Top US Securities and Exchange Commission officials were in the dark that staff were probing Bernard Madoff until the former financier was arrested in December 2008 for running a $65 billion Ponzi scheme, a federal watchdog said in a report released on Friday.
The report, expanding on a summary released Wednesday, underscores the disconnect between top officials and more junior employees who often lacked the skills to pursue tips against Madoff and failed to grasp the magnitude of their task.
Former Chairmen Christopher Cox, William Donaldson and Arthur Levitt, former director of enforcement Linda Thomsen and former director of examinations and compliance, Lori Richards, were "generally unaware" of the SEC's probes of Madoff, according to the 457-page report released late on Friday before a three-day holiday weekend.
And while SEC Inspector General David Kotz found these top officials did not act inappropriately, he said Madoff used his stature in the financial industry and mentioned the names of prominent SEC officials to intimidate agency staffers.
In the report summary, Kotz accused the regulator of never conducting a competent probe of Madoff despite complaints dating back to 1992.
He said the SEC missed numerous red flags and did not follow up on leads that may have uncovered Madoff's investment scam years ahead of his confession in December of 2008.
Madoff pleaded guilty in March to orchestrating the Ponzi scheme and is now serving a 150-year prison term.
Prosecutors have said that Madoff appeared to be rewarding his customers with steady returns, but he was faking their account statements and did not place trades on their behalf Among his criticisms, Kotz said SEC compliance managers and examiners assigned to a 2003 investigation of Madoff lacked "any particular expertise or experience."
Kotz, who interviewed 122 people, recommended that current SEC Chairman Mary Schapiro take "appropriate action" to address failures by employees who still work at the agency.
Some involved in the probes have since left the SEC, others however have advanced through the ranks of agency.
He is expected to make further recommendations on how the SEC should improve its operations.
Details on how the SEC failed to uncover Madoff will soon be scrutinized by Congress. Senator Christopher Dodd's Banking Committee will examine Kotz's report on Thursday and the House of Representatives investigative committee will also convene hearings.
A number of lawmakers have already decided what needs to be done to improve the agency. Representative Paul Kanjorksi said the report highlights the need to adopt new laws to reward whistleblowers -- a measure Schapiro has been seeking.
Some portions of the report were blacked out. Earlier this week, Schapiro said she wanted to safeguard any ongoing law enforcement action, and protect the names of junior staffers who did not play a central role in the examinations or investigations.
Kotz found that former SEC Assistant Director Eric Swanson's romantic relationship with Madoff's niece, Shana Madoff, had influenced the SEC's conduct.
After Madoff was arrested, the SEC's director of examinations' Richards recused herself from all matters concerning Bernard Madoff because Swanson had been in her chain of command. - Reuters