Luis Felipe Perez seemingly had a good thing going. He was a custom jewelry designed whose business was purportedly growing because of his special approach. After all, look at this article in Haute Living magazine.
But as we now have learned through the Securities and Exchange Commission, it was all allegedly a house of lies. No one worked for his design company. No shops. And the pawn stores he was supposedly building didn’t exist.
The press releases come regularly, announcing the Securities and Exchange Commission taking action against this alleged scam and that one.
Good news. The SEC certainly is interested in being seen on top of things enforcement-wise, especially after the spectacular failure to detect the supreme scamster, Bernard Madoff, for so many years.
It’s depressing in that humankind seems endlessly capable of launching new schmes to defraud. It’s depressing in that a certain sector of humankind seems endlessly susceptible to scams.
Whatever the SEC and other watchdogs are up to and capable of detecting, caveat emptor has to still be the standard for investors. At a minimum, the bad guys are only caught by the securities cops after they’ve done some hoodwinking.
You have to wonder if even this made-up exchange would have raised eyebrows at the Securities and Exchange Commission.
EXAMINER: Mr. Madoff, how do you explain the remarkable returns you generate year after year even when others aren’t doing well.
BERNIE MADOFF: Ouija.
EXAMINER: Mr. Ouija, one of your employees? Is he a fund manager? (The examiner scribbles the name on a piece of paper with the words next to it: DON’T BOTHER TO FOLLOW UP)
BERNIE MADOFF: No, Ouija Board. (At which point Bernie pulls one out of his briefcase. He and the examiner place the board on their knees with their hands moving across the top. Moments later Bernie claims to hear a voice, whispering – “Bernie, buy July IBM 120 calls, sell September American Express 33 puts…”)
The news from the inspector general of the Securities and Exchange Commission is nothing short of shocking. And grizzled journalists aren’t supposed to shock easily.
SEC Inspector General David Kotz reported on how the SEC failed to expose the fraud perpetrated by Bernard Madoff, despite getting six warnings over 16 years.
The inspector general found no influence by Madoff or his family, but it is a tale of astonishing incompetence that makes one worry and wonder about the capabilities of the U.S. markets watchdog.
Here’s just one paragraph from the article on the report by The Wall Street Journal’s Kara Scannell. The whole article and the whole IG report are worth reading.
“The report described how the SEC staff at times didn’t follow through on leads, failing to seek information from a third party because reviewing such information could be too time cinsuming. In another instance, an SEC examiner looked into an institution that Mr. Madoff had said he used to clear his trades. The examiner learned from the institution there was no trading activity by Mr. Madoff during the period under review. The SEC associate director in examinations never followed up or informed the rest of the staff, according to the report.”
Is paying bounties the way to better protect U.S. investors?
The inspector general of the Securities and Exchange Commission thinks so. And while a certain vague distate arises from the notion of paying people to turn other people in, it’s probably a good idea.
With all the talk in the air about new regulations and “behavioral economics,” the direct appeal of cold cash for information does cut through the clutter and appeal to our basic (and possibly baser) instincts.
If it works and gets securities law violators off the figurative streets faster, why not? With the downturn and market decline for a time exposing what seemed like a Ponzi scheme du jour, the need for faster and more effective enforcement is certainly there.
All this relates back to Bernard Madoff, the just-sentenced king of the Ponzi, who avoided for so many years being apprehended by the SEC. In that case, the watchdog agency apparently got some leads even without bounties as inducements.
The SEC’s failure to uncover the $65 billion Madoff fraud has led the inspector general of the SEC, H. David Kotz, to try to find out why this happened. He is, in esssence, the watchdog of the watchdog.
As Kotz has investigated the SEC and the Madoff affair, he’s been urged by Rep. Paul Kanjorski, D-PA., the chair of the House Financial Services Subcommittee on Capital Markets, to provide updates on this probe. Kotz was also asked specifically for some ideas on modifying securities laws to avoid a Madoff recurrence as Congress prepares to debate regulatory reform legislation.
Kotz replied on June 30 with some ideas, one of which was about bounties. (The Financial Times wrote a news article about the inspector general’s bounty idea.)
“Bounty programs are an effective tool to encourage whistleblowers to come forward and would provide necessary incentives for outside entities to bring complaints about possible illegal activity,” Kotz wrote. He said there’s some evidence that bounty programs run by the Department of Justice and the Internal Revenue Service have borne the desired fruit.
The SEC already does have a bounty system, Kotz noted, which is 20 years old. But few awards are paid, he said, because it’s limited to insider trading cases “and the stated criteria for judging bounty applications are broad, somewhat vague and not subject to judicial review.”
Kotz’s recommendation: authorize the SEC to “award a bounty for information leading to the recovery of a civil penalty from any violator of federal securities laws, not simply insider trading violations.”
There seems no harm in trying a broader distribution of bounties. If nothing else, the Madoff scandal made clear enforcement help is needed.
Another Great Cartoon From Newsday's Walt Handelsman
The headlines all screamed “150 years” for Bernie Madoff behind bars. But what a lot of people missed was the additional 33 years of “supervised” monitoring the judge tacked on for good legal measure. What that means is that when Bernie is 220+ years old and gets out of the pen, he’s supposed to be monitored full-time for 33 years…
The U.S. business media and even the general news mediums will be busy today with all Madoff all the time.
A couple of comments to add to the fray:
-Besides the symbolism of the 150-year sentence for fraudster Bernard Madoff, U.S. District Judge Denny Chin called the crimes “extraordinarily evil.” The sentence length and the language are usually reserved for violent crimes committed against other human beings. This shows that white collar crime, if pervasive and long-standing as Madoff’s crimes were, are starting to equate with violent crimes in the view of the courts. Many were shocked a few years back when Worldcom Inc. Chief Executive Bernard Ebbers got 25 years in jail for his white-collar crimes. This continues the trend. Whether it will prove a deterrent to further white collar crimes, or whether, as some argue, there are some people who are just simply going to violate the rules whatever the rules may be, we”ll let the pyschologists and criminologists ponder.
-For all the recent criticism of the actions or inaction of the Securities and Exchange Commission in recent years, the Madoff case stands out as the watchdog agency’s most egregious failure. SEC staff were being provided with information from Madoff rivals. Nothing happened. The nature of the crime should have played to the SEC’s historical enforcement strengths: a Ponzi scheme involving traditional securities.
Of course, the Madoff story isn’t over.
An Animated Video About The Credit Crisis
Click Here to watch it. Think “West Side Story” morphing into “Worst Slide Story.” Hats off to Walt Handelsman of Newsday.
Financial journalists should know how to read a balance sheet, understand the basics of banking and know that bond yields move inversely to bond prices.
These days, some experience in law and order also wouldn’t hurt. As we navigate this global recession, consider the following that could fall under the category of business crime reporting:
How many times in the wake of the 9/11 attacks against the U.S. did we hear complaints about outmoded and “siloed” technology employed by various law enforcement agencies of the U.S. federral government? That was followed by vows to make it right. On a much smaller scale, the head of the Securities and Exchange Commission Wednesday described to Congress her agency’s technological and systemic stumbling blocks. SEC Chairman Mary Schapiro in written testimony cited systems problems at the agency, which has been lambasted for being behind the curve in the financial crisis and missing years-long scandals like the alleged Madoff Ponzi scheme. The agency gets 700,000 tips and referrals a year and has “no central depository or system through which this information comes together to ensure it is handled consistently or appropriately.” The Obama administration has asked for a 9% bigger SEC budget for fiscal 2010 and some money would go here, Schapiro said. But don’t look for anything overnight. First there will be a “comprehensive review,” Schapiro said, adding the agency will invest “over the next couple of years in new systems as needed.”
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