SEC Chair Fails to Disclose a Conflict in the Madoff Matter

Published: Mar 9, 2011

Author: Array

Mary Schapiro, current chairman of the Securities and Exchange Commission,did not create all the problems at the SEC. Like many commissioners before her, she inherited most of them.

From a technologically backward process for reviewing corporate filings and an inability to detect fraud to an unwieldy management structure and a unionized, lawyer-heavy work force, the SEC has developed a reputation as an outdated bureaucracy unable to track its own finances and lacking in basic accountability and transparency.

Schapiro was supposed to change all that. At her January 2009 confirmation hearing, then-Chairman-designate Schapiro pledged to “reinvigorate enforcement” and “re-engage with investors.”

Moreover, she promised to “deepen the SEC’s commitment to investor protection, transparency, accountability and disclosure.”

In a Senate deeply divided over many of the president’s nominees, she was confirmed unanimously.

Investigators Knew
Quite alarming, therefore, is emerging evidence that Chairman Schapiro failed to disclose a serious conflict of interest within her own management team. Last month, the Oversight Committee learned that the commission’s general counsel, David Becker, was named in a lawsuit seeking the claw-back of a former Madoff account valued at more than $2 million and owned by Becker’s late mother.

Congressional investigators have now learned that Mr. Becker liquidated the account — an original investment of $500,000 — upon his mother’s death. They have also learned that Chairman Schapiro knew of Becker’s association with a Madoff account when she appointed him to the SEC staff in February 2009.

The SEC’s ethics office knew too, but neither required Becker to recuse himself from Madoff-related work.

In fact, Becker was granted a waiver within 25 minutes of a request to the commission’s chief ethics lawyer — who was under his immediate supervision — and continued working on the Madoff file.

Over the course of his tenure at the SEC, Becker participated in drafting, editing and filing numerous briefs and representing the SEC on matters related to the Madoff case. All the while, both Becker and Schapiro knew that he was a potential defendant in the Madoff lawsuits as both executor and beneficiary of his mother’s investment.

Meanwhile, Chairman Schapiro was testifying before the House Committee on Financial Services that she “was committed to working (to) take the most expansive view of how to repay (Madoff) claims and do it in as quick a fashion as possible.”

Ethics Demanded
At no time did she disclose to Congress in dozens of hearing appearances that her top lawyer was a potential litigant in a Madoff-related case and concurrently representing the commission to Madoff victims.

The SEC occupies a unique position atop the structure of the U.S. financial markets. Its mission requires the commission to embody impartiality, competence and independence. To maintain both the appearance and reality of those virtues, the commission has adopted strict canons of ethics and employee conduct requirements to prohibit and prevent conflicts of interest.

Investors tolerate no margin of error when it comes to protecting their retirement accounts, investment portfolios and life savings from fraud.

The events surrounding Schapiro’s knowledge of a manifest conflict of interest at the highest level of her management team and her willingness to allow a conflicted party to represent the Commission in matters related to the largest securities fraud in history raise serious questions about her ability to guide the SEC during a distressed economy and widespread uncertainty about the future of capital formation.

Indeed, no amount of additional funding and no increase in regulatory authority can compensate for that kind of poor judgment.

Issa, R-Calif., is chairman of the House Committee on Oversight and Government Reform.