SEC Gave Cash Award to Employee Who Bungled Madoff Investigation

(Pictured above: not an actual SEC employee)

  By MICHAEL SMALLBERG

A new audit released yesterday by the Securities and Exchange Commission (SEC) Office of Inspector General (OIG) revealed that the SEC gave a cash award to a key participant in the agency's bungled investigation of Bernie Madoff's Ponzi scheme.

In 2009, the OIG released an exhaustive report on the SEC's Madoff investigation, and recommended potential disciplinary action against several employees who mishandled the case. But in its most recent audit, the OIG found that "one of the key participants in both the 2005 examination and 2006 investigation of Madoff received a $1,200 cash award in April 2010."

To make matters worse, the OIG found that the award was justified in part based on the employee’s work in a follow-up investigation of Madoff. The OIG also raised concerns about the official who nominated the employee for the award:

The award nomination was signed by the employee’s Branch Chief and Assistant Regional Director on September 14, 2009, just two weeks after the August 31, 2009, issuance of the OIG’s final investigative report on the Commission’s failure to uncover the Madoff Ponzi scheme. Moreover, both the employee being rewarded and the Assistant Regional Director who recommended the award were cited in the report for numerous performance issues and were subject to potential disciplinary action at the time the award recommendation was made.

Among other things, the OIG recommended that the SEC implement controls to ensure that employees who are subject to disciplinary action are not given awards for performance that resulted in the discipline.

In addition, the audit indicates that the SEC hired an outside law firm, Fortney & Scott, LLC, to review the OIG’s findings from the Madoff investigation. Although Fortney & Scott’s report did not dispute the OIG’s findings, the law firm nonetheless concluded that “the employee’s actions did not warrant formal disciplinary action.”

This would not be the first time the SEC has relied on an outside review of an OIG disciplinary recommendation. A few years ago, the SEC declined to take disciplinary action against several senior officials cited in the OIG’s Bear Stearns and Pequot reports after an SEC administrative law judge determined that the record did not support such action.

For more background on this issue, be sure to check out POGO’s resource page on the SEC’s recent responses to OIG disciplinary recommendations.

Michael Smallberg is a POGO Investigator.

Image by Flickr user bradjward.

Comments

[Nancy Schuhrke]

Response to A. D. Jackson's comment: Yes, the gentleman to whom you refer in the Bernie Madoff debacle was Harry Markopolous and I'm currently reading his book, No One Would Listen. I HIGHLY recommend this book to everyone who wants to know how truly incompetent the SEC is. Not only was the SEC warned about Madoff once, Mr. Markopolous sent the SEC FIVE separate detailed notifications over an EIGHT year period and was ignored or dismissed each time. Supposedly, things were going to change at the SEC after the Madoff fraud exploded, but I have serious doubts about how much it's actually changed. The book is excellent reading, but disturbing. . . truly disturbing.

[Kotz maybe]

Maybe Kotz is the one off the reservation? He has made a number of criminal referrals that haven't panned out either. Who's checking to make sure he's doing his job properly?

[billwalker]

What else is new with the SEC ?

[A. D. Jackson]

It has been said often about govt. / civil service: screw up and move up. I have read that some fellow in the investment business warned the SEC about Bernie Madoff that he could only generate such returns from a pyramid, but he was dismissed as a jealous competitor. To some extent we should blame Alan Greenspan of the Federal Reserve who thought the economy can and should regulate itself. And those who fix prices and "water the stock", are they not honorable men?