WASHINGTON
Government and industry regulators were put sharply on the defensive yesterday at a Senate hearing over their failure to uncover the more than 10-year, multibillion-dollar fraud scheme that authorities say was carried out under their noses by Bernard Madoff, a prominent Wall Street figure and money manager.
With charities and residents in their states ruined by losses from Madoff, members of the Senate Banking Committee demanded answers and accountability. They were scarcely satisfied with explanations given by two high-ranking officials of the Securities and Exchange Commission and the interim CEO of the securities industry's self-policing organization.
They said that the scandal showed the need for an overhaul of the patchwork system governing regulation of the financial markets -- something the new Congress appears to be moving toward.
"Madoff's fraud was so immense and obvious, and took place over such a long period of time, it is simply inexplicable how the SEC missed it," said Sen. Charles Schumer, D-N.Y. "It's as if there was a giant elephant standing next to the SEC in a rather small room for 25 years, and the SEC never noticed."
Schumer wants the SEC to get more money from Congress to hire 100 new enforcement-staff members and to move its inspections office from its Washington headquarters to Wall Street.
The chairman of the Senate Banking Committee, Sen. Christopher Dodd, D-Conn., demanded of SEC Enforcement Director Linda Thomsen and the other regulators: "What's happened here?
"We want some action very quickly in this area," Dodd told them, saying he spoke for the whole committee. He asked the regulators to report to the committee every three months on progress they were making to improve their processes for detecting fraud.
Thomsen said that the SEC is committed to finding ways to strengthen fraud detection after its breakdown in the Madoff case. Although the agency needs to improve its internal processes for pursuing cases, she said, the SEC also needs authority to regulate parts of the financial system that escape oversight and more money to carry out more investigations.
"If we had more resources, we could clearly do more," Thomsen testified.
She faced grilling along with Lori Richards, who heads the SEC's inspections division, and Stephen Luparello, the interim chief executive of the Financial Industry Regulatory Authority. FINRA, the industry regulator, was headed until last month by Mary Schapiro, President Obama's new SEC chairwoman.
Luparello said that Madoff carried out the scheme through his investment business, and FINRA was empowered to inspect only the brokerage operation. He also said that the SEC did not share with FINRA the tips it got from outsiders on Madoff's operation.
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