Senator Chris Dodd, chairman of the Senate Banking Housing & Urban Affairs Committeee, is holding a hearing today on the SEC's failure to detect  the Madoff fraud. The hearing begins at 2:30 and can be viewed live on video here or later in the archives here

The hearing will focus on SEC Inspector General H. David Kotz's 477-page report released late Friday afternoon. The report is online here.  

Kotz is scheduled to appear as a witness as is Harry Markopolos, the now-famous whistleblower who tried to alert the SEC about the Bernie's Ponzi scheme several times.

Rumor has it that Genevievette Walker-Lightfoot, a former SEC staff attorney, will also appear as a witness. In a July article, the Washington Post reported that Walker-Lightfoot, the lead examiner in the 2004 investigation, created a list of nine questions about Bernie's business which, if asked, might have uncovered the Madoff fraud. However, the investigation was effectively terminated by her supervisor without Walker-Lightfoot's questions being answered.

In his report, David Kotz was not inclined to credit Walker-Lightfoot for her work on the investigation. The fact that Walker-Lightfoot refused to testify in person during his investigation apparently was a source of irritation for Kotz. Walker-Lightfoot has said that she wanted her testimony to be in writing to prevent misquotes.   

Having now read the entire report, I think David Kotz tried to be thorough about identifying why each particular investigation failed to uncover Bernie's Ponzi scheme. But he omitted some information that would have been helpful to put the SEC's failure in context.

His analysis is light on what role senior management's played in the investigations and he doesn't provide much information as to how seriously managment took the various allegations of fraud. For example, did Mark Schonfeld, an SEC director in the NY office, assign the investigation of the Markoplos complaint to his A-team or was it relegated to the C-team?

There is no mention in the report about the SEC investigation of the National Stock Exchange (NSX) that took place between 2002 and 2005. Bernie owned a 10% share of the exchange at the time and BMIS may have been one of the firms that engaged in the thousands of instances of frontrunning the SEC uncovered. My understanding is that Eric Swanson played a significant role in the NSX case.

Kotz could have taken a broader view of Shana Madoff's professional and personal relationship with Eric Swanson and the influence Shana Madoff exerted on the SEC investigations. Kotz also appears to have omitted some pertinent informaton about the Swanson-Madoff affair out of professional courtesy for Swanson.

Last December, Eric and Shana Madoff Swanson hired a p.r. firm that helped place articles in the New York Times and the Wall Street Journal that cast the Swansons in a very favorable but, as we now know, untrue light. As such, Swanson's testimony is not totally  credible.   

There are other issues I think Kotz should have explored more fully. The SEC's failure to identify forged documents is one of them. The inability to quickly discount frontrunning as a factor in Bernie's profitability is another.

More to come.