Congress was technically not in session yesterday but that didn’t stop Representative Paul Kanjorski, a Democrat from Pennsylvania, from convening a meeting of the House Financial Services Committee on the alleged $50 billion Ponzi scheme perpetrated by Bernie Madoff.

During the meeting many lawmakers were openly calling for regulatory reform, saying they had lost confidence in the Securities and Exchange Commission. On hand to testify were David Kotz, the SEC Inspector General; Stephen Harbeck, president of the Securities Investor Protection Corporation (SIPC); and Allan Goldstein, a Madoff investor who lost his life savings.

Kotz was adamant that his office would diligently undertake an investigation of what happened within the SEC when dealing with the Madoff complaints which began years ago, as well as why the many red flags raised by Madoff’s operation went unchecked.

One lawmaker asked Kotz how sure he was that there were not people within the SEC that were complicit in the fraud and enabled it to happen, to which he replied he wasn’t sure. Kotz responded, “On its face it certainly looks as if there may be that possibility.”

But one thing glaringly missing from yesterday’s meeting was any sort of discussion addressing how Madoff was able to pull off his fraud and how he was able to continue it for so long. There was no focus on where the money Madoff purportedly stole went, or who was involved if anyone else.

There was mention that the Madoff broker-dealer arm and the investment advisory business were technically the same legal entity, and that obviously the broker-dealer arm had filed false reports with the SEC and with FINRA over the years involving it in the fraud. But no real talk about how he
defrauded all of his investors and where the money might be.

By now we all know what the “red flags” were that should have tipped off the SEC and/or FINRA to Madoff’s fraud. The small accounting firm, with one accountant for a $17 billion client; the steady positive returns even in economic downturn; the complaints raised and articles written about the supposed Ponzi scheme dating back to 1999, and the list goes on.

But how did he actually do it? Where did the money really go and who was actively involved in the fraud?

The Congressional meeting was definitely a platform for lawmakers to push for regulatory reform and what many called “a 21st Century regulatory scheme for the 21st Century.”

I’m interested in this as well, and will even be focusing a feature for the next issue of Advanced Trading on regulatory reform and what will the potential new SEC look like.

But as a trading industry observer I’d really like to know the details of how Madoff pulled it off, both in terms of the level of deception and his trading operations.