On Thursday, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled, “Oversight of the SEC’s Failure to Identify the Bernard L. Madoff Ponzi Scheme and How to Improve SEC Performance.” Senators Tim Johnson (D-SD) and Richard Shelby (R-AL) provided opening statements, and the hearing focused on the need for the committee’s continued oversight of the Securities and Exchange Commission (SEC), including a focus on changes needed to prevent securities fraud on any scale. This inquiry, a result of the SEC’s Inspector General’s Report detailing the failure of the agency to detect Bernard Madoff’s extensive Ponzi scheme, is similar to that announced by the House Oversight and Government Reform Committee just last week.

The Committee heard testimony from the following witnesses:

Panel 1

H. David Kotz, Inspector General, U.S. Securities and Exchange Commission

Panel 2

Harry Markopolos, Chartered Financial Analyst and Certified Fraud Examiner

Robert Khuzami, Director, Division of Enforcement, U.S. Securities and Exchange Commission

John Walsh, Acting Director, Office of Compliance Inspections and Examinations, U.S. Securities and Exchange Commission

Mr. Kotz discussed his investigation of the Madoff Ponzi scheme, which began on December 16, 2008, immediately upon notification of Madoff’s confession. The Office of the Inspector General (OIG) collected documents and information from all departments of the SEC, as well as third parties, conducted 140 testimonies and interviews of 122 individuals with knowledge relevant to the investigation, and retained outside consultants to assist in the review and analysis of such information collected. The OIG issued a report of investigation to the Chairman of the SEC on August 31, 2009, detailing the results of the investigation; including the SEC’s receipt, over a period of 8 years, of six informative and specific complaints as well as notification of two published articles concerning red flags related Madoff’s investment advisor operations. The SEC did conduct two investigations and three examinations related to Madoff’s business, but none identified the fraud. The OIG plans to release three additional reports that include specific and concrete recommendations to improve the oversight function of the SEC.

Mr. Markopolus focused on the urgency of the current economic and financial situation, which he believes is in large part a result of unchecked white collar crime. Mr. Markopolus praised the accuracy and transparency of the OIG report and concluded by explaining each of his fourteen recommendations for regulatory reform.

Messrs. Khuzami and Walsh emphasized the SEC’s pledge to the government and to the investing public to identify and remedy the causes of its failure to detect the massive Madoff fraud. They detailed the current initiatives and future programmatic commitments of the Division of Enforcement (DE), the Office of Compliance Inspections and Examinations (OCIE), and the SEC overall to address its problems; including the hiring of new staff with more specialized expertise, improvement upon the communication and coordination among the various divisions and officers of the SEC, adoption of new examination and investigation procedures, reallocation of resources, and more aggressive enforcement generally.

Mr. Harry Markopolos , Chartered Financial Analyst and Certified Fraud Examiner

Robert Khuzami, Esq., Director, Division of Enforcement, U.S. Securities and Exchange Commission

John Walsh, Esq., Acting Director, Office of Compliance Inspections and Examinations, U.S. Securities and Exchange Commission

Mr. Kotz discussed his investigation of the Madoff Ponzi scheme, which began on December 16, 2008, immediately upon notification of Madoff’s confession. The Office of the Inspector General (OIG) collected documents and information from all departments of the SEC, as well as third parties, conducted 140 testimonies and interviews of 122 individuals with knowledge relevant to the investigation, and retained outside consultants to assist in the review and analysis of such information collected. The OIG issued a report of investigation to the Chairman of the SEC on August 31, 2009, detailing the results of the investigation; including the SEC’s receipt, over a period of 8 years, of six informative and specific complaints as well as notification of two published articles concerning red flags related Madoff’s investment advisor operations. The SEC did conduct two investigations and three examinations related to Madoff’s business, but none identified the fraud. The OIG plans to release three additional reports that include specific and concrete recommendations to improve the oversight function of the SEC.

Mr. Markopolus focused on the urgency of the current economic and financial situation, which he believes is in large part a result of unchecked white collar crime. Mr. Markopolus praised the accuracy and transparency of the OIG report and concluded by explaining each of his fourteen recommendations for regulatory reform.

Messrs. Khuzami and Walsh emphasized the SEC’s pledge to the government and to the investing public to identify and remedy the causes of its failure to detect the massive Madoff fraud. They detailed the current initiatives and future programmatic commitments of the Division of Enforcement (DE), the Office of Compliance Inspections and Examinations (OCIE), and the SEC overall to address its problems; including the hiring of new staff with more specialized expertise, improvement upon the communication and coordination among the various divisions and officers of the SEC, adoption of new examination and investigation procedures, reallocation of resources, and more aggressive enforcement generally.