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SEC Recommends More Hedge Fund Oversight in Audit on Its Failure to Uncover Madoff Fraud; House Oversight and Government Reform Committee Chairman Questions SEC Competence

On September 4, 2009, the Securities and Exchange Commission (SEC) published the report of its Office of the Inspector General (OIG) chronicling the failure of its enforcement and examinations staff to uncover Bernard Madoff’s fraud despite numerous red flags dating as far back as 1992.  In an accompanying statement, SEC Chairwoman Mary Schapiro pledged her agency’s continuing and careful review of the report to “learn every lesson we can to help build upon the many reforms we have already put into place.”  Meanwhile, in a letter dated September 3, 2009 to Chairwoman Schapiro, House Oversight and Government Reform Committee Chairman Edolphus Towns (D-N.Y.), asked whether the level of experience of the SEC’s employees has improved since Congress authorized the SEC to increase compensation in 2002.  He also pledged to hold a hearing on the subject.  Then, on September 10, 2009, SEC Inspector General H. David Kotz testified before the Senate Banking Committee regarding the audit of the agency’s failed oversight of Bernard Madoff.  He told the committee to expect more reports, more revelations of missteps, and more recommendations aimed at improving nearly every aspect of operations within the Office of Compliance Inspections and Examinations (OCIE), and of procedures within the Division of Enforcement (DoE).  This article summarizes the major findings of the OIG report, the concerns expressed in Chairman Towns’ letter, and the pertinent details of Inspector General Kotz’ testimony before the Senate Banking Committee.

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