What the SEC did wrong with Madoff

Seal of the US Securities and Exchange Commission

TEXT OF STORY

Stacey Vanek-Smith: The Securities and Exchange Commission has come under fire in recent months. It's accused of letting corporations run wild in the years leading up to the credit crisis. But the SEC's been very busy of late: Filing charges against Bank of America, settling a fraud case with General Electric, and speeding up the pace of investigations.

Next week, all eyes will be on the regulator when the SEC's inspector general releases a report on the Madoff debacle -- basically, how the agency missed Bernie Madoff's decade-long, $50 billion Ponzi scheme.

No question, it's been a rough time for investors. And, as Marketplace's Steve Henn reports, it may have been even worse for the agency that's supposed to protect them.


Steve Henn: Ronnie Sue Ambrosino never imagined she'd spend August in an RV park outside of Phoenix.

Ronnie Sue Ambrosino: Not in my wildest dreams. Yeah, I think the hottest it's gotten here is 115.

But she and her husband are stranded in the desert. They were traveling back from Alaska last December when they pulled into the town of Surprise, Ariz., and found out their entire life savings had been wiped out by Bernie Madoff -- $1.6 million gone.

Ronnie Sue: I'm fearful that the American investor is unprotected. We're unprotected. What makes you think that some of the other broker-dealers that may also look like stellars and rock-solid brokers are not doing the same thing?

Despite their big nest egg, Dominic Ambrosino says he was really just a working guy from New York.

Dominic Ambrosino: Yeah, I was a New York City Department of Corrections officer.

A prison guard on Rikers Island. Ronnie Sue was a computer analyst. But they were frugal

Dominic: Frugal is putting it mildly. We saved for our future. We banked everything that we could.

For years they clipped coupons, worked overtime, and then sold their house and invested all of it with Madoff. The plan was an early retirement traveling across America in their RV.

But now that's history. It costs about a dollar a mile to keep their rig on the road.

Dominic So, to get across the United States to go to Florida -- a 2,500-2,600 mile trip -- would be $2,500 or $2,600.

So the Ambrosinos are stuck. They blame Madoff, but they also blame the SEC.

Ronnie Sue: How can anybody trust the SEC.

Dominic: We have our money in a viable institution and nobody was there to check. I mean, if I went to work every day at the Department of Correction and just left the door open and let the inmates out.... That's my job to keep them in line, keep them behind the gate. Did anybody do that at the SEC? Absolutely not.

Back in Washington, it's Robert Khuzami's job to close the gate and restore that trust. He's the new head of the SEC's enforcement division. When he took the reins four months ago the outlook for the agency was grim.

Robert Khuzami: There had obviously been a great deal of criticism about the enforcement division in particular.

It can be hard to remember now, but Jack Coffee, a corporate governance expert at Columbia University, says less than a decade ago the SEC was an investor watchdog with teeth. The damage to the agency's reputation didn't happen overnight.

Jack Coffee: Well, I think any government agency is going to be influenced by the people at the top. And the people at the top believed in deregulation. They did not believe in close governmental supervision.

Under the Bush administration most political appointees in the agency believed less regulation would create more dynamic markets and spur economic growth. But some investigators at the SEC say they were hamstrung and often had to get the full commission's approval before making relatively minor decisions.

James Coffman: I left disappointed.

James Coffman was an SEC enforcement attorney for 27 years before he retired two years ago.

Coffman: I was disappointed that the enforcement program was not getting the support from the Commission that we had in the past.

During the late 80s, Coffman investigated the junk bond king, Michael Milken, and helped send him to jail. But in Coffman's final years at the SEC, he says staff judgments were routinely second guessed and investigations bogged down.

Coffman: There was a level of distrust, I thought, between the commission and the staff that was unusual in my experience.

It didn't make it any easier to catch crooks or enforce the law. But everyone I talked to now says things inside the SEC are changing. Frontline investigators have more power. They can issue subpoenas and push investigations forward on their own. They're creating new specialized units to police complex markets like credit default swaps. And the pace of investigations and new cases is accelerating.

So does this mean the SEC's turned a corner? Jack Coffee at Columbia says maybe.

Coffee: There has been a change in morale. The SEC is now seeking to be a tougher, stronger enforcement agency and has totally reorganized its enforcement division. But I'm not sure that all is bliss down there yet.

The agency's reputation is still clouded by Madoff and the entire country may have a tough time moving on. Madoff's victims, like Ronnie Sue and Dominic Ambrosino, can't.

Dominic: Upset? Of course I'm upset. I should be traveling the country right now, doing what I want to do. What am I doing? I'm stuck in Arizona.

In the middle of August, with hardly a dime to his name.

I'm Steve Henn for Marketplace Money.

About the author

Steve Henn was Marketplace’s technology and innovation reporter for the entire portfolio of Marketplace programs until December 2011.

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