We now know that the SEC failed big time with the Madoff investigation.
As Peter J. Henning, a professor at Wayne State Law School, writes in the New York Times, releasing the SEC’s inspector general full report at 5pm the Friday before labour Day was pretty wise. Great day to bury the news.
Going beyond the agency’s failures, Henning tries to see which lessons the SEC will (should) draw from the report.
First, communicate. As the report has shown, different SEC offices were conducting simultaneous examinations without knowing about each other’s activities.
“In fact, one set of examiners in the Office of Compliance, Inspections and Examinations didn’t even learn about the other examination until Mr. Madoff himself told them,” Henning writes.
Then, if you hire good people, support them. At various times during the investigations, some examiners wanted to follow on tips or suspicions but were discouraged to do so by their superiors.
“Even in an era of limited resources, sometimes it’s good to let a staff person follow a hunch to see where it might lead,” Henning explains.
Next, think about the unthinkable.
It is more than just a matter of not taking things at face value, or having a healthy scepticism. The S.E.C. should, at least on occasion, make sure that a business is all that it claims to be, and not just whether it is complying with the multitude of rules that are in place.
Finally, Henning says, fraud is about finding the money.
The S.E.C. staff appears to have flunked its course in Fraud 101, assuming they ever took it. [Editorial side note: But they’re redeeming themselves with the “fraud college”)
Reviewing financial records is not particularly interesting, and one must be willing to wade into a pile of documents, which is very time-consuming. But once you do, a wealth of information awaits.
In the end, this is rather simple common sense and there is no magic here. But sometimes, going back to the basics and sticking to what you are supposed to do is best. And works.