Thursday, September 24, 2009

Fire David Kotz

"The [SEC] botched numerous opportunities to uncover Bernard Madoff's Ponzi scheme, in part because of an inexperienced staff and delays in examinations, said an SEC inspector general report. ... The release of the findings comes as the SEC is seeking to rebuild its credibility. According to the report, the SEC received six warnings about Mr. Madoff's trading business over 16 years, but failure of staff to follow up adequately--including to determine whether trades were executed when Mr. Madoff said they were--and poor commincation within the agency's divisions enabled him to continue his scheme. ... The investigation found no evidence that the SEC staff had been influenced by Mr. Madoff or any of his family members. ... Sen. Charles Grassley (R., Iowa) called the SEC's failures 'further evidence of a culture of deference toward the Wall Street elite at the SEC.' He said, 'Until that culture is transformed, the SEC will not be the tough cop on the beat that the public needs.' ... The 22-page executive summary said the agency staff was too inexperienced or too narrowly focused, and missed opporunties to uncover the fraud. It said the SEC's structure hampered its effectieness, with two groups of examineers looking separately into Mr. Madoff's business at one point without knowing about the other. ... The IG report found that Mr. Madoff attempted to intimidate SEC staff during an examination in 2005 by dropping names of senior SEC officals, but the report didn't conclude whether he was successful. ... When examiners reported Mr. Madoff's aggressively pushback tactics to higher-ups, they didn't get any support and were 'actively discouraged from forcing the issue,' the report said", my emphasis, Kara Scannell at the WSJ, 3 September 2009, link:

"Unseasoned investigators from the [SEC] were alternatively intimidated and enthralled by a name-dropping, yarn-spinning Bernard L. Madoff as he dodged questions about his financial house of cards, according to a scathing new report on the agency's repeated failures to uncover the huge investment fraud. 'Madoff carefully controlled to whom they spoke at the firm,' the SEC's independent watchdog said in the report on Wednesday. ... In fact, the string of lapses was capped by a staff lawyer receiving the highest performance rating from the agency, in part for her 'ability to understand and analyze the complex issues of the Madoff investigation.' Perversely, Mr. Madoff used the SEC's inquiries as a selling point to reassure investors that the government had looked over his operations and found no problems. ... It was the fact that, 'despite numerous credible and detailed complaints,' the SEC never took 'the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme.' ... 'A simple inquiry to one of several third parties could have immediately revealed the fact that Madoff was not trading in the volume he was claiming,' the report said. ... One investigator described Mr. Madoff as 'a wonderful storyteller' and 'a capitvating speaker' after the 2005 encounter in which Mr. Madoff, a former Nasdaq chairman, boasted of his ties to people high up in the SEC and he said he was on the short list to be the next agency chairman--the post which went to Mr. Cox. ... The failure to heed Mr. Markopolos was almost inexplicable, except that some agency officials did not like him personally, Mr. Kotz said", my emphasis, David Stout at the NYT, 3 September 2009, link:

"Renaissance Technologies, the big hedge-fund run by James Simons, raised questions about Bernard Madoff at least as early as 2003, eventually triggering a regulatory investigation of Mr. Madoff and withdrawal of money according to a [SEC] watchdog report. Details revealing Renaissance executives' concerns about Mr. Madoff's strategy and the validity of his reported returns figure prominently in the SEC report, released Friday. ... Henry Laufer, Renaissance's chief scientist, questioned Mr. Madoff's ability to exit the market, selling its investments and holding primarily cash supposedly to avoid lossses that hit other investment firms. The timing of the moves, Mr. [Nathaniel] Laufer said, was almost statistically impossible. 'We would have loved to figure out how he did it so we could do it ourselves,' he testified this year to the SEC. 'And so that was very suspicious.' ... Nathaniel Simons told regulators the firm believed the SEC had closely examined Mr. Madoff's investments, and regulators should have been able to perform the same analysis of Mr. Madoff's trading strategy that Renaissance had. ... 'We did feel that despite the fact that we're kind of smart people, we were just looking at matters of public record,' he also said in his testimony", Jenny Strasburg and Scott Patterson at the WSJ, 8 September 2009, link:

"Top officials at the [SEC] pledged at a Senate hearing on Thursday to fix the problems that led to the agency's failure to detect the multibillion-dollar fraud conducted for more than a decade by Bernard L. Madoff. ... 'We intend to learn every lesson we can,' [Robert Khuzami] said. 'There are no sacred cows.' ... Harry Markopolos, the fraud investigator who brought his allegations to the SEC about improprieties in Mr. Madoff's business starting in 2000, testified that the agency's staff 'was not capable of finding ice cream in a Dairy Queen.' The system of conducting inspections at the agency rewards attention to detail rather that investigative energy and mortivation to catch misconduct, he said. ... Khuzami disputed Mr. Markopolos assertion that large numbers of SEC staff should be fired, saying the failures in the Madoff case were not emblematic of the the entire enforcement division", my emphasis, NYT, 11 September 2009, link:

Crap. Blame structure and SEC peons, not higher-ups for quashing the Madoff investigations. This looks like the John Mack fiasco, my 23 October 2008 post: Will any SEC higher-ups be named and indicted? This sounds like a Big 87654 audit. If there's a problem, blame the peons. "Discouraged from forcing the issue". By whom? Six warnings. Hmm. What can we do with this? Kotz: "It is true that all these instances, taken singly, do not prove beyond question that White knew the statements which he prepared were padded with false entries; but logically the sum is often greater than the aggregate of the parts, and the cumulation of instances, each explicable only by extreme credulity or professional inexpertness, may have a probative force immensely greater than any one of them alone. ... We do not say that his guilt was demonstrated, but enough was proved to subject him to the hazard of a verdict; faced with the choice of finding him a knave or a fool, we cannot say that the jury was bound to acquit him; fair men might have had no compunction in refusing to believe that he was so credulous or so ill acquainted with his calling as a finding of innocence demanded", US v. White, 124 F2d 181, 185 (2nd Cir., 1941) (Hand, J). Kotz, we're watching you; fool or knave?

The lawyer understood her job well. If the apparent "perp" is a person of consequence, ignore whatever you find. What complex issue? Madoff was a big shot. Check with third parties? Is the SEC PWC auditing Satyam? What difference does it make if SEC employees like Markopolos? What matters is: the facts. These morons should have to watch hundreds of Dragnet, 1954-62, reruns until they can cite Sgt. Joe Friday in their sleep, "Just the facts maam. Just the facts".

This is also my experience with the SEC and DOJ. It doesn't matter what you give these clowns, including matters of public record. They are only interested in ingratiating themselves with persons of consequence. If Goldman Sachs' general counsel handed the same materials to the SEC as Markoplos, Madoff would have been in prison years ago. Look at Aleynikov's experience, my 12 September 2009 post:

Now we get a "twofer", i.e., fire Khuzami too. I agree with Markoplos. Most SEC enforcement people are glorifeiod box ticking clerks. No sacred cows? How about John Mack, or Lloyd Blankfein for starters. Reorganiztion is the refuge of the incompetent.

1 comment:

Anonymous said...


Some wrist slapping for the SEC staff involved is all? It's not exactly confidence inspiring for the public.

If the SEC was the "cop on the beat" and while standing on the corner 6 people came up to warn them of a murderer nearby and nothing was done would we just accept a report and investigation of the cop?

Not likely... we'd want some house cleaning... or more...