Madoff Hearing Confirms Need to Expand IG Subpoena Powers

On Monday, the House Financial Services Committee held a full committee hearing to discuss Bernard Madoff's alleged $50 billion Ponzi scheme and the need for greater regulation of U.S. financial markets (an archived webcast of the hearing can be viewed here).  We were particularly interested in the testimony of SEC Inspector General David Kotz, who has launched a sweeping investigation to determine if and how the agency dropped the ball on the Madoff case.

Despite the expansive scope of Kotz's investigation, it looks like his hands may be tied in one crucial way: when pressed by committee members to explain his investigative authority, Kotz admitted that he does not have the power to subpoena testimony from former SEC employees.

This means that certain key witnesses from the Madoff case will be off-limits.  As TPMMuckraker's Zachary Roth points out, two of the three SEC enforcement staffers who found “no evidence of fraud” during a 2006-2007 inquiry into Madoff are no longer at the agency, which means that Kotz will be unable to compel their testimony.

In our 2008 report on IG independence, we raised concerns about the limited power of IGs to seek physical and electronic evidence and to compel testimony.  The recently passed Inspector General Reform Act of 2008 gives IGs the authority to access electronic and tangible items, but does not give them the authority to compel interviews or sworn testimony.

The Legislation Committee of the National Procurement Fraud Task Force has recommended expanding IG subpoena authority, noting that the ability to “compel interviews from employees or customers during investigations would be invaluable in investigating and prosecuting a case.”  We couldn't agree more, and we hope that Congress will give Kotz all the resources he needs to investigate how the SEC failed to detect what may be the largest case of investment fraud in U.S. history.

-- Michael Smallberg