US securities regulators missed "numerous" red flags that may have led to Bernard Madoff's $65 billion Ponzi scheme and never did a "thorough and competent" probe despite complaints dating to 1992, a federal watchdog has concluded.
The US Securities and Exchange Commission's inspector general said in a blistering report that despite five probes and having caught Mr Madoff in "lies and misrepresentations," the SEC failed to follow up on inconsistencies.
"Despite numerous credible and detailed complaints, the SEC never properly examined or investigated Mr Madoff's trading and never took the necessary, but basic, steps to determine if Mr Madoff was operating a Ponzi scheme," Inspector General David Kotz wrote.
Mr Kotz said the SEC's "most egregious" lapse was its failure to verify Mr Madoff's purported trading with any independent third parties, even after it took testimony from Mr Madoff in May 2006.
Mr Madoff later admitted that he thought it was "game over" after testifying to having cleared his trades through the Depository Trust, part of the US Federal Reserve, and provided his account number. He said he was "astonished" that the SEC did not follow up.
Mr Kotz quoted one senior-level SEC examiner as saying, "Clearly, if someone ... has a Ponzi and they're stealing money, they're not going to hesitate to lie to create records," and thus "some independent third-party verification" such as through the DTC would be essential.
He said the SEC had made a "surprising discovery" earlier this decade that Madoff's hedge fund business was making far more money than his better known market-making business, but no one thought this was a "cause for concern."
Mr Madoff pleaded guilty in March to orchestrating the Ponzi scheme, which used money from new investors to pay old ones, He is serving a 150-year prison term.
Prosecutors have said that Mr Madoff appeared to be rewarding his customers with steady returns, but he was faking their account statements and did not place trades on their behalf.
Mr Kotz said SEC staffers were at times too inexperienced or narrowly focused, and resisted whistle-blowers' efforts to expose Mr Madoff.
He said his investigation had not found evidence of improper ties between the SEC and Mr Madoff that interfered with the SEC's examination or investigatory work.
And he said he had not found that former SEC Assistant Director Eric Swanson's romantic relationship with Mr Madoff's niece, Shana Madoff, had influenced the SEC's conduct.
A 22-page summary of the report was released yesterday. The full 450-page report is expected tomorrow.