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Wed, Dec 17, 2008 - Page 10 News List

Regulators slept through Madoff fraud, analysts say


Bernard Madoff’s biggest — if unwitting — accomplices in his gigantic alleged fraud may have been US regulators, analysts said on Monday.

“Obviously they were sleeping at the switch,” said Brad Simon, a former prosecutor turned white collar criminal defense attorney.

“Considering the amount and size of the loss, which is just staggering, you really have to wonder why every time it’s only after a huge crisis that they seem to wake up,” he said.

Madoff is alleged to have burned some US$50 billion in a pyramid scheme that fooled banks and top-notch private investors worldwide.

Yet what Madoff allegedly confessed to be a “big lie” — possibly the biggest fraud in Wall Street history — was apparently not big enough to be noticed by the Securities and Exchange Commission (SEC).

Prosecutors say Madoff was “cryptic” and literally hid his illegal business on a separate floor of the building housing his company’s booming brokerage arm.

Former SEC official Laura Unger said Madoff may also have been able to side-step many SEC requirements by not classifying his investment business as a hedge fund.

But, even so, the red flags were flapping right in regulators’ faces, analysts said.

The most obvious warning signs were Madoff’s incredibly consistent returns, money that prosecutors now say was actually being siphoned from investors’ principal.

No less startling was that accounts for this multibillion dollar enterprise were handled at a tiny, obscure accountancy firm in New City, New York state.

And if SEC investigators needed any further tip-off, they only had to listen to concerns being widely aired on Wall Street.

For example, back in 2001 hedge fund analyst Michael Ocrant wrote how market watchers were “baffled” by Madoff’s high returns.

Pressure is mounting at home and abroad — including on Monday from IMF chief Dominque Strauss-Kahn — for US regulators to get their act together.

“I’m shocked,” Strauss-Kahn said when asked about the scandal. “The surprise is not that there are some thieves in the system, the question is where were the police?”

“It’s very surprising to find you’re living in a system where a failure of the regulatory system was so big,” he told a news conference in Madrid.

Unger said one problem for the SEC is simply under-funding.

“The market has just got far too complex, far too fast-moving for the agency to keep up,” she said on CNBC television.

But a core issue, analysts say, is that regulators, politicians and investors are too cozy with financial powerhouses to act independently.

Unger said that Madoff’s alleged fraud was tightly entwined with the financial community elite — “a wide reaching scheme, if you will, that really embraced some pillars of the community.”

Simon stressed Wall Street’s heavy funding of political campaigns and success in warding off uncomfortable oversight.

“There’ve been several instances of the SEC ... succumbing to outside pressure,” Simon said. “The securities industry and Wall Street have been very powerful and got their way.”

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