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The Madoff Investment Securities Fraud: Regulatory and Oversight Concerns and the Need for Reform Hearing Committee on Banking

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The Madoff Investment Securities Fraud: Regulatory and Oversight Concerns and the Need for Reform Hearing Committee on Banking S. HRG. 111–38 THE MADOFF INVESTMENT SECURITIES FRAUD: REGULATORY AND OVERSIGHT CONCERNS AND THE NEED FOR REFORM HEARING BEFORE THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS UNITED STATES SENATE ONE HUNDRED ELEVENTH CONGRESS FIRST SESSION ON HOW THE SECURITIES REGULATORY SYSTEM FAILED TO DETECT THE MADOFF INVESTMENT SECURITIES FRAUD, THE EXTENT TO WHICH SECURITIES INSURANCE WILL ASSIST DEFRAUDED VICTIMS, AND THE NEED FOR REFORM JANUARY 27, 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 50–465 PDF WASHINGTON : 2009 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) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate Nov 24 2008 08:33 Jul 07, 2009 Jkt 048080 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 S:\DOCS\50465.TXT JASON 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 COLIN MCGINNIS, Acting Staff Director WILLIAM D. DUHNKE, Republican Staff Director DEAN V. SHAHINIAN, Legislative Assistant KATE SZOSTAK, Legislative Assistant BRIAN FILIPOWICH, Legislative Assistant DREW COLBERT, Legislative Assistant DIDEM NISANCI, Legislative Assistant DAVID STOOPLER, Legislative Assistant JONATHAN DAVIDSON, Legislative Assistant TAMARA FUCILE, Legislative Assistant EMILY PALADINO, Legislative Assistant ROB LEE, Legislative Fellow MARK F. OESTERLE, Republican Counsel ANDREW OLMEM, Republican Legislative Assistant HESTER PEIRCE, Republican Legislative Assistant JONATHAN GRAFFEO, Republican Legislative Assistant COURTNEY GEDULDIG, Republican Legislative Assistant SARAH NOVASCONE, Republican Legislative Assistant JASON TUBER, Republican Legislative Assistant DAWN RATLIFF, Chief Clerk DEVIN HARTLEY, Hearing Clerk SHELVIN SIMMONS, IT Director JIM CROWELL, Editor (II) VerDate Nov 24 2008 08:33 Jul 07, 2009 Jkt 048080 PO 00000 Frm 00002 Fmt 0486 Sfmt 0486 S:\DOCS\50465.TXT JASON CONTENTS TUESDAY, JANUARY 27, 2009 Page Opening statement of Chairman Dodd .................................................................. 1 Opening statements, comments, or prepared statements of: Senator Shelby .................................................................................................. 4 Senator Johnson Prepared statement ................................................................................... 54 Senator Menendez ............................................................................................ 6 Senator Bennet ................................................................................................. 7 Prepared statement ................................................................................... 54 Senator Johanns ............................................................................................... 7 Senator Schumer .............................................................................................. 8 Senator Merkley ............................................................................................... 10 WITNESSES John C. Coffee, Jr., Adolf A. Berle Professor of Law, Columbia University Law School ............................................................................................................ 11 Prepared statement .......................................................................................... 55 Response to written questions of: Senator Shelby ........................................................................................... 81 Senator Johnson ........................................................................................ 82 Senator Johanns ........................................................................................ 83 Henry A. Backe, Jr., M.D., Orthopedic Surgeon, Fairfield, Connecticut ............ 14 Prepared statement .......................................................................................... 61 Response to written questions of: Senator Johnson ........................................................................................ 83 Senator Johanns ........................................................................................ 84 Lori A. Richards, Director, Office of Compliance Inspections and Examinations, Securities and Exchange Commission ...................................... 17 Prepared statement .......................................................................................... 63 Response to written questions of: Senator Dodd ............................................................................................. 84 Senator Shelby ........................................................................................... 87 Senator Johnson ........................................................................................ 89 Senator Johanns ........................................................................................ 90 Linda C. Thomsen, Director, Division of Enforcement, Securities and Exchange Commission ......................................................................................... 19 Prepared statement .......................................................................................... 67 Response to written questions of: Senate Banking Committee ...................................................................... 91 Senator Dodd ............................................................................................. 93 Senator Shelby ........................................................................................... 98 Senator Johnson ........................................................................................ 100 Senator Johanns ........................................................................................ 104 (III) VerDate Nov 24 2008 08:33 Jul 07, 2009 Jkt 048080 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 S:\DOCS\50465.TXT JASON IV Page Stephen I. Luparello, Interim Chief Executive Officer, Financial Industry Regulatory Authority ........................................................................................... 21 Prepared statement .......................................................................................... 73 Response to written questions of: Senator Dodd ............................................................................................. 107 Senator Shelby ........................................................................................... 113 Senator Johnson ........................................................................................ 114 Senator Johanns ........................................................................................ 116 Stephen P. Harbeck, President and CEO, Securities Investor Protection Corporation ........................................................................................................... 23 Prepared statement .......................................................................................... 77 Response to written questions of: Senator Dodd ............................................................................................. 117 Senator Shelby ........................................................................................... 117 Senator Johnson ........................................................................................ 118 Senator Johanns ........................................................................................ 119 ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD Harry Markopolos, Chartered Financial Analyst, Certified Fraud Examiner .... 120 Paul Hiller, Chief Fiscal Officer, Town of Fairfield, Connecticut ........................ 142 Barbara Roper, Director of Investor Protection, Consumer Federation of America ................................................................................................................. 144 VerDate Nov 24 2008 08:33 Jul 07, 2009 Jkt 048080 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 S:\DOCS\50465.TXT JASON MADOFF INVESTMENT SECURITIES FRAUD: REGULATORY AND OVERSIGHT CONCERNS AND THE NEED FOR REFORM TUESDAY, JANUARY 27, 2009 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee met at 10:04 a.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. Good morning. The Committee will come to order. We meet today and the subject matter is the ‘‘Madoff Invest- ment Securities Fraud: Regulatory and Oversight Concerns and the Need for Reform.’’ First, let me welcome Members of our Committee. Let me begin by welcoming Michael Bennet, a new member of the U.S. Senate from Colorado. We are delighted to have you with us, Senator, and are looking forward to your service on this Committee. Senator BENNET. Good morning. Chairman DODD. We also have a new Member,
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