Top U.S. 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 blistering summary released Wednesday, underscores the disconnect between top officials and more junior employees who often lacked the skills to pursue tips against Madoff.
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 acted inappropriately, he said Madoff used his stature in the financial industry and mentioned the names of prominent SEC officials to intimidate SEC examiners.
Kotz has accused the SEC 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, using money from new investors to pay old ones, and is now serving a 150-year prison term.
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.
Five probes over 16 years failed to snare Madoff. Kotz said SEC staffers were sometimes suspicious of the whistleblower, in addition to being inexperienced.
For example, three staffers in the SEC's Northeast Regional Office discounted a detailed 2005 submission on Madoff by Harry Markopolos because he was a competitor rather than a Madoff employee or investor.
Kotz said Doria Bachenheimer, who was an assistant director of enforcement, had never conducted a Ponzi scheme investigation at the time. She then involved Meaghan Cheung, an enforcement branch chief, and relatively junior enforcement attorney Simona Suh, both of whom had never investigated a Ponzi scheme, the report said.
Cheung and Bachenheimer have since left the SEC. Suh is currently an SEC branch chief. Emails to Bachenheimer and Suh seeking comment were not immediately returned. Attempts to locate Cheung were not successful.
Schapiro reiterated in a statement Friday that the Madoff scandal was a failure the agency continued to regret and one that has led to many reforms.
Kotz is expected to make further recommendations on how the SEC should improve its operations.
His report will be the subject of hearings in 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 ongoing law enforcement action, and to protect names of junior staffers who did not play a central role.
Kotz's report was posted online at http://www.sec.gov/news/studies/2009/oig-509.pdf
(Reporting by John Poirier, Julie Vorman, Rachelle Younglai; Editing by Tim Dobbyn)