SEC Enforcement Officer Resigns over Madoff Miss

Bernard Madoff’s Ponzi scheme has claimed another victim – the top enforcement officer at the Securities and Exchange Commission (SEC).  Linda Chatman Thomsen, who had led the SEC’s enforcement division, resigned yesterday amid an avalanche of criticism over the agency’s failure to detect Modoff’s scam.

Madoff was arrested on one count of securities fraud on December 11.  Madoff – once a chairman of the Nasdaq stock exchange – was the founder and primary owner of Bernard L. Madoff Investment Securities LLC. The firm was primarily known for its business in market-making, or serving as the middleman between buyers and sellers of shares. However, Madoff also oversaw an investment-advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.

According to the FBI complaint against Madoff, that business was largely a Ponzi scheme.  The FBI said Madoff  “deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars.”

Madoff’s scam allegedly went on for decades, and the SEC has faced a great deal of scrutiny because of its oversight failures. According to a January report in The Washington Post, the SEC conducted routine examinations of the company in 1999, 2004, and 2005, as well as investigation that ended in 2007. Only the 2005 examination found “minor problems”.

Last week, Harry Markopolos, a fraud investigator who spent nearly 10 years investigating Madoff, blasted the SEC for its oversight failures.  In testimony before the House Financial Services Committee, Markopolos  told lawmakers that in 2000, he had spotted Madoff’s fraud in “about five minutes” by looking at his promotional material.  Markopolos said that he and a team of investigators brought 29 specific red flags regarding Madoff’s operations to SEC offices in New York, Boston and Washington, DC,  but no one at the commission ever acted on his tips.

Thomsen also testified at that hearing, often appearing defensive in response to lawmakers’ questions.  Her reluctance to answer some of the Committees’ questions angered some.  At one point, the chairman of the Committee accused the SEC of impeding his investigation.

According to The New York Times, other critics of Thomsen have charged that she failed to detect and prosecute improprieties among mortgage companies, the nation’s brokerage firms and powerful investment advisers and hedge funds that led to the current financial crisis.  A recent report from the SEC’s inspector general reprimanded the enforcement unit for its “common practice” of allowing outside lawyers representing people before the commission to communicate with supervising staff lawyers who are investigating the matters, the Times said.