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The revelation that Bernard Madoff -- who himself had in the past served as an adviser to the SEC on electronic trading -- was running an alleged "$50 billion ponzi scheme" has rocked the SEC to its core, according to a current long-serving member of the commission's enforcement division.

"This has put the agency into a state of complete panic," the SECer told TPMmuckraker in an interview.

The source said that one associate director in the enforcement division had in recent days ordered junior staff to review every case that's been closed over the last few years, to ensure that violations weren't missed -- as they appear to have been in the 2006 investigation of Madoff. "There's a real paranoia around here," the source added.

That paranoia -- or at least extreme concern -- apparently extends to commission officials in Washington. The source said that since the Madoff allegations came to light last week, SEC brass had sent out numerous emails warning staffers not to destroy documents relating to the case -- which is being investigated both by SEC enforcement and by the FBI. There have also been several warnings not to speak with the press, the source added.

Separate from the SEC and FBI investigations, SEC chair Chris Cox announced last week that he has has asked the commission's inspector general to probe how the SEC failed to uncover catch Madoff after receiving several complaints going back to 1999.

Felipe Sixto -- the former aide to President Bush charged with stealing from a government-funded agency that works for democracy and human rights in Cuba -- pleaded guilty today to theft from a federally aided program, reports the Associated Press

Sixto resigned in March from his White House job as special assistant to the president for intergovernmental affairs.

Before that, he had worked as chief of staff of the Center for a Free Cuba, from which he stole more than $579,000 by overcharging the center for radios and flashlights, according to the Justice Department.

His sentencing is set for March.

More fallout from the Jack Abramoff investigation, nearly five years after the first hints of the scandal first broke.

The Associated Press reports:

David Safavian was found guilty of one count of obstruction and three counts of making false statements to investigators. Each count carries a maximum penalty of five years in prison.

Safavian, the former top procurement official at the White House, was on trial for lying to investigators about his relationship with disgraced lobbyist jack Abramoff. His 2006 conviction on similar charges had been overturned.

AP adds:
Safavian and his lawyers decided this week not to put on a defense, ending their case without calling a single witness or without Safavian testifying.

There's no longer much debate about the fact that the SEC badly slipped up by failing to catch Bernard Madoff's alleged "$50 billion ponzi scheme." Even commission chair Chris Cox lamented "multiple failures over at least a decade" in the matter. And yesterday President-elect Barack Obama declared that the commission had "dropped the ball."

But it's also becoming clear that the Madoff failures didn't arise out of nowhere. In recent years, particularly under Cox, a former California GOP congressman, the SEC has pursued a policy of de-emphasizing enforcement, part of the broader anti-regulatory philosophy of the Bush years -- helping to make Madoff, and perhaps others like him, possible.

"[Cox] in many ways worked to dismantle the SEC," Ed Nordlinger, a former longtime enforcement director in the commission's New York office, told TPMmuckraker. "He slowed everything down. I don't think he believed in heavy regulation."

That view has been echoed by several others in a position to know. Ross Albert told TPMmuckraker for a post published yesterday: "Under Cox, SEC had de-emphasized the enforcement program. Cox worshipped at the same altar of de-regulation that the rest of the Bush administration worshipped at."

And a former enforcement division supervisor told Portfolio for a lengthy October story about the SEC under Cox: "It was like someone poured molasses on the enforcement division."

How, specifically? Let us count the ways -- many of them detailed in that Portfolio story -- which focused on what it described as Cox's scaling back of the commission's enforcement role and was titled "SEC No Evil" -- as well as a followup web piece by the same writer, Scott Paltrow.

First, the SEC under Cox did not take steps to make sure that it had enough inspectors to look into the fast-growing number of financial institutions requiring regulation.

The enforcement division has actually lost staff under Cox, even as its workload increased. "Since Cox took office in 2005, the staff count in the division has dropped 9 percent, to 1,124 people this year," reports Portfolio.

Cox's predecessor, William Donaldson, a friend of the Bush family, told the magazine, carefully: "With the kind of problems we have now, any attempt to reduce the effective role of the S.E.C. as a policeman has been a mistake."

We're hoping to have more extensive numbers on this later today, but former SEC chair Arthur Levitt recently told Bloomberg that in 2004, the agency had 477 people in its inspection office, overseeing about 8,000 investment advisers, while today, 430 people regulate 11,300 advisers.

And a union rep for SEC workers told the Washington Post for a story published today that employees were "outgunned" and "underfunded."

Cox also, according to Portfolio, didn't replace the head of the S.E.C.'s new risk-assessment office -- created under Donaldson to improve the commission's ability to anticipate financial upheavals like the one we're in now -- for nearly two years.

But it's not just a human resources problem. According to the magazine, Cox instituted new rules which gave the commissioners, rather than the enforcement staffers, the power to negotiate fines against public companies in certain cases. The result has been a drop in penalties since the rule came into effect.

Portfolio added:

A January analysis by the law firm Morgan Lewis found that S.E.C. penalties have dropped by a "staggering degree" and that "the numbers suggest a philosophical shift by the Cox commission in what constitutes an appropriate penalty."

And Cox distanced himself from the enforcement division, according to Portfolio, rarely consulting with its director. His predecessors had conferred daily with their enforcement directors.

The commission also appears to have passed over for promotion staff members who were too aggressive in their approach to enforcement. Veteran S.E.C. lawyer James Coffman told Portfolio that he was told he didn't get a promotion because he was "too tough." He left the SEC soon after.

In addition, Cox failed to fix a communications problem within the commission, which made enforcement harder. Portfolio reports:
Madoff was required to tell one S.E.C. office how much money he managed as an investment adviser, but was required to report his actual trading positions to another office.

Katz [a former secretary to the commission] said if the two had been compared, investigators may well have discovered a big discrepancy that would have triggered a focused investigation.

Cox will step down when the Bush administration leaves office. Obama's pick for the job, Mary Schapiro, has a reputation as a dedicated regulator, and close SEC watchers expect her to move the commission back toward its enforcement mission -- a shift that appears to have been necessary long before Bernard Madoff became a household name.

The jury in the corruption trial of Abramoff crony David Safavian has reached a verdict. We'll learn later today what it is, reports the Associated Press.

Safavian, who served as the White House's chief procurement officer, is on trial for allegedly lying to investigators about his relationship with Abramoff.

Safavian was convicted in 2006, but that conviction was overturned on appeal.

More when the verdict is available...

In an interview with the Associated Press, the watchdog for the government's $700 billion bailout program expressed frustration with the Bush administration's delay in providing a plan for allocating bailout funds. Elizabeth Warren, the chairwoman of the Congressional Oversight Panel, is also angry over the apparent secrecy surrounding the Treasury Department's decisions. Warren has previously expressed these disappointments in an interview with the New York Times and in her report to congress. (Associated Press)

The Government Accountability Office has found in a new report that the U.S. Navy is storing at least $7.5 billion worth of spare parts in warehouses across the country. Excess amounts reach into the millions, including 2 million unneccesary aircraft parts and 10 million unnecessary ship parts. The revelation could provide fuel for those who argue for cuts to the Defense Department's budget. (Boston Globe)

Sen. Jim Bunning (R-KY) has drawn scrutiny for his role as the single salaried employee of a charity he set up in 1996. The Jim Bunning Foundation has paid the senator $180,000 and yet only distributed $136,435 to Kentucky charities. Watchdog groups are concerned that the foundation skirts IRS and Senate rules governing outside income for senators. (Associated Press)

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As readers who have been following this story know, the SEC conducted a number of reviews of Bernard Madoff's brokerage business over the last decade, and found no serious problems.

But if the SEC can be said to be on trial, one recent investigation may be emerging as Exhibit A for the prosecution.

That's the one, highlighted by the Wall Street Journal this morning, that begun in 2006 in response to a long and detailed complaint from Harry Markopolos, a rival broker, and wrapped up the following year with its only significant action being to require Madoff to register as an investment adviser.

But is it fair to blame that SEC team for falling down on the job? And was the wrap on the knuckles ultimately prescribed by the commission an example of Madoff getting special treatment?

To a lay person, the details of the case appear pretty damning. In an SEC enforcement document entitled "Case Closing Recommendation" and posted by the Journal, an SEC staffer wrote:

[I]n the course of a preliminary inquiry into [Markopolos' allegations that Madoff's hedge fund profits were the result of fraud], the staff learned that during a recent examination of BLM by NERO's broker-dealer examination staff, Bernard Madoff, the sole owner of BLM, did not fully disclose to the examination staff either the nature of the trading conducted in the hedge fund accounts or the number of such accounts at BLM.

Under "Conclusions Reached", the document reads:
The staff found no evidence of fraud. The staff did find, however, that BLM acted as an investment adviser to certain hedge funds, institutions, and high-net -worth individuals in violation of the registration requirements of the Advisers Act ... As a result of discussions with the staff, BLM registered with the Commission as an investment adviser.

Then, under "Reasons for Closing":
We recommended closing this investigation because ... BLM ... voluntarily remedied the uncovered violations, and because those violations were not so serious as to warrant an enforcement action.

The document is said to have been "prepared by Simona Suh, Staff Attorney, and reviewed and approved by Doria Bachenheimer, Assistant Regional Director and Meaghan Cheung, Branch Chief."

There are two separate questions here:

First, did the SEC stumble by not detecting the fraud that Madoff himself would confess to the following year? It certainly looks that way.

"Were there sufficient red flags for SEC to have caught this?" asked Ross Albert, a partner at Morris, Manning & Martin in Atlanta, and a former SEC senior special counsel. "Absolutely, without a doubt."

"Would a more aggressive team have caught it?," he continued. "Yes."

James Cox, a securities expert at Duke Law School, agreed, calling it "pretty amazing" that the commission failed to detect what appears to have been such large-scale fraud.

But given what SEC did find, was the mild action they took -- merely requiring that Madoff register as an investment advisor -- appropriate?

Albert said that it was. He pointed out that SEC ultimately found only that Madoff did not disclose certain information to examiners, not that he necessarily misled them, as the original inquiry had alleged. And given that the major problem identified was his failure to register as an investment adviser, requiring him to do so was an obvious and appropriate remedy.

Albert identified a less tangible, more philosophical problem as one major factor in the failure to catch Madoff. "Under [commission chair Chris] Cox, SEC had de-emphasized the enforcement program," he said. "Cox worshipped at the same altar of de-regulation that the rest of the Bush administration worshipped at."

That can work OK in good times, he said. But in bad, it can lead to disaster.

It looks like President-elect Barack Obama is on board with the emerging consensus about the Securities and Exchange Commission's failure to properly probe Bernard Madoff despite several warnings.

At a press conference this morning to announce key members of his financial regulatory team, including SEC chair, Obama declared:

In the last few days, the alleged scandal at Madoff Investment Securities has reminded us yet again of how badly reform is needed when it comes to the rules and regulations that govern our markets. Charities that invested in Madoff could end up losing savings on which millions depend - a massive fraud that was made possible in part because the regulators who were assigned to oversee Wall Street dropped the ball. And if the financial crisis has taught us anything, it's that this failure of oversight and accountability doesn't just harm the individuals involved, it has the potential to devastate our entire economy. That's a failure we cannot afford.

As SEC chair, Obama named Mary Schapiro, a former SEC commissioner and Commodity Futures Trading Commission chair who now runs the Financial Industry Regulatory Authority, the largest regulator for all securities firms that do business with the United States.

A new report from the Inspector General of the State Department recommends that the department not renew Blackwater Worldwide's license to operate in Iraq. The absence of Blackwater contractors would be the most significant of numerous security challenges facing American diplomats in the country. (Associated Press)

A new report from the ombudsman for U.S. Citizenship and Immigration Services charges that some federal judges have delayed swearing-in ceremonies for newly naturalized citizens. The delays, which stem from judges insisting upon administering oaths themselves -- thus earning a fee from the government -- may have kept many from voting in the November election. (Washington Post)

Residents of Las Vegas, Nevada and the surrounding area are complaining to the Congressional Oversight Panel of the federal bailout program that the results of the spending have not yet "trickled down" to average Americans. The area has seen unemployment rise to 7 percent and has the nation's highest foreclosure rate. (Los Angeles Times)

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A securities enforcement veteran has added his name to the growing consensus that the SEC's failure to detect Bernard Madoff's alleged "$50 billion ponzi scheme" likely represented a serious failure on the part of the commission.

Robert Fusfeld, who spent 31 years as an SEC enforcement lawyer, and for 15 managed the trial unit in the commission's Denver office before retiring in 2006, told TPMmuckraker in an interview last night that Madoff's profile contained several "classic red flags" that should have attracted the SEC's attention.

Among those, he said, were the facts that Madoff's outside auditor was a three-person firm operating out of a small suburban office (one employee was a secretary, and another a 78-year old living in Florida); that Madoff is said to have used a secretive "black box" algorithm to determine when to buy and sell stocks; and that he had social ties -- often through the Jewish community -- to many of his investors.

Fusfeld said that these characteristics should certainly have alerted enforcement lawyers to the possibility of fraud -- though he stressed that he had no direct knowledge of the case, and that the facts still remained opaque.

On Tuesday night, SEC chair Chris Cox acknowledged in a statement that there had been "apparent multiple failures over at least a decade" to thoroughly investigate claims against Madoff.

Since 1999, the SEC has conducted several reviews of Madoff's brokerage business -- though none, it appears, of his investment advisory business, where the fraud is alleged to have taken place. A 2005 inquiry found several rule violations, but a subsequent review last year -- conducted after he had registered with the commission in 2006 -- gave Madoff a clean bill of health.

Fusfeld added that during the 90's he had used Madoff as a witness in a securities case to which Madoff was tangentially connected. "The man had charisma," said Fusfeld."He was one of those people that, when he walked into a room, everyone stopped what they were doing and watched him."

Had the SEC watched him a little closer, however, numerous investors might have been saved some crippling losses.