SEC Didn’t Act on Madoff Tips
December 16th, 2008Imagine my shock.
Friehling and Horowitz… Just where is that rabbit hole going to lead?
Via: Washington Post:
The Securities and Exchange Commission learned about what it describes as one of the largest securities frauds in history when Bernard L. Madoff volunteered his confession, raising questions about the agency’s ability to police the financial marketplace.
The SEC had the authority to investigate Madoff’s investment business, which managed billions of dollars for wealthy investors and philanthropies. Financial analysts raised concerns about Madoff’s practices repeatedly over the past decade, including a 1999 letter to the SEC that accused Madoff of running a Ponzi scheme. But the agency did not conduct even a routine examination of the investment business until last week.
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Others said that the SEC should have flagged Madoff for examination no later than the moment he registered as an investment adviser, in 2006, because of the history of complaints against his firm and because of its unusual characteristics. These included Madoff’s history of smooth earnings — above 10 percent a year, every year — and his company’s reliance on a small auditing firm that had no other large Wall Street clients.
Aksia, a New York-based consulting firm that advises institutional investors about hedge funds, found that Madoff’s auditor worked out of a 13-foot-by-18-foot office in Rockland County, N.Y., with only three employees. The employees of the firm, which had only Madoff as a client, included a 78-year-old living in Florida and a secretary, Aksia said it discovered. The auditor, Friehling and Horowitz, did not respond to a request for comment.
“If it’s true that the SEC had begun receiving warnings in 1999, then even if they did nothing before then, surely when he registered with them in 2006, he should have gone to the top of their list,” said Barbara Roper of the Consumer Federation of America.
Madoff avoided scrutiny despite the dogged bell-ringing of a Boston accountant, employed by another investment firm, who repeatedly accused Madoff of breaking the law in a series of letters to the SEC that began in 1999. The accountant, Harry Markopolos, said he sent his most recent letter in April.
A former SEC enforcement official said the letters should have raised red flags for regulators.
He said that investigating a Ponzi scheme is not difficult: The agency can simply demand proof that the investment adviser holds the amount of money he claims to hold. And he added that regulators also should have noticed that Madoff was audited by a tiny company with no reputation. He said there are only a few accounting firms with the sophistication to audit an investment adviser that, at the time of registration with the SEC, reported $17 billion on assets.
Regulators should have noticed instantly, he said, that Madoff’s auditor was not on the list.
