"This was perhaps the most egregious failure in the enforcement investigation of Madoff," Kotz's report said. "They never verified Madoff's purported trading with any independent third parties." Had the SEC cross-referenced Madoff's account statements with DTCC's trading records, they would have "immediately realized that Madoff was not trading in anywhere near the volume that he was showing on the customer statements."
How can the SEC learn from its errors? Sam Antar, who was convicted in the 1980s on several felony counts of securities fraud in his role as CFO of the Crazy Eddie stores, says the SEC committed the cardinal sin of fraud investigation: it didn't verify Madoff's records. "Never trust," Antar says. "Just verify, verify, verify."
Antar is also skeptical of the lawyers who play a major role in investigating frauds at the SEC. "The SEC needs experienced investigators, such as forensic accountants who are properly trained to ferret out fraud," he says. "Lawyers are not investigators."
And the SEC lawyer on the 2006 Madoff investigation was inexperienced: Most of it was conducted, Kotz wrote, by a "staff attorney who recently graduated from law school and only joined the SEC 19 months before she was given the Madoff investigation. She had never previously been the lead staff attorney on any investigation, and had been involved in very few investigations overall. The assignment was also her first real exposure to broker-dealer issues."