On the SEC, Madoff, etc.

The Inspector General of the Securities and Exchange Commission has this week come out with an elaborate (457 pages) report on the failure of the SEC to uncover what Madoff was up to, especially in the period subsequent to 1992.

Nineteen ninety-two is significant because that was the year the SEC investigated and shut down an investment firm known as Avellino & Bienes, which was actually just a feeder fund for Madoff. A more thorough scrutiny into A&B would have led to Madoff, because what they were (accurately) suspected of doing was just a microcosm of the bigger Madoffian picture.

The IG found that "the SEC had sufficient information to inquire further and investigate Madoff for a ponzi scheme back in 1992. There was evidence of incredibly conistent returns over a significant period of time without any losses, purportedly achieved by Madoff using a basic trading strategy of buying Fortune 500 stocks and hedging against the S&P index."

So why did the SEC not inquire further? I see no real effort at an answer here other than a lament about the "inexperience" of the examination and inspection staff members involved.

On another point, the IG's office says that it could find no reason to believe that the romantic relationship between Bernie Madoff's niece and an SEC official, Eric Swanson, did Bernie any good in the later years of the ongoing scheme. There is a brief biography of Swanson on page 89 of the report -- which, due to introductory materials, constitute page 109 of this pdf.

Swanson, who graduated from law school in 1993, joined the SEC staff three years later. He worked within the Office of Compliance, Inspections, and Examinations (OCIE), in particular in an SRO Group. The OCIE's SRO groups oversee the self-regulatory activities of industry organizations.

After working in the SRO Group for about two years, Swanson was promoted to Branch Chief. Thereafter, his career reads like that of a successful climber of such ladders. He became Senior Counsel, and soon thereafter Assistant Director of the OCIE.

Indeed, there's a bit of high-school-gossipy stuff in the interior of the report, since the OIG tracked down two of Swanson's former girlfriends, who apparently knew about each other but did not know about Shana Madoff, during the period when he was most involved in various Madoff-investigating capacities. Apparently Swanson and Jane Doe were set to be married on Florida in October 2005, before a hurricane scuttled those plans. Then they broke up in November.

I would suspect, giving those facts, that there was something other than a hurricane involved there. Its easy enough for two people who love each other to get married regardless of meteorology. But I'll make no hypotheses.