Bernie Madoff’s legacy as one of Wall Street’s most notorious Ponzi schemes will survive him – and the lessons learned by regulators have implications for policymakers today.
The collapse of Madoff’s business, along with the discovery that he had undertaken a $ 65 billion scam of tens of thousands of investors for at least 16 years, has brought many people in and out. outside the regulatory community wondering how this could have gone right under the nose of the Securities and Exchange Commission.
“The Bernie Madoff scandal was one of the biggest black eyes the SEC has ever received,” said James Cox, law professor at Duke University. “The incident caused a huge culture change at the SEC in terms of the inspection process. They had to be much more skeptical.”
No major new laws or rules were enacted after the scam was discovered, but it prompted securities regulators across the country to look inside to figure out how Madoff escaped from such a huge crime and during so long. The SEC has published a list of reforms it has undertaken: improving internal controls, strengthening audit procedures, increasing resources for investigations, and investing in more staff and specialized training.
John Coffee, a professor at Columbia University Law School, said that while the scandal has prompted the SEC to prioritize investigating the Ponzi schemes, less has been done to mitigate the broader risk investors are facing. faced. “The next crisis always comes from the blind side, and the key fact is that the SEC enforcement budget has not increased commensurate with the size and growth of the market,” he said.
“If they did nothing else, these events should have ended the idea that wealth is a reliable predictor of financial sophistication.”
Barbara Roper, director of investor protection for the Consumer Federation of America, said: “There are a lot of lessons that should have been learned from the Madoff Ponzi scheme, some of which may have been learned better than others. “
Roper said the scandal was a cautionary tale for regulators and investors not to suspend their skepticism. “They can’t let someone’s stellar reputation, or institution, cause them to let their guard down,” she said, noting that many of Madoff’s victims were experienced market players. “If they did nothing else, these events should have ended the idea that wealth is a reliable predictor of financial sophistication.”
Former White House chief ethics attorney Richard Painter, a professor of corporate law at the University of Minnesota, blamed the concept of “affinity fraud,” a con man’s tactic of making himself fun with a particular demographic or community to gain their trust.
“It’s a classic fraud,” Painter said. “He takes advantage of the same religious perspective or the cultural identity of people to let his guard down. I believe the problem was enforcement. We didn’t need new rules to stop Bernie Madoff from happening. apply the old rules. “
But funding was tight and Madoff was famous.
Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, said: “It reminds us if it’s too good to be true, it probably is. People were suspending their disbelief over the force of his reputation and his personality. “
Painter blamed a paltry enforcement budget and a lack of financial, technological and human resources dedicated to tracking leads and investigating suspicions of fraud – an issue he said worsened during the last administration.
“In the Trump years, there was enormous hostility towards financial regulation,” Painter said. “The antipathy you get for regulation, you see in the financial community – you see it with former President Donald Trump.”
Roper said she hoped the administration of President Joe Biden and Gary Gensler, the former head of the Commodities Futures Trading Commission, whom Biden chose to lead the SEC, would work to strengthen financial regulation and commit to fund the application at the appropriate level.
“I am optimistic that we will see a new harshness in the SEC’s approach to oversight and enforcement, now Gary Gensler has been confirmed as chairman,” she said. “We still have not taken effective steps to address the real shortcomings in our oversight of investment advisers.”
Painter said there might not appear to be much of a connection between Madoff’s crime and the calls Gensler is facing from progressives to create a reporting and disclosure framework for diversity and environmental programs. But focusing on increasing diversity within U.S. businesses, as well as within regulatory agencies themselves, could break the cycle of group thinking that criminals like Madoff can exploit, he said. he declares.
Diversity, Painter said, means more variety of perspectives and experiences and fewer entrenched assumptions – which can offset complacency. “It helps overcome this affinity fraud problem,” he said.