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Report Shows Investigators Botched Madoff Probes

Disgraced financier Bernard Madoff tried by turns to bully and impress the federal examiners who looked into his business, but the investigators managed by themselves to botch the probes and enable Madoff's multibillion-dollar fraud to continue for nearly two decades, a new report shows.

A trove of revelations came to light in the report by the Securities and Exchange Commission inspector general, David Kotz, which was released Friday evening. The 477-page document paints in excruciating detail how the SEC investigations of Madoff were bungled over 16 years — with disputes among agency inspection staffers over the findings, lack of communication among SEC offices in various cities and repeated failures to act on credible complaints from outsiders that formed a sea of red flags.

An inspection of Madoff's operation in 2003-04 "was put on the back burner" even though the exam team still had unresolved questions, the report says.

An SEC official who later would marry Madoff's niece told investigators this year that if he had carefully reviewed a complaint about Madoff's business, he would have investigated more extensively, according to the report. Eric Swanson was an SEC attorney and inspections official during the 2003-04 exam.

Swanson told a colleague in April 2004 that the inspection of Madoff's business was ongoing, after the exam team had stopped working on it, according to the report. It said Swanson recently explained that an inspection would be considered ongoing even if it were put on hold.

Kotz's investigation found no evidence that the relationship between Swanson and Madoff's niece, Shana, who married in 2007, influenced the SEC exams of Madoff.

Swanson testified in the inquiry that he wasn't closely involved in the 2003-04 Madoff exam after Mark Donohue became an assistant director of the SEC inspections division in February 2004 and that he never discussed the exam with Shana Madoff.

A prominent Wall Street figure, Bernard Madoff "attempted to intimidate and impress examiners," and he dropped names of top officials in the SEC, the report says. One of the examiners quoted describes him as "charismatic" and "charming" — "except when he was angry with us."

Among the disclosures: During an agency investigation in May 2006, Madoff feared that he had been caught.

"I thought it was the end game, over," Madoff was quoted as saying when SEC investigators queried him about what account he was using to clear certain trades.

He said he felt very fortunate when there was no follow-up call to check on the account number he had given the investigators.

"After all this, I got away lucky," he told Kotz in a prison interview, though he added he thought it was just a matter of time before he would eventually be caught.

That "narrow escape" in 2006, enabled by the SEC enforcement staff neglecting to verify Madoff's account at a securities industry clearinghouse for trades, allowed his fraudulent scheme to flourish for another 2 1/2 years, the report says.

Madoff, who pleaded guilty in March, is serving a 150-year sentence in federal prison in North Carolina for a Ponzi scheme that could be the biggest in U.S. history. It destroyed thousands of people's life savings, wrecked charities and gave investors' already shaken confidence in the financial system yet another big jolt.

Revelations in December of the SEC's failure to uncover Madoff's massive scheme touched off one of the most painful scandals in the agency's 75-year history.

"It is a failure that we continue to regret and one that has led us to reform in many ways how we regulate markets and protect investors," SEC Chairman Mary Schapiro said in a statement Friday. "In the coming weeks we will continue to closely review the full report and learn every lesson we can to help build upon the many reforms we have already put into place since January."

Schapiro, appointed by President Barack Obama, took over in January. Enforcement efforts have been strengthened, and the agency has started a number of initiatives meant to protect investors in the wake of the financial crisis, officials said.

Swanson acknowledged in his testimony to the IG's office this year that if he had carefully examined complaints about Madoff's business, he would have dug more thoroughly, according to the report.

Swanson said a complaint from outside the SEC and financial articles on Madoff published in 2001 "mean something different to (Swanson) today than they did at the time of the (SEC) examination" in 2003-04, the report says. It quotes Swanson as saying, "I didn't know anything, very little anyway, about hedge funds and mutual funds and how they operated."

Swanson now is general counsel of BATS, a major securities trading exchange. His spokesman, Eric Starkman, said Friday that "the report speaks for itself."

The SEC enforcement staff "almost immediately caught Madoff in lies and misrepresentations but failed to follow up on inconsistencies" and rejected whistleblowers' offers to provide additional evidence, the report says. Kotz's investigation, begun the week before Christmas last year, involved interviews with 122 people and reviews of thousands of documents.

Among those interviewed were former SEC chairmen Christopher Cox and William Donaldson, as well as Lori Richards, the former director of the SEC inspections office, who was Swanson's boss, and Linda Thomsen, the former enforcement director.

Kotz's probe found no evidence of improper ties between agency officials and Madoff, nor of senior SEC officials trying to influence the agency's investigations of his business.