SEC Awarded Bonus to Employee Who Failed to Uncover Madoff Ponzi Scheme, IG Says

By Pete Winn | August 12, 2011 | 3:04 PM EDT

In this March 10, 2009, file photo, Bernard Madoff exits Manhattan federal court in New York. (AP Photo)

( - The U.S. Securities and Exchange Commission (SEC) issued a $1,200 bonus in 2010 to an SEC employee who played a key role in an examination and an investigation that failed to uncover investment counselor Bernie Madoff’s $50 billion Ponzi scheme.

In a report released August 2, SEC Inspector General H. David Kotz disclosed that during a general review of SEC bonuses earlier this year, his staff uncovered the fact that one of the key participants in both a 2005 examination and a 2006 investigation of Madoff had received the $1,200 cash award in April 2010.

"In August 2009, we completed our investigation of the SEC’s failure to uncover Bernard Madoff’s $50 billion Ponzi scheme," said the inspector general's report. "We found that the examinations and investigations of Madoff and/or his firm were generally conducted by inexperienced personnel, were not planned adequately, and were too limited in scope.

"We further found that the SEC examiners and investigators failed to understand the complexities of Madoff’s trading and the importance of verifying his returns with independent third parties," said the report. "As a result, we recommended in our investigative report that the Chairman share with management the portions of the investigation that related to performance failures by employees who still worked at the SEC and that appropriate action, including performance-based action, be taken on an employee-by-employee basis.


"We found during our review that one of the key participants in both the 2005 examination and 2006 investigation of Madoff received a $1,200 cash award in April 2010," said the report. 

"The narrative justification for the award indicated that it was made, in part, to reward the employee’s efforts in 2009 pertaining to a follow-on investigation of Madoff," the inspector general's report said. "The award nomination was signed by the employee’s Branch Chief and Assistant Regional Director on September 14, 2009, just two weeks after the August 31, 2009, issuance of the OIG’s final investigative report on the Commission’s failure to uncover the Madoff Ponzi scheme. Moreover, both the employee being rewarded and the Assistant Regional Director who recommended the award were cited in the report for numerous performance issues and were subject to potential disciplinary action at the time the award recommendation was made.


"We did find that SEC postponed payment of the award to the employee until April 25, 2010, after the SEC’s receipt of a report from Fortney & Scott, LLC, which concluded that the employee’s actions did not warrant formal disciplinary action," said the report.

"However," said the inspector general's report, "the Fortney & Scott report did not dispute the serious performance issues pertaining to the employee raised in our report, including the fact that the 2005 examination of Madoff in which the employee had played a critical role was inappropriately focused, conducted without obtaining critical independent data, closed with unresolved issues remaining, and relied too heavily on the representations of Madoff.

"Further," said the inspector general's report, "the Fortney & Scott report recommended formal disciplinary action, including removal from service, for the Assistant Regional Director who approved the award nomination in question.


"The lack of adequate documentation to support cash and time-off awards and approval by division and office heads of awards to employees potentially subject to disciplinary action, jeopardizes the integrity of the awards program," the inspector general concluded.

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