Report: SEC Official Raised Madoff Concern

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This is ALL THINGS CONSIDERED from NPR News. I'm Melissa Block.

ROBERT SIEGEL, host:

And I'm Robert Siegel.

Did the Securities and Exchange Commission ignore the work of its own investigator who had found irregularities in the filings of Bernard Madoff?

The Washington Post's Zachary Goldfarb reports today that in 2004, an investigator named Genevievette Walker-Lightfoot looked through Madoff's documents and came up with some serious questions about his methods. She told her supervisors and prepared a list of those questions. But the supervisors evidently showed no interest.

Zachary Goldfarb, what did she find that didn't smell right?

Mr. ZACHARY GOLDFARB (Business and Economics Reporter, The Washington Post): She found that the documents that Madoff had turned over to the SEC were full of inconsistencies. He claimed he engaged in one kind of strategy for trading stocks and options and other kinds of securities, but in fact, the documents suggested he wasn't engaging in these kinds of activities.

Much later, when he was charged with fraud and many other crimes by the Department of Justice, the criminal complaint specified the same kinds of concerns that she brought to the attention of the SEC in 2004.

SIEGEL: Well, when she brought those concerns to the attention of her supervisors, what did her supervisors do?

Mr. GOLDFARB: Her supervisors asked her to list some questions she wanted to ask Madoff in a second request for information. But we don't know that those specific questions were followed up on ever. Shortly after she unveiled her concerns, she was asked to work on a different case focused on the mutual fund industry unrelated to Madoff.

The SEC in this period of time was under heavy pressure to investigate potential wrongdoing in the mutual fund industry. And Ms. Walker-Lightfoot's group in Washington didn't have enough resources to spend on Madoff and the mutual fund case. Eventually, this case was moved to New York where they continued to look at Madoff. They found minor violations of rules, but not the fraud.

SIEGEL: And eventually, she left the Securities and Exchange Commission.

Mr. GOLDFARB: That's correct. She left in early 2006.

SIEGEL: Now, one of the odd twists to this story is that Walker-Lightfoot's - I guess it's her supervisor's supervisor, Eric Swanson, later married Bernard Madoff's niece. Is there any suspicion of conflict of interest there?

Mr. GOLDFARB: Well, the inspector general of the SEC, David Kotz, has said he will review and is reviewing the relationship between Madoff's niece and Eric Swanson, who was, as you said, the supervisor of Walker-Lightfoot's supervisor. Swanson did not marry Shana Madoff until 2007. The SEC said the last time he worked on anything related to Madoff's firm was in early 2004, and that he never worked on any Madoff-related activities while he was romantically involved with Madoff's niece.

SIEGEL: Now, to put your story in the context of a timeline: as early as 2001, Barron's had published an article questioning Madoff's methods. Later, in 2007, after what you've reported on what happened, Harry Markopolos, the independent investigator, wrote to the SEC saying this is a Ponzi scheme. Is there any evidence that the SEC went back after Markopolos' allegation to look and see what its own investigator had said a few years earlier?

Mr. GOLDFARB: No, there's no indication that Walker-Lightfoot was ever consulted again on the case of Madoff. She left, of course, in 2006. And the last investigation of Madoff's firm was in 2006 and 2007, when they in fact went looking for a Ponzi scheme or other type of similar fraud and didn't find one.

SIEGEL: How embarrassing is it to the SEC that they could not catch a, people say, a $50 billion Ponzi scheme, despite multiple investigations and voluminous filings by Bernard Madoff?

Mr. GOLDFARB: It's probably the worst defeat for the agency in its history, certainly in recent memory. It came after several difficult years when the SEC tried to take steps to monitor investment banks. But the failure of those banks contributed to the financial crisis. There are questions about whether the SEC was being tough on enforcement.

The new SEC chairman, Mary Schapiro, has promised to revive the agency. She's promised to toughen up enforcement. She's promised to introduce new policies, and in fact, has pursued new policies to make it more difficult for an operator like Madoff to run a Ponzi scheme.

SIEGEL: Zachary Goldfarb, thank you very much for talking with us.

Mr. GOLDFARB: Thanks very much for having me.

SIEGEL: And Mr. Goldfarb is a business and economics reporter for the Washington Post.

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