Congressmen sound off against SEC in Madoff affair

WASHINGTON — Lawmakers excoriated federal regulators Monday for failing to pursue “red flags” signaling that Bernard L. Madoff’s storied investment business was an elaborate Ponzi scheme, and some officials promised more investigation and regulation in coming months.

During a panel session on Capitol Hill, Rep. Paul Kanjorski (D-Pa.), chairman of the House subcommittee on capital markets, warned that Congress intended to scour the records of the Securities and Exchange Commission and impose new rules to prevent a similar lapse in the future.

“We now know that our securities regulators have not only missed opportunities to protect investors against massive losses from the most complex financial instruments like derivatives, but they have also missed the chance to protect them against the simplest of schemes, the Ponzi scheme,” said Kanjorski. “Clearly, our regulatory system has failed miserably. And we must rebuild it now.”

Top SEC officials declined to appear at the meeting, which did not have the status of a formal hearing because Congress was officially still in holiday recess.

In New York, meanwhile, prosecutors asked a federal judge to revoke Madoff’s bail, arguing that he violated its conditions by giving away $1 million in jewelry and other items to family and friends despite a freeze on his assets.

The items included watches, cuff links and mittens, according to Bloomberg News. Madoff is currently under 24-hour house arrest in his Manhattan apartment.

Madoff’s attorney, Ira Sorkin, said his client wasn’t seeking to flout a court order freezing his assets.

“We disagree with the government and we don’t think what is alleged to have happened constitutes a violation,” Sorkin said.

U.S. Magistrate Judge Ronald Ellis is expected to rule on the request this week. Ellis ordered the prosecution and defense to file briefs on the issue in the next three days.

In Washington, Kanjorski and other lawmakers said the government’s failures in the case were too egregious to delay discussion of the problems until later this month, when the House Financial Services Committee would be formally reconstituted.

Lawmakers pointed to several facts that they said should have caught regulators’ attention, including Madoff’s use of a small, little-known auditing firm and a report from the SEC’s Boston office suggesting that his investment strategy was a hoax.

“Why did investigators never use subpoena powers to obtain truthful information?” asked Rep. David Scott (D-Ga.) “Instead, they only relied upon information voluntarily produced by Mr. Madoff. That’s sort of like asking a thief if he’s stealing.”

David Kotz, the SEC inspector general, whose watchdog office operates independently from SEC management, told lawmakers he had launched a probe to determine whether regulators improperly responded to allegations about Madoff, including whether they may have had personal or professional ties that influenced their decisions.

Kotz said that his investigation aimed not only to identify individual regulators who failed to do their jobs but also to find and plug holes in the agency’s regulatory network.

“I firmly believe that the circumstances surrounding the Bernard Madoff matter may very well dictate a more expansive analysis of commission operations,” said Kotz.

“Bernard Madoff’s victims collectively paid hundreds of millions of dollars in federal and state taxes. Yet, the federal government did not use any of this tax or any other tax dollars to properly oversee or discover any deceitful fraudulent activity in the Madoff empire in time to mitigate potential losses or to protect investors,” Rep. Gary Ackerman (D-N.Y.) said.

“The Madoff scheme would still be in operation today and perhaps for decades into the future had it not been for the meltdown on Wall Street that brought it to public notice,” Rep. Brad Sherman (D-Sherman Oaks) said.

Madoff was arrested Dec. 11 and charged with running a fraudulent investment business that lost as much as $50 billion he collected from individuals, pension funds, charities and hedge funds.

Stephen Harbeck, president of the Securities Investor Protection Corp., a private fund that insures investors up to $500,000, said he hoped his group could start writing checks soon to reimburse swindled investors for some of their losses.

But Harbeck warned that much of the money investors thought they had earned -- especially funds invested with Madoff long ago -- was in fact “false profits” that never existed and therefore cannot be reimbursed.

He said his fund had about $1.6 billion in reserves and a $1-billion line of credit. It hopes to recover as many of Madoff’s assets as possible and will try to distribute them fairly among Madoff’s alleged victims.

“This fraud was of a completely different order of magnitude of anything in SIPC’s history,” Harbeck said. “We won’t know the extent of the call on SIPC’s resources for some time.”

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Times staff writer Walter Hamilton in New York contributed to this report.