IG: Madoff probe could delve into SEC operations

Madoff's reputation may have caused agency examiners to eschew a more thorough review.

The SEC's inspector general testified Monday that his probe into Bernard Madoff's alleged $50 billion Ponzi scheme might go beyond the case and expand into the agency's operations into enforcement and compliance matters.

David Kotz told members of the House Financial Services Committee Monday his investigation into Madoff could climb into areas that Chairman Christopher Cox had not specifically asked him to investigate, such as the overall operations of the SEC's Division of Enforcement and Office of Compliance and Inspections.

Kotz said that he could not provide preliminary judgments or findings in the Madoff case, in which regulators have alleged the former NASDAQ chairman set up a phony set of records to cover up billions in fraud perpetrated on his investors. But he said one area of interest would be whether there were red flags overlooked by SEC examiners and inspectors that could have led to a more thorough review of Madoff.

One question is whether there was a conflict of interest between Madoff's niece and a former SEC attorney, and how the extent that Madoff's reputation -- including his service on SEC advisory committees -- affected any lack of investigation.

"At the end of these investigative efforts, there needs to be more than just the potential identification of individuals who may have engaged in inappropriate behavior or potentially failed to follow-up appropriately on complaints, but rather an attempt to provide the commission with concrete and specific recommendations as appropriate to ensure that the SEC has sufficient systems and resources to enable it to respond appropriately and effectively to complaints and detect fraud through its examinations and inspections," Kotz said.

Kotz added that he is mobilizing more resources for his office and may issue periodic reports on the case. Kotz's testimony kicks off the first congressional debate into revamping the SEC, which many critics, including former chairman Arthur Levitt, say has been demoralized because of a lack of resources and a lax regulatory environment. President-elect Obama has selected Mary Schapiro, who heads the Financial Industry Regulatory Authority, an industry-operated watchdog group, to head the agency. Schapiro is likely to face questioning in her Senate confirmation over the authority's investigation in Madoff.