The SEC’s Inspector General released his report on how his agency failed to detect Madoff’s $65 billion Ponzi scheme. According to accounts in yesterday’s and today’s New York Times and Wall Street Journal, the report gives lots of useful information, but not much of an answer.
The Journal picked up on how “turf battles and poor communication,” hampered investigators, adding that some investigators naively took Madoff’s answers at face value and did not check up on non-existent trades when they had the chance. Implausible data was simply not looked into. Red flags were missed by “inexperienced and incompetent” examiners, agrees the Times, but their reporters stress how investigators “were cowed by Mr. Madoff, who had an inflated reputation on Wall Street.” They described how meetings were broken up suddenly, and questions unanswered – and then not pursued.
According to the Times, “One investigator described Mr. Madoff as ‘a wonderful storyteller’ and ‘a captivating speaker’ after the 2005 encounter in which Mr. Madoff, a former Nasdaq chairman, boasted of his ties to people high up in the S.E.C. and said he was on the short list to be the next agency chairman — the post that went to Mr. Cox. But Mr. Madoff turned angry — ‘veins were popping out of his neck,’ an investigator said — when asked to produce certain documents, and he tried to dictate what paperwork he would yield.”
A good performance, no doubt, aided by the strong desire to have what he wanted and the absence of scruples that marks the true sociopath. But the most compelling part of his performance seems to be his mimicry of legitimate authority, his ability to consistently appear as an insider and significant player whose motives were above question. The important aspect of this skill, though, is not how well he managed it but how easily it worked to intimidate and mislead those who should have known better.
Another story in yesterday’s Journal shed more light on that. Madoff not only bragged that he had made the “short list” to become chairman of the SEC, as the Times noted, he also “predicted that Rep. Christopher Cox was going to get the job.” The Journal notes that this “startling prediction” suggests the extent of “his behind the scenes influence.” I don’t know about influence, but certainly inside knowledge or access to informed opinion. He was talking to someone who knew something, and he let the investigators know it.
When we take into account the marked discrepancy between the salary and status of SEC investigators and those they investigate, the fact that the investigators move in and out of the industry they monitor, no doubt hoping for better jobs, the fact that Madoff obviously had inside knowledge and the seductive charm to display it – along with the temper to intimidate those who challenged him — is it any wonder at all that he escaped detection?
There was a bumper sticker popular 30 years ago: “Question Authority.” Far from questioning authority, the SEC investigators seem to have been dazzled by it, unable to tell the difference between Madoff’s mimicry and the real thing. Most law enforcement officers quickly discover the power of their own authority and learn to use it, but the culture of the SEC doesn’t seem to encourage much skepticism or assertiveness. Perhaps, the SEC investigators don’t know they know how little authority they possess.