say if any other SEC staff had recused themselves.
The SEC has faced heavy criticism over its failure to discover the $50 billion Ponzi scheme allegedly run by Madoff, the prominent Wall Street figure and money manager now fallen into disgrace - despite credible allegations against him that were brought to the agency over the course of a decade.
Against the backdrop of the worst financial crisis since the 1930s, the SEC also is accused of contributing to that disaster with lax oversight of Wall Street and the markets. Lawmakers of both parties are calling for a shake-up of the agency to help restore investor confidence.
Also appearing before the banking panel Tuesday was Stephen Luparello, the interim chief executive of the Financial Industry Regulatory Authority, the securities industry's self-policing organization.
Dodd, the panel's chairman, recently asked Mary Schapiro - President Barack Obama's newly confirmed chairman of the SEC - about the failure of the industry regulatory agency to detect the alleged Madoff fraud in its inspections of his brokerage operation. Schapiro, who has led FINRA since 2006, said that the matter went undiscovered because the scheme was carried out through Madoff's investment business and FINRA was empowered to inspect only the brokerage operation.
After acknowledging last month that staff members at the SEC repeatedly had failed since at least 1999 to fully investigate Madoff's operations, then-SEC Chairman Christopher Cox ordered the agency's inspector general, H. David Kotz, to determine what went wrong. Kotz told a House hearing recently that he was expanding the inquiry to examine the operations of the divisions led by Thomsen, who has been the enforcement chief since mid-2005, and Richards, who has held that position since mid-1995.
Follow the Madoff Money Trail
A look at the people and institutions that have lost millions in the alleged Bernie Madoff Ponzi scheme.
Kotz has also been examining the relationship between a former SEC attorney, Eric Swanson, and Madoff's niece, Shana, who are now married. As an SEC attorney, Swanson was part of a team that examined Madoff's brokerage operation in 1999 and 2004. Neither review resulted in any action against Madoff, a former chairman of the Nasdaq Stock Market who was a member of SEC advisory committees.
Lawmakers say Madoff's alleged fraud, which caused massive damage to investors large and small around the world and may be the largest pyramid scam in history, reflects deep, systemic problems at the SEC.
The Banking Committee is examining the case "to determine how so many people could have been deceived and how such a massive fraud could have gone undetected for so long," Dodd said. "American investors deserve an explanation and the responsible parties must be held accountable. I am hopeful that our findings will also help inform our efforts to improve regulation so that such abuses do not occur in the future."
The committee has requested an extensive array of documents related to Madoff from the SEC.
Six weeks after Madoff's arrest in New York, thousands of victims who lost money investing with him have been identified - including ordinary people and Hollywood celebrities - as well as big hedge funds, international banks and charities in the U.S., Europe and Asia.
In Brussels, Belgium, on Monday, the European Union said it will check investor protection rules in all 27 member nations after France complained of lax standards that saw French investors lose billions of euros in the scandal. The review should clarify how far European funds could be held responsible for placing client money with Madoff - and whether they could be ordered to compensate investors.