Lax Oversight At Securities & Exchange

[Orange_Juice]

No wonder we are having so many problems on Wall Street, the wolves were in charge of the hen house. The free market can regulate itself?

http://www.nytimes.com/2008/12/25/business/25fraud.html?_r=1&th&emc=th

WASHINGTON — Federal officials are bringing far fewer prosecutions as a result of fraudulent stock schemes than they did eight years ago, according to new data, raising further questions about whether the Bush administration has been too lax in policing Wall Street.

Legal and financial experts say that a loosening of enforcement measures, cutbacks in staffing at the Securities and Exchange Commission, and a shift in resources toward terrorism at the F.B.I. have combined to make the federal government something of a paper tiger in investigating securities crimes.

At a time when the financial news is being dominated by the $50 billion Ponzi scheme that Bernard L. Madoff is accused of running, federal officials are on pace this year to bring the fewest prosecutions for securities fraud since at least 1991, according to the data, compiled by a Syracuse University research group using Justice Department figures.

 

[Chris]

The SEC was warned numerous times about Madoff and did nothing.

 

[editec]

The SEC was warned numerous times about Madoff and did nothing.

During the REAGAN administration the (then) recently understafffed actually audited his books and found no problems.

What a surprise.

 

[mash107]

No wonder we are having so many problems on Wall Street, the wolves were in charge of the hen house. The free market can regulate itself?

Since when is the free market free when there's an SEC giving false hope to everyone?

 

[KittenKoder]

The free market isn't a bad idea, the problem is those who regulate the market now and have been for awhile. You think these 'bailouts' are all the government has done to trump up some corporations?

 

[editec]

The SEC was warned numerous times about Madoff and did nothing.

No, that's not entirely true according to the reports I read.

source

In 1992, the SEC investigated one of Madoff's feeder funds, Avellino & Bienes, which invested solely with Madoff.[44] Avellino & Bienes was accused of selling unregistered securities, and in its report the SEC mentioned the fund's "curiously steady" promised yearly returns to investors of 13.5% to 20%; however, the SEC did not look any more deeply into the matter.[44] Avellino shut down in 1993, with investors receiving their money back.[44] At the time, Madoff said that he didn't realize the feeder fund was operating illegally and that his own investment returns tracked the previous 10 years of the S&P 500.[44] Avellino & Bienes, previously an accounting firm, had turned to full-time investments in 1984 in a partnership with Madoff.[44] At the time of the investigation, the SEC did not publicly name Madoff because he was not accused of wrongdoing.[55] Michael Bienes later became a philanthropist donating at least $30 million in Florida and the United Kingdom, with a news report explaining that he "got lucky on the New York Stock Exchange."[56]

The SEC said it conducted two inquiries of Madoff in the last several years and did not find major problems.[57] An SEC statement detailed that inspectors examined Madoff's brokerage operation in 2005, finding three violations of rules requiring brokers to obtain the best possible price for customer orders, while in 2007, SEC enforcement staff completed an investigation and did not refer the matter to the SEC commissioners for legal action.[58]

As a result, the SEC's chairman Christopher Cox has said that an investigation will ensure into "all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by staff regarding the firm."[59] A former SEC compliance officer, Eric Swanson, married Madoff's niece Shana, a Madoff firm compliance attorney.[59]

[edit] Red flags

Outside analysts raised concerns with Madoff's firm for years.[10] Financial analyst Harry Markopolos complained to the SEC's Boston office in May 1999 telling the SEC staff they should investigate Madoff because it was impossible to legally make the profits Madoff claimed using the investment strategies that he claimed to use. In 2005 Markopolos sent a detailed 17 page memo directly to the SEC, entitled The World's Largest Hedge Fund is a Fraud.[60] In part, the memo concluded: "Bernie Madoff is running the world's largest unregistered hedge fund. He's organized this business as "hedge fund of funds privately labeling their own hedge funds which Bernie Madoff secretly runs for them using a split-strike conversion strategy getting paid only trading commissions which are not disclosed." If this isn't a regulatory dodge, I don't know what is."

Among the suspicious signs was the fact that Madoff's company avoided filing disclosures of its holdings with the SEC by selling its holdings for cash at the end of each period.[10] Such a tactic is highly unusual. Madoff's use of a small auditing firm, Friehling & Horowitz, which has only one active accountant, is also highly unusual and was noted by hedge fund advisory fund firm Aksia LLC when it advised its clients in 2007 not to invest with Madoff.[61][62] Friehling & Horowitz has reported since 1993, in writing, to the American Institute of Certified Public Accountants that it doesn't conduct audits.[63] David Friehling assumed control of the firm from partner Jerry Horowitz, his father-in-law, who reportedly did accounting work for Madoff for decades.[29][62]

While hedge funds typically hold their portfolio at a securities firm that acts as the fund's prime broker (typically a major bank or brokerage), allowing an outside investigator to verify their holdings, Madoff's firm was its own broker-dealer and supposedly processed all its trades.[47]
Although Madoff was a pioneer of electronic trading, he refused to provide his clients online access to their accounts.[10] He sent out account statements by mail,[64] whereas most hedge funds email statements and allowed them to be downloaded via computer for easier analysis by investors.[23]

Improbably steady investment returns despite exceedingly volatile markets were another red flag.[65] A longtime friend said that "his rate of return [...] was never attention-grabbing, just solid 12–13 percent year in, year out".[11] Robert Ivanhoe, chairman of the real estate practice of the law firm Greenberg Traurig, added that Madoff increased his allure by refusing some investors.[11]

Charles Gradante, co-founder of hedge-fund research firm Hennessee Group, observed that Madoff "only had five down months since 1996",[66] and commented on Madoff's investment performance: "You can't go 10 or 15 years with only three or four down months. It's just impossible."[65] A 2001 story in MARHedge interviewed traders who questioned how Madoff could have 72 gaining months in a row, saying that type of stock success had never occurred before.[1]

Madoff also operated as a broker dealer with an asset management division. Joe Aaron, a longtime hedge fund professional, found the structure suspicious and in 2003 warned a colleague to steer clear of the fund, saying "Why would a good businessman work his magic for pennies on the dollar?"[67]

At the same time as potential investors such as Société Générale were finding red flags from Madoff's firm, clients such as Fairfield and Union Bancaire Privee claimed that they had been given an "unusual degree of access" to look into Madoff's funds and had seen nothing wrong with his firm's investments.[52]

 

[Paulie]

Have you seen who the new SEC chairperson is going to be?

Looks like wolves will still be guarding the hen house.

Matter of fact, when HAVEN'T wolves guarded our various hen houses?