Michael Hiltzik: What's stopping the next Bernie Madoff?

Michael Hiltzik, Los Angeles Times on

Published in Business News

A "thorough and competent investigation ... was never performed." Indeed, Madoff's success at fending off fraud investigations by the SEC signaled to investors that the regulators had given him a clean bill of health.

Following the Madoff debacle, the SEC moved to shore up its enforcement efforts. It established specialized units and recruited staff with expertise and experience, including ferreting out fraud; revamped its handling of tips; and lobbied for more resources.

But a regulatory agency is only as good as its leadership. The SEC's experience during the Trump era gives cause for alarm. Under Chairman Jay Clayton, a former Wall Street lawyer, the agency pulled back on enforcement despite Clayton's pledge at his confirmation hearings to look out for the small investor.

In fiscal 2020, the agency disclosed in its most recent annual report, it brought only 405 enforcement actions, the lowest number since at least 2015. The largest drop in cases from 2019 to 2020 concerned investigations of investment advisors and firms, which fell to 87 from 191 in that time frame.

The decline dated from the inception of the Trump administration, according to an analysis in late 2017 by Georgetown University law professor Urska Velikonja. The number of cases brought declined by 17% in that first year of Trump. Penalties fell by more than 15% to $3.5 billion, she found — and most of that sum was due to cases brought during the Obama administration.


Financial professionals can expect an upswing in enforcement actions under incoming SEC Chairman Gary Gensler, a former commodities regulator who was confirmed by the Senate on Wednesday. The first signs of tougher oversight had already emerged under acting SEC Chair Allison Lee, who reversed a number of Trump initiatives that had sapped the authority of enforcement staff.

But one lesson of the Madoff scandal is that any lessening of vigilance over the investment industry can cost billions. Gensler and his staff will not only have to keep fighting the last war, riding herd on schemes that use traditional means to defraud but profit from secrecy; they'll also need to be alert for new species of fraud, perhaps based on investment assets and techniques such as cryptocurrencies that are evolving in real time.

None of that will absolve individual investors of taking responsibility for their own actions. As Madoff himself told Steve Fishman of New York Magazine in 2011: "Everyone was greedy. I just went along."

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