U.S. Securities and Exchange Commission - Regulatory Failures

Regulatory Failures

Christopher Cox, the former chairman of the SEC, has recognized the organization's own multiple failures in relation to the Bernard Madoff fraud. Starting with an investigation in 1992 into a Madoff feeder fund which only invested with Madoff, and which, according to the SEC, promised "curiously steady" returns, the SEC did not investigate indications that something was amiss in Madoff's investment firm. The SEC has therefore been accused of missing numerous red flags and ignoring tips on Madoff's alleged fraud. As a result, Cox has said that an investigation will ensue into "all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by staff regarding the firm." Approximately 45 per cent of institutional investors felt that better oversight by the SEC could have prevented the Madoff fraud. Harry Markopolos complained to the SEC's Boston office in 2000, telling the SEC staff they should investigate Madoff because it was impossible to legally make the profits Madoff claimed using the investment strategies that he claimed to use.

A similar but even worse failure occurred in the case of Allen Stanford, who sold fake certificates of deposit to tens of thousands of people, many of them working-class retirees. In 1997 the SEC's own examiners spotted this fraud and warned about it. But the enforcement division would not pursue Stanford despite repeated warnings by SEC examiners over the years. After the Madoff fraud emerged, the SEC finally took action against Stanford in 2009.

In June 2010, the SEC settled a wrongful termination lawsuit with former SEC enforcement lawyer Gary Aguirre, who was terminated in September 2005 following his attempt to subpoena Wall Street figure John J. Mack in an insider trading case involving hedge fund Pequot Capital Management. While the insider case was dropped at the time, a month prior to the SEC's settlement with Aguirre the SEC filed charges against Pequot. The Senate released a report in August 2007 detailing the issue and calling for reform of the SEC.

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    Small successes are still successes; great failures are still failures.
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