S.E.C. Knew Him as Foe and Friend

As the Securities and Exchange Commission begins an internal examination into how it missed the red flags of one of the largest frauds in history, it will inevitably discover that Bernard L. Madoff was a Wall Street pioneer who over the last 20 years alternately impressed and infuriated the agency’s top policy makers.

Christopher Cox
Christopher Cox

Commissions led at various times by Republican and Democratic appointees came to see Mr. Madoff’s trading operations as a healthy alternative to the New York Stock Exchange. As one of the first companies to recognize the power and efficiency of electronic trading, Mr. Madoff’s stock-trading operation was able to offer deep discounts and quick execution, forcing the older exchanges to compete.

It was one of the first to offer trading beyond the traditional hours of Wall Street, a recognition of the growing global nature of the markets. And as it began to take business away from the more established market makers — middlemen between buyers and sellers of stock — like the New York Stock Exchange, it drew increasing criticism.

But the same officials who came to admire his efforts at making markets faster and less costly also challenged him when they thought Mr. Madoff pushed the boundaries too far.

Those conflicting approaches toward Mr. Madoff were perhaps most evident during the tenure of Arthur Levitt Jr., the longest-serving chairman of the commission, who oversaw a significant transition of the stock markets.

In a speech in 1999 in Boca Raton, Fla., before the Securities Industry Association, Wall Street’s largest trade group, Mr. Levitt sharply criticized a practice of Mr. Madoff’s firm of compensating financial institutions for directing trades toward the firm, a practice known as payment for order flow. Mr. Madoff also fought unsuccessfully against Mr. Levitt’s initiative to change the system of pricing stocks from one using fractions of a dollar to one using decimals, a change that wound up significantly reducing commissions and saving investors billions of dollars, but reduced profitability for firms like Mr. Madoff’s.

But Mr. Levitt, who served as chairman for all eight years of the Clinton administration, also occasionally turned to Mr. Madoff for advice about how the markets worked, and appointed him as a member of a large advisory commission that included a wide range of industry representatives that explored the rapidly changing structure of the financial markets.

“From my point of view, he understood the markets and we could ask him a question of how this worked and that worked and get a credible answer,” Mr. Levitt said in an interview on Wednesday. “But he also fought us tooth-and-nail on some issues, like the conversion to decimals.”

Mr. Levitt said he was unaware of the inquiries by commission staff members into Mr. Madoff’s firms during the 1990s. He disputed the notion that Mr. Madoff had any particular influence at the commission, or that the enforcement staff under him or any of his predecessors or successors would have been lulled into going lightly on Mr. Madoff because of his status as a prominent Wall Street executive.

To the contrary, Mr. Levitt said, the enforcement staff during his term “delighted” in taking on high-profile figures if there was evidence of wrongdoing.

“The notion that Bernie Madoff was too powerful or too influential to be pursued is totally off the mark,” he said. “The higher up the person in the industry, the more aggressive the effort. If there was any hint or suggestion that Madoff was doing wrong, we would have come down on him with hob-nailed boots.”

But in announcing on Tuesday that the agency would review how it failed to detect the fraud scheme earlier, Christopher Cox, the current chairman of the commission, said that the agency ignored specific and credible evidence of problems going back to at least 1999.

“Our initial findings have been deeply troubling,” Mr. Cox said.

On Wednesday, Mr. Cox softened his criticism somewhat.

“I want to emphasize that there is no evidence that anyone is aware of at this point that any personnel did anything wrong,” Mr. Cox told reporters after an agency meeting on other matters.