Sunday, November 01, 2009

Madoff Lesson: Liars Can Thwart an SEC Investigation

The 536 exhibits released by the SEC Inspector General late Friday on Bernie Madoff don't seem to contain any explosive new revelations, but underscore an essential point about SEC investigations: if you are the target of a probe, just lie, again and again.

The SEC won't check up, even if it's obvious.

Ask Bernie. The documents show that he lied on the most obvious thing possible -- whether he managed money for people. He said no. The SEC either knew this was a lie or was brain-dead not to check up on it, if for no other reason than that there had been two articles in the media in 2001, in Barron's and MAR/Hedge, about what an astounding money manager he was, and raising questions about just how he performed such a fete. (Included among the exhibits is the transcript of a 2009 interview with the author of the MAR./Hedge article, in which he complained that he was ripped off by Barron's.)

Notes to one interview with the SEC in April 2005 say that "Based upon [name deleted] algorithm and capacity to manage money, this led us to ask if [name deleted] (or anyone at the firm) has ever managed money for an outsider. Bemie said, Never."



A few days later, an SEC investigator reported: "I specifically asked Bernie if the London office manages money for outside investors. Bemie said it is my money."



And lastly, here's a record of the cock-and-bull story that Madoff gave the SEC during an interview a few weeks later:


One thing I've learned over the years is that the SEC has a very poor sense of what is actually happening out there in the real world, that it relies too much on documents supplied by the target of the probe, and that it fails to do elementary, shoe-leather investigation. In this case, some basic investigation would have proven that Madoff was lying about a fundamental fact.

The SEC simply didn't have the contacts and street-level sources required to contradict Madoff on something as simple as whether the man ran money for people.

Instead, the probe showed the SEC investigators--one of whom wound up marrying Madoff's niece--tripping over their own shoelaces. Madoff himself marveled at the incompetence of the SEC.

We've seen the SEC's ineptness proven time and time again, such as in its botching of an investigation of Overstock.com's accounting, despite in-your-face GAAP violations uncovered by a whistleblower. The probe has been reopened, but Overstock.com CEO Patrick Byrne has already learned the Madoff' Lesson: Lie, early and often. Lie on your financial statements. Lie in your conference calls. Put aside a "cookie jar reserve" to manipulate your earnings.

The SEC doesn't give a damn.

There are more large and material lies, I hear, unrelated to the financial statements, that haven't publicly surfaced.

Will the Overstock strategy of deception work? The Madoff case is depressing precedent that it will, but the jury is still out.

© 2009 Gary Weiss. All rights reserved.

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