Punishment far too lenient for the fail to regulate Bernie Madoff

“Seven SEC employees disciplined on failure to stop Madoff fraud

By David S. Hilzenrath, Updated: Friday, November 11, 1:18 PM

The Securities and Exchange Commission, which failed to stop Bernard Madoff’s long-running investment fraud despite repeated warnings, has disciplined seven agency employees over their handling of the matter but did not fire anyone, a person familiar with the actions said.

An eighth employee resigned before disciplinary action was taken, the person said.

The SEC’s head of human resources had recommended that SEC Chairman Mary L. Schapiro fire one individual, according to a second person, an official involved in the process. The human resources head took that position after a law firm hired by the SEC to advise it on the disciplinary actions also recommended that the employee be fired, the official said.

The law firm, Fortney & Scott, “recommended formal disciplinary action, including removal from service,” for an assistant regional director at the SEC, the agency’s inspector general said in an August report.

The punishments given the employees varied and included suspensions, pay cuts and demotions, according to the first person familiar with the matter. An employee who received one of the most severe sanctions got a 30-day suspension and a demotion. Another was given a pay cut of about 6 percent. At the low end, one employee was suspended for seven days, another for three days and yet another was issued a “counseling memo,” which is a step below a reprimand.

SEC spokesman John Nester said Friday that the agency “thoroughly examined all factors relevant to the imposition of discipline, including the employees’ performance before and since the Madoff events.”

An individual who was recommended for termination received a 30-day suspension without pay and a reduction in pay and grade, Nester said.

The SEC chairman decided not to fire the employee because doing so “would have an adverse impact on the agency’s work,” Nester said.

The SEC’s disciplinary process with respect to the Madoff matter was concluded months ago, he added.

When the law firm advising the SEC recommended that an employee be fired, it included a qualifier, the second person familiar with the matter said. If the SEC thought it was important to avoid losing that individual’s services, it could consider a different punishment.

The people who spoke about the disciplinary process did so on condition of anonymity. One cited the sensitivity of the information and the other was not authorized to discuss it.

Madoff’s fraud cost investors billions of dollars, shattered lives, and became perhaps the biggest embarrassment in the SEC’s history. After Madoff’s house of cards collapsed in 2008, a financial sleuth named Harry Markopolos became famous for having tried in vain to get SEC employees to see through the scam.

The SEC’s inspector general issued a 477-page report in 2009 concluding that the agency “received numerous substantive complaints since 1992 that raised significant red flags concerning Madoff’s hedge fund operations.”

Although the SEC conducted five examinations and inspections of Madoff based on the complaints, agency personnel “never took the necessary and basic steps to determine if Madoff was misrepresenting his trading,” the inspector general reported.”