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Oversight of the Securities and Exchange Commission's S. HRG. 111–368 OVERSIGHT OF THE SECURITIES AND EXCHANGE COMMISSION’S FAILURE TO IDENTIFY THE BERNARD L. MADOFF PONZI SCHEME AND HOW TO IMPROVE SEC PERFORMANCE HEARING BEFORE THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS UNITED STATES SENATE ONE HUNDRED ELEVENTH CONGRESS FIRST SESSION ON ANALYZING THE SEC’S OVERSIGHT AND EXAMINATION OF THE ACTIVI- TIES OF BERNARD L. MADOFF AND BERNARD L. MADOFF INVEST- MENT SECURITIES, LLC AND WHY IT FAILED TO IDENTIFY THE PONZI SCHEME, AND TO ASSESS RECOMMENDATIONS FOR HOW TO IMPROVE THE REGULATORY PERFORMANCE OF THE SEC SEPTEMBER 10, 2009 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html U.S. GOVERNMENT PRINTING OFFICE 55–785 PDF WASHINGTON : 2010 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS CHRISTOPHER J. DODD, Connecticut, Chairman TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama JACK REED, Rhode Island ROBERT F. BENNETT, Utah CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky EVAN BAYH, Indiana MIKE CRAPO, Idaho ROBERT MENENDEZ, New Jersey MEL MARTINEZ, Florida DANIEL K. AKAKA, Hawaii BOB CORKER, Tennessee SHERROD BROWN, Ohio JIM DEMINT, South Carolina JON TESTER, Montana DAVID VITTER, Louisiana HERB KOHL, Wisconsin MIKE JOHANNS, Nebraska MARK R. WARNER, Virginia KAY BAILEY HUTCHISON, Texas JEFF MERKLEY, Oregon MICHAEL F. BENNET, Colorado EDWARD SILVERMAN, Staff Director WILLIAM D. DUHNKE, Republican Staff Director and Counsel DEAN SHAHINIAN, Senior Counsel MARK JICKLING, CRS Detailee MATTHEW GREEN, FDIC Detailee BRIAN FILIPOWICH, Legislative Assistant MARK OESTERLE, Republican Chief Counsel HESTER PEIRCE, Republican Senior Counsel JONAH CRANE, Legislative Assistant DAWN RATLIFF, Chief Clerk DEVIN HARTLEY, Hearing Clerk SHELVIN SIMMONS, IT Director JIM CROWELL, Editor (II) C O N T E N T S THURSDAY, SEPTEMBER 10, 2009 Page Opening statement of Chairman Dodd .................................................................. 1 Prepared statement .......................................................................................... 49 Opening statements, comments, or prepared statement of: Senator Shelby .................................................................................................. 4 Prepared statement ................................................................................... 50 Senator Johnson Prepared statement ................................................................................... 50 Senator Reed Prepared statement ................................................................................... 51 Senator Schumer .............................................................................................. 25 WITNESSES H. David Kotz, Esq., Inspector General, Securities and Exchange Commission 6 Prepared statement .......................................................................................... 51 Response to written question of: Chaiman Dodd ........................................................................................... 106 Harry Markopolos, Chartered Financial Analyst and Certified Fraud Examiner .............................................................................................................. 30 Prepared statement .......................................................................................... 60 John Walsh, Acting Director, Office of Compliance Inspections and Examina- tions, Securities and Exchange Commission ..................................................... 32 Prepared statement .......................................................................................... 95 Responses to written questions of: Chairman Dodd ......................................................................................... 110 Senator Brown ........................................................................................... 117 Robert Khuzami, Director, Division of Enforcement, Securities And Exchange Commission ........................................................................................................... 32 Prepared statement .......................................................................................... 95 Responses to written questions of: Chairman Dodd ......................................................................................... 120 Senator Brown ........................................................................................... 138 (III) OVERSIGHT OF THE SECURITIES AND EXCHANGE COMMISSION’S FAILURE TO IDENTIFY THE BERNARD L. MADOFF PONZI SCHEME AND HOW TO IMPROVE SEC PER- FORMANCE THURSDAY, SEPTEMBER 10, 2009 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee met at 2:33 p.m., in room SD–538, Dirksen Sen- ate Office Building, Senator Christopher J. Dodd (Chairman of the Committee) presiding. OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD Chairman DODD. The Committee will come to order, and let me thank all of our guests here today in the Banking Committee, my colleagues and staff. Today’s hearing is entitled ‘‘Oversight of the SEC’s Failure to Identify the Bernard L. Madoff Ponzi Scheme and How to Improve SEC Performance.’’ Let me thank the staff and others for the work they have done on this issue and the follow- on we will need to do as well, not that this one hearing is going to complete the examination of this question, because obviously the significance of it Americans are well aware of, including the most recent reports about taped conversations between Mr. Madoff and others in which his contempt for the process, the SEC, and the American people is quite evident. Obviously, as he says, ‘‘First of all, this conversation never took place, OK?’’ Some indication of what we are—the individual, the psychopathic individual we are dealing with on these issues. I am going to make some brief opening comments, and then I will turn to Senator Shelby for opening comments, and following the Bob Corker rule, there will be no statements made by any other member of the Committee until the opening round. [Laughter.] Chairman DODD. This way we can get through this thing and make sure we get two rounds in. I tease Bob Corker about his pref- erence. Senator MENENDEZ. Mr. Chairman, is that who we have to be thankful to? Chairman DODD. I do not know. Ask Bob Corker about that rule. [Laughter.] Chairman DODD. I have teased him about it along the way. And, again, if anyone feels absolutely compelled that they would like to (1) 2 say something, obviously I try to accommodate my colleagues’ re- quests. But if it would be all right, we would like to move along and cover the ground. Let me begin. Bernie Madoff stole $50 billion, and maybe more. He stole from individuals, he stole from pensions funds, he stole from charities and municipalities, communities like Fairfield in my home State of Connecticut. He stole more than money. He stole the retirement savings and the economic security of families and indi- viduals, organizations, and charities all across the United States. And the very agency charged with the responsibility of policing Mr. Madoff, the Securities and Exchange Commission, did not stop him. There can be no excuse for that colossal failure. But I demand, as my colleagues do here, Democrats and Republicans, that victims of this fraud—some of whom hail from my home State and many, of course, all across the country that have testified before this Com- mittee, as some have, also demand an explanation. How did this happen? What went on? Who was on the beat? What was going on that allowed this colossal—colossal—thievery to occur? And so today we hold our third hearing on Ponzi schemes, and our second on the Madoff fraud, in particular, to find out how this could possibly have happened and what we need to do as a Govern- ment, as an Exchange Commission, as well as the Congress of the United States, to minimize this ever occurring again. Incredibly, it emerged late last year that the SEC staff had re- ceived multiple complaints over a period of 16 years—16 years, from 1992 to 2008—that Bernie Madoff’s business was not legiti- mate, but had not taken any effective action. To his credit, then- Chairman Christopher Cox directed the SEC Inspector General to conduct a full investigation of why these credible reports had been ignored. The Inspector General released a report last week, and it is deeply disturbing, to put it mildly. As the report indicates, the SEC received, and I am quoting: more than ample information in the form of detailed and substantive com- plaints, but a thorough and competent investigation or examination was never performed. The report goes on to describe an embarrassing series of internal failures at the SEC. One, incompetent supervisors directed their offices to look only for the types of fraud they understood and failed to recognize the type actually being committed in the Madoff case. Number two, inexperienced SEC staff simply accepted Mr. Madoff’s claims without making the single phone call or sending the single letter that it would have taken to verify the information they were given. Number three, no one ever thought it merited a closer look when Mr. Madoff said he traded in Europe with a firm that reported there was no activity—when a firm that reported there
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