Capital Markets Subcommittee Chairman Says: "The Time Has Come for You to Act"

WASHINGTON - Today, Congressman Paul E. Kanjorski (D-PA), the Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, sent a letter to U.S. Securities and Exchange Commission Inspector General H. David Kotz in which he strongly urges the inspector general to immediately provide a public update about his investigations into the failure of the Commission to detect Bernard Madoff's Ponzi scheme and to offer recommendations for improving enforcement and closing legal loopholes that became apparent as a result of the $65 billion fraud.  While Mr. Kotz previously pledged in testimony before the House Financial Services Committee that he would try to issue reports on a timely basis and move quickly on his investigations into these matters, five months have passed, and the SEC Office of the Inspector General has released very little information on these matters.

The text of Chairman Kanjorski's letter to SEC Inspector General Kotz from June 15 follows:

Dear Mr. Kotz:

When the Obama Administration reveals its much-anticipated proposal for restructuring the financial services industry later this week, the debate in Congress on regulatory reform will begin in earnest.  As part of one of our hearings on the fraud perpetrated by Mr. Bernard Madoff, you have publicly committed to provide us with your recommendations, based on your findings, for closing statutory loopholes and fixing our securities laws.  Additionally, you pledged to act expeditiously in your investigations into the Madoff matter and to make public your results as they become available.  Accordingly, please provide me at once with an update on your examinations on the failure of the U.S. Securities and Exchange Commission to detect the Madoff fraud and your suggestions for modifying our federal securities laws.

In your written testimony at the meeting of the Financial Services Committee in early January, you noted that the Office of Inspector General at the U.S. Securities and Exchange Commission opened an official investigation into the Madoff matter on December 17, 2008.  You also said that you understood "that it is critical that our investigative efforts be conducted expeditiously."  Moreover, you noted that you were "considering preparing reports on a ‘rolling basis' - assuming that we can identify discrete issues that may be resolved separately and expeditiously - so that some conclusions may be provided very shortly."  At these proceedings, you further testified that you were mobilizing additional resources to ensure that your office made "every possible effort" to complete "as soon as possible" its investigations and reviews.

Additionally, in response to one of my questions you indicated that you hoped to "be able to get something out in a matter of months, certainly not years."  When replying to yet another one of my questions, you also said "this is not something that we can sit and we can work on for years and years and years and then issue some 500-page report many years down the road."  You then added that you understood "absolutely" that this was "a matter that has to be dealt with immediately."

Moreover, in the ongoing series of hearings of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises on these matters, I have sought to use the Madoff fraud as a case study for determining how to improve oversight of and investor protection in our securities markets going forward.  In my questioning, I therefore specifically asked you expeditiously to provide information about your findings so that Congress could act to close loopholes and fix enforcement problems.  In response, you said:  "I agree with you, absolutely.  ...  So, absolutely, as we can identify issues and we can thoroughly investigate them and come to a conclusion, we will absolutely issue a report."

Six months have now passed since you began your investigations into the $65 billion Madoff Ponzi scheme.  In addition, more than five months have ensued since you testified and made public commitments regarding these matters.  To the best of my knowledge, the only information that your office has made public during these timeframes is a one-page summary of your Madoff investigations, as found in your most recent semiannual report to Congress for the period ending on March 31.  While this brief discussion provided some helpful insights, I found it an inadequate response to my earlier requests and your prior public commitments.

In short, the time has come for you to act.  Consistent with all applicable law and regulation, I therefore ask that you inform me of the progress your office has made in examining the shortfalls of the Commission in detecting the Madoff fraud and your expected timeframes for issuing reports on these matters.  Additionally, I request that you provide your current recommendations for legislative action resulting from your Madoff investigations or your other examinations, as I am now actively working to develop legislation to modify our securities laws and build upon the reforms contained in H.R. 6513, the Securities Act of 2008, which passed the House last year.

In closing, I look forward to hearing from you on these issues no later June 30, 2009.  Please also contact me if you should have any questions regarding these matters.

Sincerely,

Paul E. Kanjorski

Chairman, Subcommittee on Capital Markets,

   Insurance, and Government Sponsored Enterprises

cc:        Ms. Mary Schapiro

Chairman, U.S. Securities and Exchange Commission

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