"Madoff's firm never had to face redemption." That observation, one among many noted by a hedge fund manager in a 2003 complaint filed with the SEC regarding suspect activity of Bernard L. Madoff Investment Securities, struck me as the most ironic if not poignant sentence in the Executive Summary of the report of the SEC's Office of Inspector General Released yesterday (Sept. 2) on: "Investigation of Failure of the SEC To Uncover Bernard Madoff's Ponzi Scheme" [2] (The full report, said to number 450 pages, is expected to be released by the SEC later this week.)

Madoff, who earlier this year began serving a 150-year prision term after being found guilty of his self-confessed multi-billion dollar Ponzi scheme, is now presumably seeking redemption.

And, the SEC is seeking redemption for its repeated failure to catch Madoff in the act, as detailed further below.

Major Findings in the OIG's Report
Right up front, the report puts to rest the more sensational accusations that had surfaced since Madoff's confession last December. "The OIG investigation did not find evidence that any SEC personnel who worked on an SEC examination or investigation of Bernard L. Madoff Investment Securities, LLC (MBIS) had any financial or other inappropriate connection with Bernard Madoff or the Madoff family that influenced the conduct of their examination or investigatory work," begins the report. "The OIG also did not find that former SEC Assistant Director Eric Swanson's romantic relationship with Bernard Madoff's niece, Shana Madoff, influenced the conduct of the SEC examinations of Madoff and his firm. We also did not find that senior officials at the SEC directed attempted to influence examinations or investigations of Madoff or the Madoff firm, nor was there any evidence any senior SEC official interfered with teh staff's ability to perform its work."

"The OIG investigation did find, however," continues the report, "that the SEC received more than ample information in the form of detailed and substantive compalints over the years to warrant a thorough and comprehensive examination and/or investigation of Bernard Madoff for operating a Ponzi schme, and that despite three examinations and two investigations being conducted, a thorough and competenet investigation or examination was never performed. "

In brief, the SEC OIG's report noted that in spite of the SEC having received at least "six substantive complaints that raised significant red flags concerning Madoff's hedge fund operations... [which] should have led to questions about whether Madoff was actually engaged in trading," the SEC's Office of Compliance Inspections and Examinations, Division of Enforcement, and regional offices repeatedly focused their efforts - in a series of investigations between 1992 and 1998, on searching for evidence of 'front running,' and eventually making the case that Madoff needed to register as an investment adviser, but failing to do rudimentary "common sense" investigative work to follow up allegations of a purported Ponzi scheme. Additionally, the OIG's report noted repeated instances of use of relatively inexperienced or untrained staff on investigations, and failing to coordinate investigative efforts between and among the Commission's various divisions and offices.

Among the complaints filed with the SEC about Madoff, noted in the report, are those submitted by Harry Markopoulos, author of the detailed roadmap of red flags he saw in Madoff's house of cards, which he and other tipsters pointedly viewed as a likely Ponzi scheme. Markopoulos, and other senjior SEC staff, testified at a Feb. 4 hearing convened by the House Financial Services Committee, Subcommittee on Capital Markets, chaired by Rep. Paul Kanjorski. SEC Inspector General H. David Kotz and others testified at a Jan. 5 hearing of the full House Financial Services Committee, chaired by Rep. Barney Frank.

[Note: I worked at the SEC from Dec. 1999-Jan. 2004 in the Office of the Chief Accountant, but was not involved in any matter relating to Madoff. However it pains me to write about the findings in the SEC OIG report, and I suspect other bloggers who are alumni of the SEC staff must feel the same way.]

Redemption
SEC Chairman Mary L. Schapiro issued a statement on Sept. 2, noting issuance of the OIG report, and emphasising some of the efforts already under way to address the shortcomings noted in the SEC's handling of the Madoff affair.

Schapiro's statement as published by the SEC includes a link to an SEC 'spotlight' page on: The SEC['s] Post-Madoff Reforms, which lists 13 major initiatives to strengthen the SEC's ability to successfully handle future investigations the likes of Madoff.

Speaking of redemption, those of you reading the headline of this post referencing the Madoff "Affair" thinking this was about that other alleged Madoff Affair, will have to read about that one elsewhere, like in the New York Post or 'Bernie Madoff's Blog'. I am curious, though, if Sheryl Weinstein's remarks at Madoff's sentencing, noted in this article, could have unduly influenced Judge Denny Chin in light of her non-disclosure (at the time of sentencing) of her alleged affair with Madoff.

Read more details from the SEC OIG's report and Post-Madoff Reforms here [3].

Niemeier Announces Intent to Leave PCAOB
In other regulatory news, the Public Company Accounting Oversight Board issued a press release on Sept. 2nd noting that PCAOB board member Charles Niemeier intends to leave the PCAOB "in the near future."

Unlike certain other press releases when SEC or PCAOB senior figures have announced their intent to leave, the PCAOB press release does not say if Neimeier intends to rejoin the private sector. This makes me wonder if Neimeier, who prior to coming to the PCAOB served as Chief Accountant in the SEC's Division of Enforcement, and was one of the rumored candidates for Chief Accountant of the Commission earlier in this year (prior to Schapiro naming Acting Chief Accountant Jim Kroeker to the position of Chief Accountant last week), may ultimately return to the SEC, or take another position in public service.

However, in an interview with Michael Corkery which appeared in the WSJ Deal Journal Blog after the PCAOB announcement, Niemeier said: "The original date for my term to end was last year. I’ve continued to serve for the 10 months beyond that. It’s simply time to move on. I have stayed focused on the best job I could do here. I haven’t spent anytime on what is next.”

In other PCAOB news, see PCAOB Publishes Staff Q&A on References to Authoritative Accounting Guidance in PCAOB Standards. (This relates to the FASB Codification.) As previously reported, the SEC issued its own interpretive release a couple of weeks ago, relating to the FASB Codification.