THE BLOG

SEC's Tough Talk Won't Stop Madoff Flim Flams

10/19/2009 05:12 am ET | Updated May 25, 2011

The 450 page SEC report on Bernie Madoff's flim flam simply says what a college freshman business student could've figured out and that's that the SEC turned a blind eye toward Madoff's crooked wheels and deals. Investigators knew he was a fraud. Whistleblowers said he was a fraud (and that included a family member). Reporting agencies documented that he was a fraud. Yet there was the SEC's blind eye.

SEC Chair Mary Schapiro and House Democrats have practically sworn on a stack of Bibles that this sordid and slimy history is all done with. Schapiro tells everyone who'll listen that her new hard nosed SEC regulations guarantee that another Bernie Madoff type financial flim-flam can't happen. The pending regulations impose tough new reporting requirements, a hawk like oversight of funds, accounts and the managers that run them, streamlined investigation procedures, oodles of whistleblowers encouraged with generous bounties to spill the beans, a spanking new staff and a bulging budget.

The problem is that these things were more or less in place when Madoff stiffed hundreds of unsuspecting investors out of their nickels and dimes and millions. What it comes down to in order to ensure there's no more Madoff type shenanigans has less to do with the SEC having more money, more staff, and more rules but the political will to crack the whip effectively on the Wall Street greed merchants. This means thorough investigations, prosecutions, and slapping big fines and jail sentences on lawbreakers. This has been a totally foreign concept to the SEC. It may still be.

The red flags fly high on the new SEC reforms. Congress still has to approve the sweeping new changes. Despite congressional posturing and Wall Street saber rattling, it's not a slam dunk. In July, Paul Kanjorski, a Pennsylvania Democrat, praised Schapiro but also warned that before comprehensive financial reform legislation is passed that Congress needed to know exactly how Madoff organized his business operations and how he perpetrated these frauds. How he perpetrated his frauds! That's been amply documented in the hours of court testimony and rulings, legions of SEC reports, whistleblower revelations, and packs of investor statements and depositions.

Then there's the history of the SEC's sweetheart hand hold with Wall Street. The snuggle up between the regulator and regulated starts with who's minding the SEC store. The cross traffic between Wall Street financial analysts, lawyers, and accountants have been well documented. Many of them work for a time at the SEC and then land lucrative gigs at Wall Street financial firms. The ties that bind were on obscene display when former SEC assistant director Eric Swanson romantically wined and dined Madoff's niece, who just happened to be, of all things, a compliance attorney at Madoff Investment Securities.

A former SEC investigator, Gary Aguirre, zeroed in on the SEC-Wall Street hand hold when he investigated an alleged insider trading scam by Pequot Capital a few years back. Aguirre screamed that SEC officials blocked him for three years from pursuing the investigation. The sole reason was politics. Aguirre was canned in 2005. But he was vindicated two years later in a joint report by the Senate judiciary and finance committees that blasted SEC officials for political meddling in the investigation and verbally berated the agency for failing to pursue the case.

The SEC's inspector general even urged disciplinary action against senior SEC officials. The IG could have saved the paper. An administrative law judge said no dice on punishment.

The periodic screech from the public, Congress and financial industry watchdog groups has always crashed hard against the long standing, cozy relationship between Wall Street and the SEC. The agency's inability to root out Wall Street scams and jail the scam artists has nothing to do with loose jointed rules, paltry staff, or lack of cash but the political will by the SEC to fully enforce the rules. Without that, the SEC's tough talk won't stop more Madoff flim flams.

Earl Ofari Hutchinson is an author and political analyst. His weekly radio show, "The Hutchinson Report" can be heard weekly in Los Angeles Fridays on KTYM Radio 1460 AM and live streamed nationally on ktym.com