Senate grills SEC for 'colossal failure' on Madoff
Senate Banking Committee takes Security and Exchange Commission to task for failing to identify Bernard Madoff's $50 billion fraud.
Madoff's London secretsNEW YORK (CNNMoney.com) -- Lawmakers took the Securities and Exchange Commission to task Thursday for failing to prevent Bernard Madoff from perpetrating one of the largest financial frauds in U.S. history.
"Because the SEC failed to do its job, Madoff stole $50 billion," said Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee. "There can be no excuse for that colossal failure."
Dodd's remarks came at the beginning of the committee's second hearing to investigate the SEC's shortcomings in the Madoff case and how to improve the agency's performance in the future.
Madoff, 71, was convicted of operating a Ponzi scheme and defrauding thousands of investors. He pleaded guilty and was sentenced to 150 years in prison in June. Prosecutors have said it was the largest investor fraud ever committed by a single person.
The hearing comes one day after officials in Massachusetts released transcripts of a phone conversation in which Madoff lectured colleagues on how to avoid being scrutinized by the SEC.
Senators heard testimony from David Kotz, the SEC's inspector general, whose office released a scathing report last week that said the commission overlooked "more than ample" evidence, including six complaints, that red-flagged the massive fraud.
The inspector general faults the SEC for a "culture" of discounting tips from outsiders such as Harry Markopolos, an investment analyst who repeatedly contacted the SEC with concerns about Madoff's illegal activities.
Kotz said the SEC relied too heavily on junior staffers and examiners that lacked the specialized knowledge required to spot unconventional frauds. The agency also failed to independently verify Madoff's statements and never took the necessary steps to determine if he was operating a Ponzi scheme, he said.
"Had these efforts been made with appropriate follow-up... the SEC could have uncovered the Ponzi scheme before Madoff confessed," Kotz testified.
Markopolos, who also testified Thursday, said he doesn't believe the SEC was guilty of "criminal activity." But he criticized the agency for its lack of diligence, saying "the SEC staff was not capable of finding ice cream at a Dairy Queen."
John Walsh, director of the SEC's office of compliance, acknowledged the criticisms and pledged to continue his efforts to improve the agency's track record.
"We all sincerely regret that we did not detect the Madoff fraud," Walsh said. "We are working diligently to address the problems that contributed to this failure."
As in a classic Ponzi scheme, Madoff accepted funds from his investors and stole instead of investing it. He used fresh funds to make payments to other investors. The amount he stole, which is still being tallied, was likely in the billions of dollars.
The inspector general offered recommendations intended to improve the SEC's ability to uncover future frauds and better police the financial markets.
Among those were increasing the agency's resources and staffing levels, ensuring that investigators have adequate training to identify sophisticated new types of fraud and consulting with the private sector to stay current on complicated financial products.
"As our markets have evolved, the SEC has not kept pace," said Sen. Chuck Schumer, D-N.Y. "Frankly, the SEC is out gunned."
Schumer said he will propose legislation to allow the SEC to keep all of the fees it collects from publicly traded companies, which it can then use to invest in technologies needed to monitor the markets. 
