Showing posts with label corporate governance. Show all posts
Showing posts with label corporate governance. Show all posts

Friday, September 11, 2009

Hearing on Oversight of the SEC’s Failure to Identify the Bernard L. Madoff Ponzi Scheme and How to Improve SEC Performance(Jui Kai Li)

On Sept 10th, the US Senate Committee on Banking, Housing, and Urban Affairs held a hearing on Oversight of the SEC’s Failure to Identify the Bernard L. Madoff Ponzi Scheme and How to Improve SEC Performance.

Testifying were H. David Kotz, Esq. - Inspector General SEC, Harry Markopolos- Chartered Financial Analyst and Certified Fraud Examiner, Robert Khuzami, Esq - Division of Enforcement SEC, John Walsh, Esq - Office of Compliance Inspections and Examinations SEC

The testimony is summarized below and copies of the written statements are available at;

Madoff's alleged Ponzi scheme is the biggest fraud held by a person in the US history. By definition, a Ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. Although investors may be able to feel something wrong with the unlikely consistent returns Madoff provided, without an independent agency to stop the problematic trading activities, investors could only continue to suffer from Madoff’s tricks.

Poor oversight of the government will cause high corporate governance risk. In this case, the failure of SEC’s early detection of Madoff’s fraud caused investors’ countless losses and victims. See the victim list below(sources: WSJ):

Results of the IG Report
SEC’s Failure
“Our report concluded that notwithstanding these six complaints and two articles, the SEC never conducted a competent and thorough examination or investigation of Madoff for operating a Ponzi scheme and that, had such a proper examination or investigation been conducted, the SEC would have been able to uncover the fraud” said Mr. Kotz.

Not Conflict of Interest Found
“We did not, however, find evidence that any SEC personnel who worked on an SEC examination or investigation of Madoff or his firms had any financial or other inappropriate connection with Madoff or the Madoff family that influenced the conduct of the examination or investigatory work. We also did not find that former SEC Assistant Director Eric Swanson’s romantic relationship with Bernard Madoff’s niece, Shana Madoff, influenced the conduct of the SEC examinations of Madoff and his firm. We further did not find that senior officials at the SEC directly attempted to influence examinations or investigations of Madoff or the Madoff firm, nor was there evidence any senior SEC official interfered with the staff’s ability to perform its work” said Mr. Kotz.

Mr.Kotz recommended that "so that appropriate action ... is taken, on an employee-by-employee basis, to ensure that future examinations and investigations are conducted in a more appropriate manner and the failures aren't repeated."

Why no one found it?
If there is truly no conflict of interest in the SEC’s investigation, the only reason why the SEC failed to uncover the fraud earlier is its inefficiency and incompetence in the agency. The lack of communication among SEC offices cleared the way for Madoff to continue his scheme for nearly two decades. "The entire SEC should be held accountable for what happened," Mr. Kotz said. Mr. Markopolos testified that the agency's staff "was not capable of finding ice cream in a Dairy Queen."

According to the transcript, Madoff dismissed an SEC investigation as a "fishing expedition" and highlighted how investigators develop cozy relationships with firms they are supposed to regulate.

"The guys ... ask a zillion different questions and we look at them sometimes and we laugh, and we say are you guys writing a book?" Madoff said. "These guys, they work for five years at the commission then they become a compliance manager at a hedge fund now."

Changes needed to be made
However, no SEC employees have been fired specifically in relation to the bungled investigations of Madoff, though the heads of the agency's enforcement division and inspections office, which conducted the probes, have left the SEC in recent months.
Mr. Khuzami, who joined the agency in March, said he has started the most extensive restructuring of his division in at least 30 years."We will thoroughly examine all of the conduct and take appropriate action," SEC spokesman John Nester said in a statement after the hearing. "The pace of reform is rapid but (the SEC) needs to keep that pace going." said Mr. Markopolos.

Tuesday, March 31, 2009

Active proxy season forecast

According to the NY Times, "This proxy season is already proving to be more contentious and active than last year.So far, 283 shareholder proposals have been disclosed, compared with 252 for the same period last proxy season. The rise is largely attributable to proposals on corporate governance issues."