Lawmakers criticize SEC in Madoff probe

Lawmakers used their first opportunity this month to probe the $50 billion Bernard Madoff scandal to call for an overhaul of the nation’s financial regulatory system.

The Madoff scandal, allegedly the largest Ponzi scheme in history, has galvanized lawmakers’ attention on working to shore up the regulatory system, particularly the Securities and Exchange Commission (SEC). Lawmakers slammed the commission on Monday for failing to protect investors and not following up on complaints about the firm.

{mosads}“Clearly, our regulatory system has failed miserably,” Rep. Paul Kanjorski (D-Pa.) said at a House Financial Services subcommittee panel, which heard testimony from, among others, the SEC inspector general and the Securities Investor Protection Corp. “And we must rebuild it now.”

Meanwhile, the Senate Banking Committee on Monday launched an investigation of its own into the Madoff situation and particularly into the regulatory role of the SEC and the Financial Industry Regulatory Authority. Sens. Chris Dodd (D-Conn.) and Richard Shelby (R-Ala.), the chairman and ranking member, respectively, of the Senate Banking Committee, sent a letter on Monday to the SEC requesting documents and data, including all communications between the SEC and Madoff’s firm.

“The Banking Committee is examining this case to determine how so many people could have been deceived and how such a massive fraud could have gone undetected for so long,” Dodd said in a statement. “American investors deserve an explanation and the responsible parties must be held accountable. I am hopeful that our findings will also help inform our efforts to improve regulation so that such abuses do not occur in the future.

Even before Congress officially came to order this session, lawmakers scheduled a House Financial Services subcommittee hearing — or, as some lawmakers preferred to call it, a meeting — to look into the Madoff scandal.

“In the wake of this unprecedented financial crisis, we now know that our securities regulators have not only missed opportunities to protect investors against massive losses from the most complex financial instruments like derivatives, but they have also missed the chance to protect them against the simplest of schemes,” Kanjorski said.

Ranking Republican Spencer Bachus (Ala.) noted that the SEC had received a complaint about Madoff’s firm a decade ago but failed to act. But while Bachus said that the Madoff scandal is evidence that the government lacks an updated regulatory structure, he declined to press for new government powers or new legislation.

“While the failures of regulatory and private sector due diligence exposed by the Madoff matter are obvious, they do not lead me to conclude at this stage of the inquiry that what is needed are broad new legislative or regulatory mandates on the rest of the securities industry,” Bachus said.

“What we may have in the Madoff case is not necessarily a lack of enforcement and oversight tools, but a failure to use them,” he said.

David Kotz, the SEC inspector general, said he was widening his investigation to include broader questions about the SEC and its ability to respond to complaints. He said he would also look into alleged conflicts of interest between the SEC and Madoff and any questions of complicity.