State Securities Regulators Blast SEC for ‘Madoff Culture’

The Securities and Exchange Commission culture that allowed the Madoff fraud scandal to go undetected for nearly two decades may not change and the agency isn’t doing enough to support investor protection proposals in Congress, according to a top state regulator.

Denise Voigt Crawford, president of the North American Securities Administrators Association, blasted the SEC for what she said has been too-weak support for provisions in financial overhaul legislation aimed at bolstering investor protection.

“The SEC has not come out as strongly or as clearly or as honestly as it should” to support the proposals, Crawford said at a news conference last Friday. The state regulators’ group wants to see, for example, strong legislative language putting stockbrokers providing investment advice under the same stricter standards of conduct as investment advisers.

Crawford, who also is Texas’ securities commissioner, said the sweeping overhaul of financial regulations now before Congress is a great opportunity for change, “like a hundred-year flood.”

“Investors really are outraged” in the wake of the financial crisis and the Madoff affair, she told reporters.

Revelations a year ago of the SEC’s failure to uncover Bernard Madoff’s massive Ponzi scheme despite numerous red flags rocked the agency and brought a shake-up of high-level officials. The SEC inspector general has detailed how the agency bungled five examinations of Madoff’s brokerage business between June 1992 and last December, when the prominent money manager confessed to his sons.

Madoff pleaded guilty in March and is serving a 150-year sentence in federal prison in North Carolina.

SEC officials say they have made major changes at the agency in the aftermath of the scandal.

Crawford acknowledged that the SEC has brought “a flurry of cases” over the past year and said agency officials understand the depth of changes that have to be made. However, she said, “I think the jury is still out on whether the culture at the SEC is going to change.”

Many of the enforcement attorneys and examiners “are looking for a job on Wall Street” after they leave the agency and less inclined to take a tough stance in cases involving potential future employers, Crawford said. “It’s going to take people who are different,” she said.

SEC spokesman John Nester called Crawford’s comments “uninformed.”

“The change at the SEC has been dramatic,” he said in a statement. “We have brought on new senior management, seen significant increases in the numbers of investigations and penalties, pursued important investor-focused rulemaking and reformed our internal operations.”

Regarding its stance on the legislative proposals, Nester said the SEC is “working closely with Congress and the administration to bring about much needed reforms.”

“In fact, the Investor Protection Act has many of the legislative changes we proposed earlier this year. These are all signs of a revitalized and re-energized agency,” he said. “We are aware of no basis for (Crawford’s) comments.”

State regulators have at times accused the SEC in recent years of lagging in crackdowns against fraud, sometimes initiated by state authorities. A bitter public dispute erupted in 2004 between then-New York Attorney General Eliot Spitzer and SEC officials over pursuit of abuses in the mutual fund industry.