When the federal judge rejected Bernard Madoff's plea for leniency Monday (29 June 2009), sentencing the 71-year-old swindler to spend the rest of his life in prison for an "extraordinarily evil", it brought closure to the victims who were swindled out of US$ 65 billion in the largest recorded financial fraud. It was only discovered in part after the investors demanded for repayment of money that was long gone when the stock market plummeted.
U.S. District Judge Denny Chin cited the unprecedented nature of the multibillion-dollar fraud as he sentenced Madoff to the maximum of 150 years in prison, a term comparable only to those given in the past to terrorists, traitors and the most violent criminals. There is no parole in federal prison so Madoff will most likely die there.
Only Madoff and an accountant accused of failing to make basic auditing checks have faced criminal charges. But a person familiar with the investigation said that 10 more people would face federal charges by the time the probe is complete. The person, who spoke on condition of anonymity because the investigation is ongoing, wouldn't detail potential charges or say whether the 10 would include Madoff's family or former employees.
While the investigation is still focused on the persons involved, the public is also clamoring for a review of the agency responsible for preventing it. The Securities and Exchange Commission (SEC) lost credibility when it emerged that a tipster had been trying to blow the whistle on Madoff for years but had been brushed off repeatedly. Since Madoff's case came to light, the agency has announced a series of changes it hopes will improve enforcement, making it easier to detect and root out fraud before it approaches this massive scale.
But this might not be enough. Hence, Daniel Wagner, an AP Business Writer, prepared some questions and answers about what the SEC is doing to shore up its examination and enforcement actions, and how far these changes will go to prevent the next Madoff-style scandal.
QUESTION: Could a Madoff-style fraud happen again?
ANSWER: Of course it could. Enforcement is by definition a backward-looking process, with officials exposing and punishing wrongdoing only after it's been committed. As far as the SEC knows, there are more Madoffs starting up right now.
But officials say fraud on Madoff's scale is unlikely because he was an uncommonly talented crook, quietly gaining the trust of investors, regulators and power brokers over decades in the financial world.
QUESTION: Does that mean they're not doing anything to stop the next Madoff?
ANSWER: Regulators are doing quite a bit to prevent similar Ponzi schemes from bilking more investors.
The examinations division, which is responsible for day-to-day oversight, will be improving examiners' expertise in fraud detection and in complex financial products, looking more closely at firms deemed more likely to commit fraud and improving handling of tips and complaints. That's according to a speech this month by Lori Richards, who directs the SEC's Office of Inspections and Examinations.
SEC Chairman Mary Schapiro has installed a new director of the Division of Enforcement: Robert Khuzami, a former federal prosecutor. He has launched efforts to improve the SEC's enforcement capabilities, including streamlining key processes, and advocates pouring vast resources into hiring new staff.
Testifying before Congress in May, Khuzami said, "Not a day goes by that I don't think about how we can stop the next big fraud."
The agency also will introduce a new computer system intended to track and sift through the complaints that come in, which number between 750,000 and 1.5 million a year.
QUESTION: That all sounds nice, but aren't there some concrete loopholes the SEC needs to close to prevent future scams?
ANSWER: Madoff exploited the opportunity to act as both investment adviser and custodian of his clients' assets. That meant there was no one to verify whether the assets existed, or whether he was making the trades he claimed.
The SEC proposed a new rule that would require third-party verification of the assets, effectively closing that loophole.
But closing loopholes doesn't prevent future abuses, warns Laura Unger, a former commissioner and acting chairman of the SEC.
"Disclosure and rules are always changed after the crisis," she says. "You're hard-pressed to prevent the next thing before it happens because it's always going to be something different."
QUESTION: With so many attempts at reform going on all at once, how can we be sure the SEC even understands where the problems were?
ANSWER: In August, SEC Inspector General David Kotz is expected to release a long-awaited investigation of the breakdowns that allowed Madoff to pull off his scam undetected. It will examine information sharing between the examination and enforcement divisions, and attempt to explain why a tipster with information on Madoff's fraud was unable to attract the agency's attention for over a decade.
Even before the formal recommendations come out, Schapiro has said she will address any weaknesses that come to her attention.
QUESTION: Now that the SEC is stepping up its game, can investors rest easy?
ANSWER: Never.
U.S. District Judge Denny Chin cited the unprecedented nature of the multibillion-dollar fraud as he sentenced Madoff to the maximum of 150 years in prison, a term comparable only to those given in the past to terrorists, traitors and the most violent criminals. There is no parole in federal prison so Madoff will most likely die there.
Only Madoff and an accountant accused of failing to make basic auditing checks have faced criminal charges. But a person familiar with the investigation said that 10 more people would face federal charges by the time the probe is complete. The person, who spoke on condition of anonymity because the investigation is ongoing, wouldn't detail potential charges or say whether the 10 would include Madoff's family or former employees.
While the investigation is still focused on the persons involved, the public is also clamoring for a review of the agency responsible for preventing it. The Securities and Exchange Commission (SEC) lost credibility when it emerged that a tipster had been trying to blow the whistle on Madoff for years but had been brushed off repeatedly. Since Madoff's case came to light, the agency has announced a series of changes it hopes will improve enforcement, making it easier to detect and root out fraud before it approaches this massive scale.
But this might not be enough. Hence, Daniel Wagner, an AP Business Writer, prepared some questions and answers about what the SEC is doing to shore up its examination and enforcement actions, and how far these changes will go to prevent the next Madoff-style scandal.
QUESTION: Could a Madoff-style fraud happen again?
ANSWER: Of course it could. Enforcement is by definition a backward-looking process, with officials exposing and punishing wrongdoing only after it's been committed. As far as the SEC knows, there are more Madoffs starting up right now.
But officials say fraud on Madoff's scale is unlikely because he was an uncommonly talented crook, quietly gaining the trust of investors, regulators and power brokers over decades in the financial world.
QUESTION: Does that mean they're not doing anything to stop the next Madoff?
ANSWER: Regulators are doing quite a bit to prevent similar Ponzi schemes from bilking more investors.
The examinations division, which is responsible for day-to-day oversight, will be improving examiners' expertise in fraud detection and in complex financial products, looking more closely at firms deemed more likely to commit fraud and improving handling of tips and complaints. That's according to a speech this month by Lori Richards, who directs the SEC's Office of Inspections and Examinations.
SEC Chairman Mary Schapiro has installed a new director of the Division of Enforcement: Robert Khuzami, a former federal prosecutor. He has launched efforts to improve the SEC's enforcement capabilities, including streamlining key processes, and advocates pouring vast resources into hiring new staff.
Testifying before Congress in May, Khuzami said, "Not a day goes by that I don't think about how we can stop the next big fraud."
The agency also will introduce a new computer system intended to track and sift through the complaints that come in, which number between 750,000 and 1.5 million a year.
QUESTION: That all sounds nice, but aren't there some concrete loopholes the SEC needs to close to prevent future scams?
ANSWER: Madoff exploited the opportunity to act as both investment adviser and custodian of his clients' assets. That meant there was no one to verify whether the assets existed, or whether he was making the trades he claimed.
The SEC proposed a new rule that would require third-party verification of the assets, effectively closing that loophole.
But closing loopholes doesn't prevent future abuses, warns Laura Unger, a former commissioner and acting chairman of the SEC.
"Disclosure and rules are always changed after the crisis," she says. "You're hard-pressed to prevent the next thing before it happens because it's always going to be something different."
QUESTION: With so many attempts at reform going on all at once, how can we be sure the SEC even understands where the problems were?
ANSWER: In August, SEC Inspector General David Kotz is expected to release a long-awaited investigation of the breakdowns that allowed Madoff to pull off his scam undetected. It will examine information sharing between the examination and enforcement divisions, and attempt to explain why a tipster with information on Madoff's fraud was unable to attract the agency's attention for over a decade.
Even before the formal recommendations come out, Schapiro has said she will address any weaknesses that come to her attention.
QUESTION: Now that the SEC is stepping up its game, can investors rest easy?
ANSWER: Never.
The people who got duped are also to blame,especially those who lost grand sums of money. Shouldn't they have taken the personal responsibility of due diligence? From what I have read, his returns were well ABOVE the averages - this is in itself a big red flag. If it sounds too good to be true - it probably is.
Also - the largest ponzi scheme going on in this country right now is Social Security. Those criminals in D.C. should be locked away because that is exactly what they have turned that money in to. That is money that should be in a lockbox on saved until we retire. Instead, the government spends that money on other unnecessary stuff. We're now at the point where they are taking the money we earn now and paying those who are now retired. But, I digress!