SEC staffer stopped from asking Madoff the right questions

Genevievette Walker-Lightfoot, a Securities and Exchange Commission lawyer with an expertise in specialized trading strategies, developed a list of critical questions for Bernard Madoff in 2004 related to inconsistencies in his trading practices. Had she been allowed to pursue that line of questioning, Madoff's massive Ponzi scheme may have been exposed, but she was cut off by her supervisors, according to a report in The Washington Post today.

Inconsistencies she found included the fact that Madoff's reported settlement times were erratic. Sometimes he settled only one day after a purchase, other times seven days later. Madoff claimed to the SEC that he was using the same strategy for all investors -- trading stocks and hedging them at the same time. But when she reviewed his data she found he followed different approaches on different accounts.

She wanted to ask nine follow-up questions after her review of his data in 2004, bringing up some critical points, according to the Post story:

  • "Do you hold any other form of brokerage account statements or accounting documents for these accounts?"
  • "Do you have the prime brokerage or custodial banking agreements for these accounts?"

    If she had been allowed to pursue these questions and others she had about Madoff's trading strategy, the Ponzi scheme could have been exposed in 2004, and possibly saved considerable pain for many Madoff victims. But instead, her supervisors told her to stop her Madoff inquiry and work on mutual fund investigations instead. Her supervisor was Branch Chief Mark Donohue, who answered to Eric Swanson, director of the department, according to Post reports. Eric Swanson is the one who later married Madoff's niece, and their relationship is one of the things being reviewed by the SEC's inspector general.

    The IG's report is due out at the end of the summer. The IG is trying to figure out how the SEC could have conducted at least five inquiries over 16 years and still miss exposing the Ponzi scheme. Steven Pearlstein said in his Post column, "Make no mistake -- the IG's report is likely to be a devastating rebuke of an agency once regarded with equal measure of fear and respect."

    Pearlstein said he expects the IG to find that the insular culture at the SEC led it to look skeptically at tips from jealous competitors, unhappy customers, disgruntled employees or publicity-seeking state regulators. He also believes it will be found that SEC staff was top heavy with lawyers who lacked understanding of traders, the markets and financial instruments. All ingredients that allowed them to be snowed by a smooth talker like Bernard Madoff.

    The Washington Post built its story by talking primarily with staff who worked with Walker-Lightfoot. They said about a month after she was told to work on mutual fund issues, her research was shipped to the New York office. Walker-Lightfoot was never consulted by the New York office.

    She did file a complaint against the SEC when she left in 2006, alleging that she'd been subjected to a hostile workplace, according to her attorney Julie Grohovsky. A person told the Post the case was settled in Walker-Lightfoot's favor.

    As we wait for the full investigation by the SEC's IG, Walker-Lightfoot may finally be vindicated but unfortunately, because her work was shelved in 2004, more investors got pulled into Madoff's scheme. We can only hope the IG's report is so devastating that true changes are made to the working environment at the SEC to prevent this from ever happening again.

    Lita Epstein has written 25 books including Reading Financial Reports for Dummies and Trading for Dummies.
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