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Morriss on Madoff and the S.E.C.

Here's another great letter-to-the-editor (of the Wall Street Journal) from my friend (and Market Correction co-blogger) Andy Morriss:

Colleen Kelley, National Treasury
Employees Union president, defends the SEC’s “front line”
employees against charges that they ignored the Madoff fraud under their noses
by declaring that it is all the Bush Administration’s fault. (“Don’t
Blame the SEC’s Employees,” Letters, Feb. 13). Give those “front
line” employees “adequate staff and resources,” “appropriate
regulatory authority … consistent with the growing complexity of
financial instruments and trading techniques” and “leaders
committed to the missions of their agencies” and there will be no more
Madoffs! This is not just nonsense but self-serving nonsense on more steroids
than all of our home run champions combined.

The Madoff fraud was one of the
oldest games in town, a Ponzi scheme. There is nothing sophisticated or new
about such schemes – indeed their name refers to Charles Ponzi, who defrauded
investors in the early 1900s. Even earlier, such frauds were so well known that
Charles Dickens included one in his 1844 novel, Martin Chuzzlewit.
Moreover, the Journal’s coverage of the Madoff scandal has uncovered
dozens of fund managers who rejected opportunities to invest with Madoff
because they undertook simple steps such as calling exchanges to see if the
volume of trades Madoff claimed to be making were occurring, comparing Madoff’s
suspiciously consistent levels of returns to historical averages, attempting to
replicate Madoff’s strategies in simulations, and talking to Madoff and
observing his unwillingness to provide information on his strategy and
suspicious use of a tiny accounting operation.

In truth, Ms. Kelley’s
members failed to uncover a type of fraud well known for over 150 years and
which others with smaller budgets (and zero regulatory authority) did uncover.
We don’t need to reward the SEC’s failure with more resources, more
authority, or more employees. And we certainly don’t need advice on how to
regulate from a union that represents the regulators who failed. Instead, we
need to stop pretending that government can protect investors from people like
Mr. Madoff and tell investors to do some due diligence themselves. The right consequences
of the Madoff scandal are that Mr. Madoff go to jail, those of Ms. Kelley’s
members who failed to act on Madoff despite the many warnings the agency
received about him lose their jobs, the SEC either get to work or close up shop,
and the investors who lost money in the scheme be more careful who they trust
with their assets next time.

Andrew P. Morriss

H. Ross & Helen Workman Professor of Law and Business
Professor, Institute for Government and Public Affairs
University of Illinois