SEC Financial Fraud Enforcement - Is it Effective?
January 7th, 2009 |Financial fraud is a type of white collar crime, which involves the unlawful use of property to one’s own benefit. The Securities and Exchange Commission, an independent agency of the United States government, is chartered with the job of preventing financial fraud - particularly with regard to securities (bonds, stocks) related markets, and investments which make use of securities markets.
Bernard Madoff, former chairman of the NASDAQ stock exchange, and chairman of Bernard Madoff Investment Securities since 1960, was recently charged with what is arguably the most important financial crime in history. Following in Charles Ponzi’s footsteps, Madoff (and his firm) managed a Ponzi-type pyramid scheme which scammed investors out of a total of $50 billion U.S. internationally. This directly and negatively effected such large businesses as HSBC, Fortis Bank and the Fairfield Greenwich Group.
This scheme developed over the last number of decades, possibly as long as the firm itself. So long in fact, a number of economists and financial analysts had blown the whistle towards Madoff, writing a number of papers and publications, and submitting them directly to the S.E.C. and other regulatory boards suggesting that his process, and how he claimed it worked, had to have been fraudulent, for the profits he was reporting was likely economically impossible given the methods he claimed.
Furthermore, the S.E.C. had launched a number of investigations in to Madoff’s fund; all of which concluded there was no fraudulent behavior going on. Notwithstanding the shutdown of an unrelated feeder fund, which tunneled all of it’s assets in to Madoff’s fund, for fraudulent and illegal behavior. Numerous times, however, the S.E.C. responded saying that Madoff’s fund did provide “curiously steady” returns, suggesting suspicion, but inaction on the part of the Commission.
As a registered broker/dealer, the firm, and Bernard Madoff himself, being chairman of the fund, would have been required to submit large amounts of documentation and clearly outline exactly what processes and engagements he was involved in with regard to the fund. Now, many are questioning why, with all the private attention, whistleblowers, and clear documentation of everything going on, the S.E.C. did not catch on earlier.
In a clear demonstration of the “new media,” hundreds of bloggers, news agencies, and political noisemakers have published questions towards the S.E.C. - why wasn’t this caught?
Adam Knife is an economist for the economics news site, Politonomist. He’s also author of a number of economics and financial fraud related articles around the web, including the entirety of the economic fraud information site.
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