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SEC Staffer's Concerns about Madoff Were Ignored in 2004

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  • John M. Baker
    A Securities and Exchange Commission lawyer raised concerns about Bernard L. Madoff Investment Securities in 2004, but those concerns were ignored because the
    Message 1 of 1 , Jul 4, 2009
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      A Securities and Exchange Commission lawyer raised concerns about Bernard L. Madoff Investment Securities in 2004, but those concerns were ignored because the SEC was focused on late trading and market timing at mutual funds, according to a front-page article in the July 2 Washington Post. The Office of Compliance Inspections and Examinations lawyer in question, Genevievette Walker-Lightfoot, indirectly reported to Eric Swanson, an assistant director at OCIE who left the SEC in 2006 and married Bernard Madoff's niece in 2007.

      Walker-Lightfoot was investigating Madoff's relationship with various hedge funds, particularly the possibility that those funds might have been allowed to trade ahead of Madoff's other customers. She found that his trades did not always settle in T+3, instead settling as quickly as T+1 or as late as T+7, and that his trades did not reflect his stated trading strategy, did not treat supposedly parallel accounts alike, and did not make sense. She wanted to follow up with additional questions.

      Instead, her supervisor, a branch chief who reported to Swanson, told her to concentrate on mutual funds. New York Attorney General Eliot Spitzer had brought public attention to the mutual fund late trading and market timing scandal six months earlier, in September 2003, and the SEC was under public pressure to show progress in that area. Walker-Lightfoot left the SEC in 2006 after filing a complaint with the agency alleging that she'd been subjected to a hostile workplace, according to the article, which says that a person familiar with the complaint said it was settled in Walker-Lightfoot's favor.

      It remains unclear why the SEC did not query Madoff's supposed counterparties, who would quickly have revealed that all of his trades were illusory. The SEC's Inspector General, David Kotz, has said he plans by August 31 to issue a comprehensive investigative report detailing all the examinations and investigations that the SEC conducted of Madoff or Madoff-related entities from 1992 until the present and analyze the reasons that the SEC did not uncover the Madoff Ponzi scheme notwithstanding these examinations and investigations.

      The Washington Post article is available online (free registration with the Post may be required) at


      Kotz's letter to Rep. Paul Kanjorski (D - Pa.), discussing his investigation and planned reports, is at


      For my December post on Madoff, which points out a number of red flags for sophisticated investors, see


      John M. Baker <JMB@...>
      Stradley Ronon Stevens & Young, LLP http://www.stradley.com
      1250 Connecticut Avenue, NW, Suite 500
      Washington, DC 20036
      202.822.0140 fax
      FundLaw Listowner http://groups.yahoo.com/group/fundlaw
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