Securities and Exchange Commission chairperson Christopher Cox late on Tuesday announced a probe into how his financial regulatory body failed to detect an alleged $50-billion fraud scheme that Bernard Madoff is accused of running despite a decade of warning signs.
Madoff (70) was arrested on Thursday and allegedly confessed to the scam, which collapsed after clients asked for their money back due to the global financial crisis.
US authorities allege that Madoff secretly used money from new investors to pay interest to other investors, in a fraud known as a Ponzi or pyramid scheme. The collapse has shaken financial institutions worldwide and hit big-name investors.
The Securities and Exchange Commission “has learned that credible and specific allegations regarding Mr Madoff’s financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action”, Cox said in a statement.
“I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations,” Cox said.
“A consequence of the failure to seek a formal order of investigation from the commission is that subpoena power was not used to obtain information,” Cox said, “but rather staff relied upon information voluntarily produced by Mr. Madoff and his firm”.
Spain’s stock market regulator said investment funds there had direct exposure of €106,9-million, a day after Spain’s biggest bank Santander announced potential losses of more than three billion dollars from Madoff Investment Securities.
British investment consultants PIRC noted that many of those hit were professional investors.
“We therefore might also ask what financial institutions actually do for their management fee if being able to spot, and avoid, a pyramid scheme isn’t part of the service?”
Jean-Pierre Jouyet, France’s former European affairs minister who this week took over at France’s financial markets watchdog, the AMF, said: “For the fourth time, American regulation is in question.”
He cited three previous crises: the 1998 collapse of US hedge fund managers LTCM; the 2001 false-accounting scandal involving energy giant Enron; and the collapse in September of the Lehman Brothers bank.
Japanese financial firms joined the growing list of those caught up in the scandal. The Aozora Bank said its exposure might amount to ¥12,4-billion ($137-million).
Nipponkoa Insurance and Mitsui Sumitomo Insurance and Daiwa Securities Group put their losses at several hundred million yen — relatively small sums compared to those already announced elsewhere.
Private Austrian bank Medici said it had exposure of $2,1-billion via two of its investment funds, but that the exposure did not threaten its survival.
Other big losers in the scheme included Dutch bank Fortis, which announced exposure of at least $1,2-billion, and Britain’s HSBC at $1-billion. A string of other European banks have announced exposure of up to hundreds of millions of dollars.
In Germany, Deutsche Bank, Postbank and the German federation of public banks VOeB all told AFP they had no exposure to the scheme.
Germany’s second biggest bank, Commerzbank, declined to comment.
Swiss insurance group Zurich Financial Services said it had no exposure, Swiss Re said it had indirectly invested less than three million dollars. Swiss Life did not give a response.
Madoff is free on a $10-million bond, but will be in court on Tuesday to establish whether he has met bail conditions set after his arrest last week.
Cox said he has “directed a full and immediate review of the past allegations regarding Mr Madoff and his firm and the reasons they were
not found credible, to be led by the SEC’s Inspector General”.
The SEC probe will also “include all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by staff regarding the firm,” Cox said.
Even the charitable Wunderkinder Foundation of Oscar-winning filmmaker Steven Spielberg fell victim to the mammoth fraud and suffered losses, according to the Wall Street Journal.
Citing people familiar with the case, the newspaper said about 70% of the dividend income and interest for the foundation had been handled by Madoff’s securities firm, but it was not known if Spielberg had also invested any of his personal fortune.
The US Securities Investor Protection Corporation (SIPC), which provides a Congress-authorised special reserve fund to help investors at failed brokerage firms, said on Monday it was liquidating the Madoff company. – AFP