SEC Watchdog to be Questioned about Madoff Scandal

The Securities and Exchange Commission heard rumblings about Wall Street money manager Bernard Madoff's investment methods nearly a decade ago. Now a House panel wants to know how, despite those warnings, Madoff continued to operate without an agency investigation.

The Financial Services Committee will question the SEC's internal watchdog Monday, as lawmakers try to learn why the regulatory agency failed to detect an alleged $50 billion investment fraud by Madoff.

Madoff's alleged Ponzi scheme will be a case study for a planned overhaul of laws regulating financial markets, said Rep. Paul Kanjorski, D-Pa., who will chair the hearing.

Witnesses include H. David Kotz, the SEC inspector general. He's already is looking into the agency's failure to uncover the fraud despite several warnings.

Kotz previously said he will examine the relationship between a former SEC attorney and Madoff's niece, who are now married.

The SEC chairman, Christopher Cox, has said credible and specific allegations regarding Madoff's wrongdoing—going back to at least 1999—were repeatedly brought to the attention of SEC staff. Cox said he was concerned by the apparent multiple failures to thoroughly investigate the allegations or at any point to seek formal authority from the commission to pursue them.

CNBC.com Bernard L. Madoff

Kanjorski, who heads a Financial Services subcommittee, said in an interview, "I hope this doesn't turn out to be a 'gotcha' hearing." Rather, he said, lawmakers will be asking, "Where were the failures? Where were the holes?"

He said Cox's statements on staff failures were a surprising indictment of his own agency.

"Why didn't they have a working group saying, 'OK guys, what are you hearing out there? What are people on the street complaining about?"'

The lawmaker said existing regulation of the financial industry is divided among different agencies that fail to communicate with each other. For instance, he said banks were among the Madoff investors and they are not regulated by the SEC. Kanjorski said he wants to learn whether banking regulators also received warnings.

Lawmakers also will question Stephen Harbeck, president of the Securities Investor Protection.

The SIPC attempts to help investors recoup their money. It was created by Congress in 1970 to protect investors when a brokerage firm fails and cash and securities are missing from accounts. Funds can be used to satisfy the remaining claims of each customer up to a maximum of $500,000. The figure includes a maximum of up to $100,000 on claims for cash.

SIPC said claim forms are expected to be sent to Madoff investors and creditors by Jan. 9. The forms will also be available for download on SIPC's Web site.

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