The U.S. Securities and Exchange Commission seal hangs on the facade of its building in Washington, D.C.
The U.S. Securities and Exchange Commission seal hangs on the facade of its building in Washington, D.C. - 
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Kai Ryssdal: Even given all we've been through courtesy of Wall Street the past 18 months, the case of Bernard Madoff continues to be the icing on the cake. Madoff was arrested three weeks ago amid charges he'd been running a $50 billion Ponzi scheme. He was in court today in New York. Prosecutors are trying to get his bail revoked, saying he's a flight risk. The judge put off a decision on that matter. But down in Washington, Mr. Madoff was present in spirit.

The House Financial Services committee is trying to figure out how the Securities and Exchange Commission missed this guy. Marketplace's Nancy Marshall Genzer explains.

Nancy Marshall Genzer: The SEC received complaints about Madoff for more than a decade. One whistleblower told the SEC repeatedly that the steady gains Madoff was reporting to investors were mathematically impossible. The SEC did investigate, but never accused Madoff of wrongdoing.

Paul Kanjorski: Our regulatory system has failed miserably, and we must rebuild it now.

That's Congressman Paul Kanjorski, a Pennsylvania Democrat. The agency's critics say SEC officials don't aggressively investigate Wall Street because they're hoping to get lucrative jobs at the very firms they oversee. Donald Langevoort disagrees. He's a former SEC lawyer now at Georgetown University. Langevoort says the problem is the SEC doesn't want to hurt investor confidence even if it's false confidence.

Donald Langevoort: When you see a bubble -- when employment or the stock market is increasing -- the message is, don't mess with that.

Another problem is, Madoff wasn't required to register his hedge fund with the SEC. The thinking is, only rich people can afford to invest in hedge funds, so they must be savvy enough to protect themselves. Wrong. Jim Coffman is a retired SEC investigator.

Jim Coffman: Should we be looking at hedge funds that control trillions of dollars and are virtually unregulated? That's something that Congress is going to have to take another look at, I think, after this.

For now, the SEC's inspector general says he'll examine its enforcement operations and inspection divisions and make recommendations.

In Washington, I'm Nancy Marshall Genzer for Marketplace.