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Madoff Victims Claim Conflict of Interest at SEC

Many of those who say they were victimized by long-time investor Bernard Madoff's alleged Ponzi scheme are up in arms that the Securities and Exchange Commission, Wall Street's top cop, didn't crack down on his activities sooner, and they’re pointing to what they believe is a troubling conflict of interest between Madoff's compliance staff and a former SEC compliance examiner who was once on a team that examined the firm.

The 70-year-old Madoff, well respected in the investment community after serving as chairman of the Nasdaq Stock Market, was arrested Thursday in what prosecutors say was a $50 billion scheme to defraud investors.

The compliance staff of the Madoff firm is headed by Bernard’s brother Peter, and his brother’s daughter, Shana, the firm’s compliance counsel.

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Bernard L. Madoff
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Bernard L. Madoff

Shana Madoff is married to a former SEC compliance examiner named Eric Swanson.

Swanson was at the commission in 2003 when the agency was examining the madoff firm. More importantly, he was also part of the SEC team that was conducting the actual inquiry into the firm.

What does all this mean? Nothing, according to Shana Madoff or her husband, whom she married in 2007.

A spokesman for Shana Madoff and one for Swanson confirm that both knew each other professionally during the time of the examination.

But they say they had no "social relationship," meaning they were neither dating nor married when the inquiry was being conducted.

CNBC has no information indicating that this relationship resulted in the SEC missing the Madoff scandal, or that either Swanson or Shana Madoff did anything wrong; neither has been charged in the scandal. Mr. Swanson's spokesman said his client has a reputation that "has been and continues to be above reproach."

Are you a victim of Madoff's alleged scheme?  Tell us your story
Are you a victim of Madoff's alleged scheme?  Tell us your story

But many investors who lost millions of dollars investing with Madoff are saying that it’s a troubling conflict, showing that the Madoff firm may have been too cozy with regulators in a number of areas that possibly caused the commission to ignore signs of wrongdoing.

They say Madoff had been on industry committees that dealt directly with the SEC on rule-making.

They also point to the fact that he knew Arthur Levitt, the former SEC chairman, who held that post for more than 35 years.