Bernard Madoff And The SEC Case: Political And Bureaucratic Environment Perspective

Rossyovi Mercedes

PAD 758 – Professor Robin Kempf

November 4th, 2014

Madoff and the SEC Case: Political and Bureaucratic Environment Perspective

The Bernard Madoff case is considered the largest Ponzi scheme in the United States’ history. Madoff defrauded clients from the 1980’s through 2008 acting as an investment adviser for Bernard L. Madoff Investment Securities Inc. He created a false infrastructure at the BLMIS to fool investors into believing that it was a legitimate investment advisory business. He then used false pretenses to solicit billions of dollars of funds from them by promising to achieve high rates of return with limited risks, however, he failed to invest the funds and instead converted them to his own use. He not only took money

from individuals, but also from charities, trusts, pension funds, and hedge funds. He repeatedly lied to the U.S Securities and Exchange Commission, whom by means of failed oversight and regulatory malfunctions, perpetuated the defrauding Madoff was conducting.

Investigations of the case later discovered that over 4,800 account holders were defrauded with balances of nearly 64.8 billion dollars, from which Madoff’s firm owed a “small” fraction. Ultimately, Madoff pleaded guilty to several criminal and regulatory charges and was sentenced to 150 years in jail.

The political and bureaucratic environment in which the case took place was a complex one. It is obvious that there wasn’t sufficient oversight and regulation from the SEC. The agency not only failed to detect the fraud, but also perpetuated it in some forms. Reports show that the SEC received more than ample information and substantive complaints to warrant a thorough investigation of Madoff and his operations. However, even after conducting three examinations and two investigations, the SEC did not find sufficient evidence to raise a case against him. It was only after his own son testified that Madoff was convicted. Additionally, Madoff knew the policies and politics involved in his defrauding, which only made it easier for him to fool the

investigators and auditors by crafting bogus financial documents and submitting altered records. One would think that overtime the SEC would become suspicious, as the information provided by Madoff was sometimes incomplete and insufficient, but no further investigative efforts were made. The aforementioned, added to the fact that many of the investigators assigned to the case were unprepared and inexperienced, prevented the fraud from being detected and prosecuted earlier. The bureaucracy in this case seemed to be dominated by Bernard Madoff completely. He controlled his staff and had them trained properly to generate false client account statements and put up fronts for the SEC. In terms of politics, he seemed to be so well trusted that for reasons already mentioned earlier, the first investigations were unsuccessful. The organizational culture and environment at the SEC did not help either. There was a lack of support from management and supervision in regards to the investigation, poor communication between the involved departments, conflicts of interests, and a revolving door culture that led to low staffing. The SEC was in crisis itself, which only furthered its failure in uncovering Madoff’s Ponzi scheme. Had they taken the necessary and proper steps, they would have discovered Madoff long before he confessed.