In his statement released last week in response to the SEC’s failure to catch Bernard Madoff’s alleged “$50 billion ponzi scheme”, commission chair Chris Cox lamented his staff’s failure, during previous investigations, to seek subpoenas to compel Madoff to provide information. But according to a veteran agency source, under Cox’s leadership the commission has made it increasingly difficult for investigators to obtain subpoenas, with the inevitable result that they have become less likely to ask for them.
In the statement, Cox wrote:
I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them. Moreover, a consequence of the failure to seek a formal order of investigation from the Commission is that subpoena power was not used to obtain information, but rather the staff relied upon information voluntarily produced by Mr. Madoff and his firm.
That passage appears to refer most directly to a 2006-2007 SEC probe in which investigators relied only on documents handed over voluntarily by Madoff, and which has emerged as the most glaring example of SEC failure on Madoff. But according to a longtime enforcement staffer, the failure to seek subpoena power in this case was in large part a natural result of the chairman’s own policy.
“Under Cox, increasingly burdensome standards were applied to obtain subpoena power,” the source told TPMmuckraker in an interview. For investigators to obtain subpoena power, they’re required to write a memo to the SEC’s commissioners. Previous commissioners were more willing to respond by granting subpoena requests. “But under Cox,” the source continued, “when you bring your memo down there, they pepper you with questions. It dies a thousand-cuts death.”
The source added that a running joke has developed among enforcement staffers that the commissioners apply a “summary judgment standard” — in other words, requiring enough evidence to make a full ruling — merely to agree to issue a subpoena. (SEC humor, perhaps — but indicative of what the source describes as the commissioners’ extreme reluctance to issue subpoenas.)
That in turn produced “a chilling effect”, said the source, in which investigators became less and less likely to ask for subpoena power — exactly what Cox appears to criticize his enforcement staff for in his statement on the Madoff case.
The source made clear that the commissioners’ greater reluctance, under Cox, to issue subpoenas was part of Cox’s well-documented “ideological bent against enforcement,” especially in regard to large financial entities.