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SEC watchdog seeks criminal probe of Madoff decisions

by William McConnell in Washington | Published September 21, 2011 at 12:41 PM

The Securities and Exchange Commission is enduring another round of bloodletting over the Bernie Madoff Ponzi scheme.

The agency's inspector general's office said Tuesday it was referring results of its investigation into former SEC General Counsel David Becker's role in handling the Madoff affair to the Department of Justice's criminal division.

The SEC already has faced severe criticism for failing to uncover Madoff's investment scam despite receiving a number of complaints over a 16-year period. The IG report issued Tuesday is also forcing an overhaul of the SEC's internal ethics policies.

The IG office began investigating Becker's actions after Feb. 22 press reports that he would be named as a defendant in a clawback suit filed by the trustee administering the liquidation of Madoff assets. Becker had announced his resignation from the SEC earlier that month. The lawsuit seeks a $1.5 million clawback of the $2 million settlement Becker and his brothers inherited from a Madoff account held by their late mother.

The IG office found that Becker, throughout much of 2009, "participated personally and substantially in particular matters in which he had a personal financial interest ... and that the matters on which he advised could have directly impacted his financial position." The IG office found that Becker played a key role in staff recommendations to the five SEC commissioners that boosted the amount of money the Securities Investor Protection Corp. provided to him and other Madoff investors. According to the report, Becker urged use of a valuation model that boosted the value of the Madoff funds they received by $138,500.

The IG also found that Becker recommended legislative changes that would have made it more difficult to bring clawback suits against individuals in the Madoff liquidation. Becker was also criticized in the report for soliciting advice on whether to recuse himself in the Madoff liquidation from agency ethics counsel William Lenox, an individual who reported directly to Becker. Lenox advised him there was no need for Becker to be recused.

The IG report will be the subject of a joint hearing Thursday by the House Financial Services and the Oversight and Government Reform committees. SEC Chairwoman Mary Schapiro and Becker, now a partner in the Washington office of Cleary Gottlieb Steen & Hamilton LLP, are expected to testify.

Sen. Chuck Grassley of Iowa, the ranking Republican on the Senate Judiciary Committee, said the IG report demonstrates the need for an overhaul of the SEC's ethics procedures. "First, the SEC missed the Madoff scam," Grassley said in a statement. "Then, the SEC was tone deaf to Madoff victims. It let a top SEC employee who profited from a Madoff account craft the commission's position on how to treat Madoff victims. It's hard to see how the agency could have let such a major conflict of interest slide. The SEC needs to reform its ethics polices top to bottom. The consequences of a haphazard approach are clear. Public confidence in the agency's ability to do its job of protecting investors is undermined by slipshod work. The SEC needs to make sure nothing like this happens again."

Schapiro would not comment on the IG's referral to the Justice Department but said she takes the report "very seriously." For starters, she agreed to hold another commission vote on how Madoff victims' accounts should be valued. Nevertheless, she said, "I believe that the decision the commission made on that issue was appropriate under the law and in the best interest of investors."

She also agreed to implement other recommendations in the IG report, including having the SEC ethics counsel report directly to the chairman rather than to the general counsel, that all advice from the ethics office be properly documented and that the ethics office implement the policies and procedures necessary to properly examine potential conflicts of interest. Despite the report's harsh characterization of Becker's actions, Schapiro praised him as someone she's known "for many years to be a talented, highly skilled lawyer and a dedicated civil servant who served under three chairmen."

Becker joined the SEC in 1998 as deputy general counsel and became general counsel in 2000. He left to become a partner at Cleary in 2002. Becker returned to the SEC as general counsel and senior policy director in 2009 and left in 2011 to rejoin Cleary.

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SEC watchdog seeks criminal probe of Madoff decisions

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