Newly released documents in the Bernard Madoff case paint a detailed picture of a feckless Securities and Exchange Commission, and an epic scam artist who was constantly amazed he did not get caught.
The documents, released Friday by the SEC following an August request by CNBC under the Freedom of Information Act, include thousands of pages of e-mails, transcripts and internal SEC documents compiled by Inspector General H. David Kotz in his investigation of the SEC's handling of the case. Kotz issued a scathing report in September citing multiple lapses by the SEC in investigations dating back to 1992.
While Madoff's Scam of the Century shocked the world, it appears Madoff was mainly shocked he got away with it so long, according to a jailhouse interview he gave to Kotz on June 17 as he awaited sentencing on 11 fraud counts. In the interview, Madoff says the fact that he did not get caught was "amazing to me." Madoff was not under oath in the interview.
"It never entered the SEC's mind that it was a Ponzi scheme," Madoff says, noting that all investigators would have had to do was contact his supposed counterparties, and they "would've seen it."
The SEC began looking at Madoff as far back as 1992, when investigators shut down an investment business run by accountants Frank Avellino and Michael Bienes who, it turned out, were funneling money to Madoff. Subsequent investigations looked at whether Madoff was using his trading business—which he continues to claim was legitimate—to benefit his investment clients; an illegal practice known as front running. But Madoff says in the interview, "Everything the SEC did prior to 2006 was a waste of time."
By 2006, SEC investigators were looking more closely at allegations by independent fraud investigator Harry Markopolos, who had been complaining as far back as 2000 that Madoff was running a Ponzi scheme. After the scandal broke, Markopolos offered a blistering indictment of the SEC.
"I gift wrapped and delivered the largest Ponzi scheme in history to the SEC," Markopolos told a house subcommittee in February, "and somehow, they couldn't be bothered to conduct a thorough and proper investigation because they were too busy on matters of higher priority."
The new SEC documents suggest the agency did investigate, but they also show staffers were overworked, inexperienced, and in many cases skeptical of Markopolos.
"I have some qualms about a self identified independent fraud analyst, but who knows," writes SEC branch chief Meaghan Cheung in a 2005 e-mail to the staff attorney to whom she has assigned the case.
In the 2009 interview, Madoff also expresses disdain for Markopolos, calling him "a joke in the industry," who was "just jealous" of Madoff's business. But the documents show Markopolos repeatedly warning investigators as far back as 2000 that "the world's largest hedge fund is a Ponzi scheme," since the returns Madoff and his feeder funds were reporting were improbable at best.
Other documents point to the SEC's chronic lack of resources. In a January, 2004 e-mail, enforcement attorney Jason Gettinger writes, "of course, we should get out of the business of burning resources to chase Ponzi schemes."
Madoff suggests his stature in the industry may have helped him navigate the SEC investigations. The former NASDAQ chairman says he "didn't have to tell examiners his role in the industry, because they already knew." Madoff says he had "too much credibility" with the SEC's headquarters staff.
Madoff Was an 'Excellent Liar...'
He calls current SEC Chairwoman Mary Schapiro "a dear friend," adding that she "probably thinks, 'I wish I never knew this guy.'" Prior to her appointment to head the SEC this year, Schapiro headed the Financial Industry Regulatory Authority (FINRA), which she had joined in 1996 when it was still known as NASD. The self-regulatory organization oversaw parts of Madoff's business.
A FINRA spokesman declined to comment.
The Inspector General found no improper influence in the SEC's handling of the Madoff case, and in a statement to CNBC, Kotz says he found no evidence to corroborate a close relationship between Madoff and Schapiro. A report last month by FINRAalso reported no evidence of improper influence, focusing instead on jurisdictional issues.
Madoff also claims he knew Arthur Levitt, who served as SEC chairman in the Clinton administration, "very well," an assertion that Levitt disputes in his interview with Kotz. Levitt says he met Madoff "on an infrequent basis" as SEC chairman, perhaps "once a year." Levitt also denies the SEC would "go easy on anybody," especially high-level industry figures. On the contrary, he says investigators "salivated" at the prospect.
Still, investigators express concern about Madoff's stature. In a 2006 e-mail, compliance examiner Peter Lamore worries about inquiries getting back to Madoff. "He is very well connected, especially to the NASD," Lamore writes.
The documents shed little light on who else might have known about Madoff's scam. Madoff insists the trading business overseen by his sons was legitimate, and says he was not concerned about his Chief Financial Officer, Frank DiPascali, giving testimony in a 2006 investigation, because, "he didn't know anything was wrong either." DiPascali has since pleaded guilty to multiple criminal charges and agreed to cooperate with authorities, but a judge has refused to release him on bail, expressing skepticism about what information DiPascali can offer.
Madoff says executives at feeder fund Fairfield Greenwich "aren't rocket scientists," although other documents suggest the fund company allowed Madoff to manage its investors money with few questions asked. The firm, which lost some $7 billion in the scam, has denied wrongdoing and said it, too, was a victim.
When the Madoff scheme finally collapsed in December, 2008, it devastated investors, including pension funds and charities. It also dashed investor confidence in the midst of a financial crisis. In the interview, Madoff acknowledges his role. "I got myself in a terrible situation, it's a nightmare," he says. "The thing I feel worst about besides the people losing money is that I set the industry back."
SEC staffers who missed the scam appear equally crushed. In an e-mail December 14, three days after the scam became public, Peter Lamore, the compliance examiner, notes, "It's been a tough couple of days for me. Although I gave the exam and follow-up investigation 110 percent, we just didn't uncover it. I think we were very close—probably only 1 or 2 phone calls away from blowing it open—but we didn't (woulda, coulda, shoulda—my best portfolio)."
Madoff says Lamore and his team spent too much time going over e-mails to catch the scam, but Lamore has a different theory.
"He was an excellent liar," Lamore writes. "Very convincing...very, very aggravating."