Bernard Madoff, accused mastermind of a $50 billion investment fraud, was placed under house arrest as pressure mounted on the Securities and Exchange Commission to explain its failure to detect his financial wrongdoing for almost a decade.
Madoff, 70, will be subject to electronic monitoring and a 7 p.m. curfew while his wife, Ruth, agreed to give up homes in Montauk, New York, and Palm Beach, Florida, if her husband flees. Madoff, who appeared briefly today with his wife in Manhattan federal court, was arrested Dec. 11 after telling his sons that his firm was “one big lie,” the SEC said.
The legal developments came after SEC Chairman Christopher Cox said yesterday the agency failed to act on “credible, specific” allegations about Madoff dating back to 1999. The Madoff affair will be at the center of planned congressional hearings on the reform of the SEC, said a senior Senate official, speaking on condition of anonymity.
The allegations “were repeatedly brought to the attention of SEC staff, but were never recommended to the commission for action,” Cox, 56, said in a statement yesterday, without detailing the allegations. He announced an internal probe to review the “deeply troubling” revelations. Cox today said the agency has no evidence of any wrongdoing by SEC personnel.
The SEC, already faulted in connection with the collapse of Bear Stearns Cos. and Lehman Brothers Holdings Inc., now faces criticism for failing to detect what Madoff termed “a giant Ponzi scheme.” Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and Senator Charles Grassley, an Iowa Republican, have questioned its vigilance in enforcing securities laws. A House panel will hold a hearing next month.
Victims
Victims of Madoff’s fraud stretch from Tokyo to Paris, encompassing foundations set up by Boston philanthropist Carl Shapiro and Nobel laureate Elie Wiesel and clients of global banks such as Banco Santander SA of Spain, Nomura Holdings Inc of Japan, and HSBC Holdings Plc of the U.K. Yeshiva University in New York lost $110 million, mostly through hedge funds controlled by trustee J. Ezra Merkin.
Madoff’s responses during a 2005 SEC inspection of his brokerage operation should have raised suspicions and prompted further inquiries, said two people familiar with the matter.
Two years later, the agency closed a separate probe into tips and press reports suggesting his investment returns were too good to be true. Money manager Harry Markopolos helped trigger that inquiry by suggesting Madoff may be running a Ponzi scheme or front-running, in which traders buy shares for their account before filling customers’ orders, a person with knowledge of the case said.
Front-Running
Investigators focused on the front-running theory and, after encountering obstacles, didn’t finish verifying trades Madoff claimed were for advisory clients, the person said. His company’s trades had been cleared through a single account at the Depository Trust & Clearing Corp., making it difficult to distinguish transactions specifically for Madoff’s advisory business. Others transactions were completed through foreign brokerages, forcing the SEC to persuade foreign regulators to collect the data. Instead, investigators closed the case.
Cox, a Republican appointed by President George W. Bush, has said he will leave office when Bush leaves office Jan. 20. Cox’s term ends in June 2009 after taking over in August 2005. President-elect Barack Obama may name Cox’s successor as soon as tomorrow, people familiar with the matter said.
Instead of wielding subpoena power to obtain information, SEC staff “relied upon information voluntarily produced by Mr. Madoff and his firm,” Cox said.
Recusals
The internal review will include “all staff contact and relationships with the Madoff family and firm,” he said, and mandate the recusal of any SEC employee with more than an “insubstantial personal” contact with Madoff and his family.
Eric Swanson, a former assistant director of compliance and examinations at the SEC, is married to Madoff’s niece, Shana, who was a compliance lawyer at the Madoff firm. Swanson left the SEC in August 2006 and is now general counsel of Bats Trading Inc., the third-largest U.S. equity exchange by trading volume.
Cox, speaking after a commission meeting today, said determining what happened is of “utmost’ importance and he had “no reason” to think staff suppressed the Madoff allegations. Cox declined to discuss possible action against any employees.
“We have thus far found no evidence of any wrongdoing by any SEC personnel,” Cox told reporters.
DiPascali
Besides talking with Madoff, who met with federal prosecutors yesterday, authorities are scrutinizing the role of Frank DiPascali, a senior official in Madoff’s investment advisory firm, according to people familiar with the case.
Janice Oh, a spokeswoman for acting Manhattan U.S. Attorney Lev Dassin, declined to comment. Madoff’s lawyer, Ira Sorkin, didn’t return a call seeking comment.
“Like everyone else, we’re trying to sort out everything and learn the facts,” DiPascali’s lawyer, Marc Mukasey of Bracewell & Giuliani in New York, said in an interview, declining further comment.
U.S. Attorney General Michael Mukasey, Marc Mukasey’s father, has recused himself from the Justice Department’s investigation into Madoff because his son represents someone involved in the case, a department spokesman said today.
Michael Mukasey is a 1959 graduate of the Ramaz School, a modern Orthodox Jewish school in New York that invested as much as $6 million in a fund that invested with Madoff, said Kenny Rochlin, Ramaz’s director of institutional advancement. Mukasey’s wife, Susan, was headmistress of Ramaz’s Lower School for children in primary grades, Rochlin said.
Passports Surrendered
U.S. Magistrate Judge Gabriel Gorenstein in Manhattan also ordered Madoff and his wife, Ruth, to surrender their passports. The ruling came as a bail hearing for her husband was postponed for a second time in as many days.
The number of co-signers on his $10 million bond was reduced by Gorenstein from four to two after Madoff was unable to find two additional guarantors. Madoff’s wife and brother, Peter, have co-signed the bond.
Madoff and his wife were in court today to sign a confession of judgment to properties they in Montauk, Palm Beach and on Manhattan’s Park Avenue.
The case is U.S. v. Madoff, 08-mag-2735, U.S. District Court, Southern District of New York (Manhattan).
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