And so we see, SEC didn't bother to even investigate Madoff-largest ponzi scheme ever

SEC chairman says agency failed to probe Madoff

WASHINGTON – In a stunning rebuke, the Securities and Exchange Commission chairman blames his career regulators for a decade-long failure to investigate Wall Street money manager Bernard L. Madoff, now accused of running one of the largest Ponzi schemes ever.

On Tuesday night, SEC Chairman Christopher Cox ordered an internal investigation of what went wrong and offered a scathing critique of the conduct of his staff attorneys. He said they never bothered to seek a formal commission-approved investigation that would have forced Madoff to surrender vital information under subpoena. Instead, the staff relied on information voluntarily produced by Madoff and his firm.

Credible and specific allegations regarding Madoff's financial wrongdoing going back to at least 1999 were repeatedly brought to the attention of SEC staff, said Cox.

A former SEC attorney, Eric Swanson, married Madoff's niece, Shana, last year, The Wall Street Journal reported. The SEC's compliance office issued a statement Wednesday saying that Swanson was part of a team that looked into Madoff's securities brokerage operation in 1999 and 2004. The SEC cited its "strict rules" prohibiting employees from participating in cases involving firms where they have a personal interest.

The SEC's inspector general, David Kotz, told the Journal that he intends to examine the relationship between Madoff's niece and Swanson.

Madoff remains free on $10 million bail. A hearing is scheduled in federal court in New York on Wednesday afternoon to iron out the terms of his bail package.

Shock waves from the Madoff affair have radiated around the globe as a growing number of prestigious charitable foundations, big international banks and individual investors acknowledge falling victim to an unprecedented fraud.

"I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them," Cox said in a written statement.

The SEC chairman said Madoff kept several sets of books and false documents, and provided false information involving his investment advisory activities to investors and to regulators.

Separately, Stephen Harbeck, chief executive of the Securities Investor Protection Corporation, said one set of Madoff's books kept track of the losses at his investment advisory arm, while the other is what investors were shown.

SIPC, created by Congress and funded by the securities industry, can give customers up to $500,000 if it is determined their money was stolen. SIPC has about $1.6 billion to make payouts, which means that amount could quickly be depleted in the Madoff case where losses could reach $50 billion. That figure comes from the SEC's court complaint, which quotes Madoff admitting to losses in that amount to two senior employees of his firm before his arrest last Thursday.

Cox's harsh assessment may have the effect of shifting questions away from the politically appointed five-member commission and placing blame squarely — if not solely — on the agency's staff for failing to aggressively pursue a massive fraud.

Cox's statement is sure to fuel a new criticism of the SEC, an agency increasingly seen in Congress and elsewhere as incapable of carrying out its basic mission: to ensure a basic level of honesty on Wall Street.

Cox spelled out the taint produced by the previous failure to aggressively pursue Madoff: The SEC commission chairman ordered removal from the Madoff criminal investigation of any SEC staff members who have had contact with the prominent Wall Street figure or his family.

Cox's strong statement came as at least two senators signaled they have lost patience with the SEC.

"They were asleep at the switch," Sen. Charles Grassley, R-Iowa, said of the SEC's failure to uncover Madoff's alleged fraud.

As Grassley had urged, Cox ordered the SEC's inspector general to conduct the internal probe of his agency's inaction.

Sen. Jack Reed, D-R.I., said the problems go much deeper.

The Madoff affair "illustrates the lack of credible enforcement over several years by the SEC," said Reed, who chairs the Senate banking panel that oversees the SEC. He criticized the agency's "lack of a strong commitment to be vigilant."

Shortly before Cox denounced his own staff, a widely respected former SEC chief accountant, Lynn Turner, aired her own skepticism. "I can't comprehend how a well-run investigation would have missed a fraud of this magnitude," Turner said.

The Madoff scandal is just the latest instance in which SEC regulators have overlooked clear warning signs of possible fraud.

An earlier review by the SEC inspector general determined that the agency's monitoring of the five biggest Wall Street firms, which included Bear Stearns, was lacking.

Cox himself has come in for strong criticism.

In March, a few days before Bear Stearns nearly collapsed into bankruptcy, Cox told reporters the agency was closely monitoring the five investment firms and had "a good deal of comfort" in their capital levels. Then, as federal officials orchestrated the rescue, Bear Stearns was bought by rival JPMorgan Chase with a $29 billion government backstop.

As for Madoff, the SEC's enforcement division looked into Madoff's business last year. Until Tuesday night, the SEC had refused to criticize the inaction that followed last year's probe.

Damaging the SEC's credibility in the Madoff case was the fact that a securities executive, Harry Markopolos, complained to the SEC's Boston office in May 1999. Markopolos told the SEC staff they should investigate Madoff because Markopolos felt it was impossible for the kind of profit he was reporting to have been gained legally.

But the SEC's Boston office has itself been accused in the past of brushing off a whistle-blower's legitimate complaints, in a case that led the head of that office to resign in 2003. The whistle-blower, Peter Scannell, eventually persuaded state regulators and the SEC to act against mutual fund giant Putnam Investments, where Scannell worked.

SEC New Rules for Credit-Rating Agencies --Still not enough

SEC adopts new rules for credit-rating agencies
Wednesday December 3, 11:43 am ET
By Marcy Gordon, AP Business Writer
SEC adopts new rules aimed at stemming conflicts in credit-rating industry

WASHINGTON (AP) -- Federal regulators on Wednesday adopted new rules designed to stem conflicts of interest and provide more transparency for Wall Street's credit-rating industry, widely faulted for its role in the subprime mortgage debacle and ensuing credit crisis.
The action by the five-member Securities and Exchange Commission was another government response touching on the global financial crisis set off by mortgage securities. The commissioners voted unanimously at a public meeting to adopt the new rules.

SEC Chairman Christopher Cox called adoption of the new rules "a significant and substantive action" that affects every aspect of the rating agency business and will give the investing public access to a trove of new information while promoting needed competition in the industry. After nearly a century of policing itself, the industry came under SEC oversight through a 2007 law.

The three firms that dominate the $5 billion-a-year industry -- Standard & Poor's, Moody's Investors Service and Fitch Ratings -- have been widely criticized for failing to identify risks in subprime mortgage investments, whose collapse helped set off the global financial crisis.

The rating agencies had to downgrade thousands of securities backed by mortgages as home-loan delinquencies have soared and the value of those investments plummeted. The downgrades have contributed to hundreds of billions in losses and writedowns at major banks and investment firms.

The agencies are crucial financial gatekeepers, issuing ratings on the creditworthiness of public companies and securities. Their grades can be key factors in determining a company's ability to raise or borrow money, and at what cost which securities will be purchased by banks, mutual funds, state pension funds or local governments.

The SEC commissioners last June proposed the new rules and opened them to public comment.

Among other things, the conflict-of-interest rules ban the rating agencies from advising investment banks on how to package securities to secure favorable ratings. Gifts over $25 from clients also will be prohibited.

Rating agencies will be banned from making ratings in cases where the agency made recommendations to the company issuing securities or the investment bank underwriting them concerning the corporate structure, assets or activities of the issuing company.

In addition, rating agencies will be required to disclose statistics on all their upgrades and downgrades for each asset type. They also will have to disclose how much verification they performed on the quality of complex securities, such as those underpinned by mortgages, student loans or auto loans, in determining ratings for them.

Investors will receive detailed information on the ratings process for complex securities, thereby exposing potential conflicts of interest for the agencies, SEC officials said.

The SEC commissioners also voted to propose and open to public comment other rules that would require rating agencies to disclose in interactive electronic format the ratings history information for all of their assessments that companies issuing the securities pay them to do.

Some critics, including investor advocates, say the SEC rules don't go far enough. They want new requirements to govern how the rating agencies are paid and to provide for the suspension of their licenses if they engage in unfair practices.

The agencies say they already have taken steps to increase transparency and will continue to make further enhancements in the future.