TPM News

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.

We've seen a lot about the philanthropic organizations, many of them focused on Jewish issues, that have taken huge hits after entrusting their money to Bernard Madoff. And Madoff's own philanthropic foundation was managed by its proprietor's investment firm, of course.

But Madoff's sons had their own foundations -- and it looks like they did things differently. Rather than entrusting the money to their father, Mark and Andrew Madoff appear to have relied on Neuberger Berman and Lehman Brothers to manage the funds, according to documents dug up by the blog Cityfile New York. (Until September, Lehman was Neuberger's parent company.)

Even with Lehman's collapse -- which ultimately led to Neuberger being taken over by its top executives, pending approval by a bankruptcy court, the brothers appear to have made a very wise decision*.

That's not to suggest that Mark and Andrew, who both worked for their father's company, supervising the firm's stock-trading desks, knew anything about their father's operation that led them to turn to an outside firm

The New York Times reports today that investigators have so far found no evidence that would contradict Madoff's initial statement, according to a criminal complaint filed last week, that it was "all his fault."

But at the very least, it suggests they perhaps didn't view their father as the omniscient wizard of the market that he often seemed to present himself as.

* This sentence has been corrected from an earlier version.

Bernard Madoff may be accused of running a "$50 billion ponzi scheme", but he certainly professed to have a high regard for the system of regulation that he allegedly beat for so long.

At a roundtable discussion on "the future of Wall Street" held last year, he noted at one point:

In today's regulatory environment it is virtually impossible to violate rules ... It's impossible for a violation to go undetected, certainly not for a considerable period of time.

He also said, later in the same discussion, that by using computers instead of humans, he had helped his firm to avoid violating the law. Although, he added, laughing, "I guess you could also program your computer to violate regulation, we haven't got there yet."

Watch the video:

As has been widely reported, one of the reasons why Bernard Madoff may have avoided regulatory scrutiny for so long is that he frequently served as an advisor to the SEC -- the very agency that should have been watchdogging him.

And here's an example of the kind of advice he was giving. During a 2004 meeting to discuss a proposed regulation of market trades, designed to protect investors, Madoff argued for making it easier for investors to opt out of the rule:

Again, you start -- have to start with, and I know this -- the modern times today does not support, you know, this amount of good faith in your brokerage firm. But you really have to start with the assumption that most of us in this industry really have their clients' interests, you know, coming first. Not necessarily the firm's self-interest.

It's worth being clear that Madoff is talking about brokerage firms, not investment advisers -- which is the arm of his business now being accused of massive fraud. But his apparent faith in the integrity of financial managers is striking, nonetheless.

How can Norm Coleman afford the services of Doug Kelley, the high-profile attorney he just hired on connection with the allegations in the Nasser Kazeminy lawsuit? After all, as Kazeminy himself is alleged to have said: "US senators don't make shit."

The answer: he plans to use campaign funds.

"We intend to have any legal fees related to what we believe to be a politically inspired legal action to be covered by the senator's campaign," said Coleman spokesman Luke Friedrich, Politico reports.

The FEC allows politicians to use campaign funds only if their legal bills arise from their official duties or their campaigns. Coleman, a Minnesota GOP senator, has claimed that suit only came to light because of his reelection fight, in which he is currently locked in a recount with Democrat Al Franken -- though many of the allegations pre-date the campaign.

The lawsuit claims that Kazeminy, a friend and supporter of Coleman, used a company he owns, Deep Marine Technologies, to pass money to the senator by making payments to the insurance broker, Hays Insurance, that employs Laurie Coleman, Norm's wife.