With Bloomberg reporting that the SEC failed in Madoff’s case to perform its customary, first-year audit, the need for independent counsel to review the actions (or inactions) of regulators becomes obvious. Neither the SEC nor FINRA can properly investigate themselves. Both must be held to account for the Madoff fraud, if facts are as they now appear.
Seemingly all of the following red flags and practices that are always carved out for heightened regulatory scrutiny were dismissed or ignored by SEC and FINRA in Madoff’s case:
1) Direction of order flow by an investment advisor through an affiliated broker-dealer.
2) An exclusive custody arrangement for assets of an investment advisory firm with a broker-dealer under common ownership and control with the advisory firm.
3) The exercise of limited or full discretion over a brokerage account by a registered representative or supervisory principal.
In addition, we have Madoff’s role as a regulator himself, his donations to Senator Schumer, and his management of funds for Senator Lautenberg, all begging independent inquiry.