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SEC Inspector General Tells Agency What It Must Do To Catch Next Madoff

UPDATED at 2 p.m. with comments from SEC inspector general:

The inspector general of the Securities and Exchange Commission -- the internal cop of the SEC -- has just issued a long report to the agency filled with changes it needs to make to avoid missing the next Bernie Madoff.

You may recall that the SEC was repeatedly warned about Madoff -- who is serving 150 years in prison for running a multi-billion-dollar Ponzi scheme -- but repeatedly whiffed. Part of the problem was a lack of SEC expertise in what Madoff did, or said he did, and fixing that is one of the IG's 58 -- yes, 58 -- recommendations.

In an interview on CNBC moments ago, SEC inspector general H. David Kotz -- who interviewed Madoff -- said that Madoff was surprised the SEC never caught him and pointed specifically to one instance where Madoff gave testimony in an investigation and was sure the next day he would be caught. He was "astonished" that he wasn't, Kotz said on CNBC.

Kotz said his investigation wanted to "get in the weeds" to try to make sure the SEC doesn't miss another Madoff. He added that SEC chairman Mary Schapiro has "made efforts to start reforming things" even before this report came out.

In the report, the IG wrote: "Specifically, we found that enforcement staff lacked adequate guidance on how to appropriately analyze complaints. As a result, enforcement staff did not conduct a thorough review of a complaint brought to their attention in 2001 regarding Madoff."

Ooof. That stings. Because that is exactly what the SEC is supposed to be doing.

It gets worse:

"We also found that enforcement staff did not always exercise due diligence in their handling of critical information regarding Madoff. As a result, we found that enforcement staff did not sufficiently review a complaint that included approximately 30 red flags indicating that Madoff was operating a Ponzi scheme."

Thirty red flags!

And, to my way of thinking, here's the worst one, as it speaks to institutional hubris or just plain neglect: "Further, enforcement staff investigating Madoff did not always seek assistance from other offices and divisions as needed during its investigation. As a result, enforcement staff had difficulty understanding key aspects of Madoff’s operations, including his purported trading overseas."

The SEC staff said it "concurs" with the IG's report and has 45 days to get back to the IG to tell him what it plans to do in responding to the blistering report, which you can read by clicking here.

-- Frank Ahrens
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By Frank Ahrens  |  September 29, 2009; 2:00 PM ET
Categories:  The Ticker  | Tags: Bernie Madoff, SEC  
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They need better investigative journalism in NYC and you need to expand. This crisis could be a great opportunity. Don't waste an opportunity.

Posted by: Dermitt | September 29, 2009 2:06 PM | Report abuse

Madoff Trustee to Sue Sons, Other Relatives:

Posted by: Cynthia111 | September 29, 2009 11:20 PM | Report abuse

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