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Madoff judge slams ‘sloppy’ US regulator's failure to use case management system

Madoff judge slams ‘sloppy’ US regulator's failure to use case management system

Basic technology could have led SEC to spot mega-fraud

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A judge has said US regulators were “sloppy” and “irresponsible” in not properly using case tracking systems to help prosecute fraudster Bernard Madoff.

The strong comments came in spite of the judge's dismissal of a $2.5 million lawsuit, brought by investors in the funds and blaming the Securities and Exchange Commission for failing to notice the scam. District Judge Laura Swain, issuing a written judgement in a New York court, ruled that in spite of the poor actions there was no specific “duty” or rule the SEC had violated.

Nevertheless, the judge wrote of “numerous instances of sloppy, uninformed, irresponsible behaviour” at the SEC, in a 28-page judgement issued at the Southern District Court of New York. The judgement reiterates comments in a 2009 government investigation into the SEC’s tracking of Madoff, which blamed the SEC for the failures and was used as a part-basis for the lawsuit.

Madoff was eventually arrested in 2008. But five years earlier, when the SEC began an investigation the work was “never formally concluded, and a final report was never produced, nor was a case-opening report entered into the SEC's case-management system”, the judge noted.

When the SEC commenced another investigation in 2004, and the New York office asked Madoff for documents, the now-imprisoned businessman informed the team that he had already supplied the documents to a different office in Washington DC. The New York office was unaware of this, because of poor communication and its “failure to use [its] internal case-tracking system”. That investigation was closed after the SEC mistakenly believed it had been dealt with.

A further investigation began in 2005 after the SEC received more extensively documented claims that the Madoff scheme was a fraud. But the case was assigned to a team with no experience in investigating Ponzi schemes, the judge wrote, and it was also misrecorded on systems.

“Miscommunication with the Broker-Dealer team, delays, misplaced priorities, and a failure to properly open and record developments in the SEC's internal case-tracking system also characterized [that] investigation,” the judge added.

The complainants, Phyllis Molchatsky and Steven Schneider, had argued the SEC had violated rules through its failure to enter reports into the case management system, as well as its failure to check for existing reports in the system. But the judge found that in the 2009 government investigation into the SEC cases, on which the lawsuit was partly based, there were “no mandatory case-opening, case-management, or other administrative or investigative protocols” detailed.

The SEC has not commented. Lawyers for Molchatsky and Schneider said: "We are disappointed with the judge’s opinion and continue to believe that the court is well-suited to oversee the SEC’s actions and inactions, which were inarguably negligent."

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