More heat for former SEC general counsel in Madoff case

NEW YORK (CNNMoney) -- The Bernard Madoff Ponzi scheme continues to haunt the Securities and Exchange Commission.

On Tuesday, the SEC's inspector general issued a widely anticipated report raising serious questions about a former top agency official.

The inspector general has referred the actions of David Becker, who left his post as the SEC's top lawyer in April, to prosecutors because of his alleged conflict of interest related to a family investment with Madoff.

The claim, in effect, is that Becker worked on Madoff matters while at the SEC when he should have excused himself because of the personal interest.

According to the report, Becker and his two brothers inherited a $2 million account that his deceased mother had held with Madoff, the convicted swindler.

At the same time, Becker played a key role in crafting the agency's methods for determining how much money victims of the Madoff fraud were able to "claw back" from funds recovered by the trustee in charge of compensation.

The report states that Becker "worked on particular matters that could impact the likelihood, and even possibility, of a clawback suit against him, as well as the amount that could be recovered in such a clawback action."

The trustee overseeing the Madoff clean-up, Irving Picard, has claimed that $1.5 million of the $2 million inherited by Becker consisted of "fictitious profits" and could therefore be clawed back and used to compensate other Madoff victims.

But the inspector general report claims that Becker advocated for methods that would limit the trustee's ability to recover funds from investors such as himself.

The trustee and the SIPC, a group that insures investors against fraud, pay claims based on a "money-in-money-out" system, according to the report.

That means investors would be able to file a claim for compensation based only on the amount of money they originally invested with Madoff, minus any withdrawals they may have made.

According to the report, Becker began pushing -- ultimately without success -- for a new system, known as the "last account statement method," in February 2009.

Under that method, investors would be able to receive the amount in their account on the date of the last statement they received from Madoff, including any "fictitious profits."

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Becker has testified that he discussed his family account with the SEC's ethics department. However, the inspector general found that the ethics official Becker consulted, William Lenox, reported directly to Becker.

The inspector general said that seven other top SEC officials, including Chairman Mary Schapiro, were aware of Becker's account in 2009. "And yet, none of these individuals recognized a conflict or took any action to suggest that Becker consider recusing himself from the Madoff Liquidation," the report states.

In a statement, Schapiro said it would be "inappropriate" for her to comment on the inspector general's decision to refer the case to the Justice Department, adding that she takes the report "very seriously."

"I do want to state that I've known David for many years to be a talented, highly skilled lawyer and a dedicated civil servant who served under three chairmen," she said.

In addition to referring Becker to the Justice Department, the inspector general recommended the SEC revisit his involvement in another 2009 vote "in a process free from any possible bias or taint."

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Schapiro said the commission will seek a re-vote on the issue of adjusting payments to Madoff victims for inflation, adding that she believes the original decision "was appropriate under the law and in the best interest of investors."

Sen. Chuck Grassley of Iowa blasted the SEC for incompetence and lax oversight, saying the agency not only missed Madoff's long-running and historic fraud but also mistreated its victims in the aftermath.

"It's hard to see how the agency could have let such a major conflict of interest slide," said Grassley. "The SEC needs to reform its ethics polices top to bottom."

Madoff pleaded guilty in 2009 and was sentenced to 150 years in prison for perpetrating one of the biggest frauds in history -- a pyramid scheme that persisted for decades and swept up thousands of victims. The SEC at the time was criticized for failing to detect the fraud.