Program Improvements Needed 

Within the SEC’s Division of 

Enforcement 

September 29, 2009 

Report No. 467

Program Improvements Needed Within the 

SEC’s Division of Enforcement

Executive Summary 

Background: On December 11, 2008, the Securities and Exchange 

Commission (SEC) charged Bernard L. Madoff (Madoff) with securities fraud for 

a multi-billion dollar Ponzi scheme that he perpetrated on advisory clients of his 

firm. Subsequently, the Commission learned that credible and specific 

allegations regarding Madoff’s financial wrongdoing, going back to at least 1999, 

were repeatedly brought to the attention of SEC staff but were never 

recommended to the Commission for action. 

As a result, former Chairman Christopher Cox requested that the Office of 

Inspector General (OIG) conduct an investigation into the past allegations 

regarding Madoff and his firm and the reasons these allegations were not found 

to be credible by the Commission. 

In June 2009, as a result of issues identified during this ongoing OIG 

investigation, the OIG launched a survey questionnaire to the Division of 

Enforcement (Enforcement) staff and management in headquarters as well as 

the regional offices. The questionnaire was designed to obtain feedback from 

Enforcement staff on topics such as allocation of resources, performance 

measurement, case management procedures, communication, adequacy of 

policies and procedures, employee morale, and management efficiency and 

effectiveness. 

Objective: The objective of our review was to identify systemic issues that 

would prevent Enforcement from accomplishing its mission to enforce the 

securities laws and protect investors and determine from discussions with staff 

and supervisors which programmatic improvements are needed. 

Prior OIG Work: This report contains information from the OIG’s Report of 

Investigation, Report No. 509, Investigation of Failure of the SEC to Uncover 

Bernard Madoff’s Ponzi Scheme, dated August 31, 2009, which described in 

detail the factual circumstances surrounding the Madoff-related complaints 

received by the SEC and the SEC’s examination and investigations of Madoff 

over the years. 

Results: The review found that there are several program improvements 

needed within Enforcement with regard to complaint handling processes, 

fostering of relationships inside and outside the Division, verification of 

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Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

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information with industry experts outside the Commission, timely handling of 

administrative matters related to opening and closing investigations, effective 

supervision over investigations, communication of program priorities, and case 

handling processes. 

Specifically, we found that Enforcement staff lacked adequate guidance on how 

to appropriately analyze complaints. As a result, Enforcement staff did not 

conduct a thorough review of a complaint brought to their attention in 2001 

regarding Madoff. In addition, we found that Enforcement staff assigned to 

investigate Madoff were inexperienced and the investigation suffered from a lack 

of supervision which had consequences for the investigation. We also found that 

Enforcement staff did not always exercise due diligence in their handling of 

critical information regarding Madoff. As a result, we found that Enforcement 

staff did not sufficiently review a complaint that included approximately 30 red 

flags indicating that Madoff was operating a Ponzi scheme. Further, 

Enforcement staff investigating Madoff did not always seek assistance from other 

offices and divisions as needed during its investigation. As a result, Enforcement 

staff had difficulty understanding key aspects of Madoff’s operations, including 

his purported trading overseas. Additionally, Enforcement staff working on the 

Madoff investigation failed to verify information provided by Madoff with 

independent third-party sources, a critical step in order to determine whether 

Madoff was actually engaged in trading. Furthermore, Enforcement staff did not 

adequately evaluate information received by the SEC while the Madoff 

investigation was inactive pending closure. Additionally, we found there were 

delays in completing administrative tasks related to opening a matter under 

inquiry on Madoff, as well as closing the investigation. 

In addition, based on a June 2009 OIG survey of management effectiveness in 

Enforcement, we found that a large number of Enforcement staff have concerns 

regarding working relationships within Enforcement, communication of program 

priorities, and case handling processes. Additionally, staff expressed that they 

did not always know where to find information regarding impartiality in the 

performance of their duties. 

Summary of Recommendations: 

To strengthen management controls, Enforcement should: 

(1) Establish formal guidance for evaluating various types of complaints 

(e.g., Ponzi schemes) and train appropriate staff on the use of the 

guidance. The guidance should address the necessary steps and key 

information required to be collected when conducting preliminary inquiries 

of various types of complaints, specify what information should be 

documented, and list whom should be consulted in other offices within the 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page iv 

SEC with relevant expertise in various subject matters and other pertinent 

data. 

(2) Ensure the SEC’s tip and complaint handling system provides for data 

capture of relevant information relating to the vetting process to document 

why a complaint was or was not acted upon and who made that 

determination. 

(3) Require tips and complaints to be reviewed by at least two individuals 

experienced in the subject matter prior to deciding not to take further 

action. 

(4) Establish guidance to require that all complaints that appear on the 

surface to be credible and compelling be probed further by in-depth 

interviews with the sources to assess the complaints validity and to 

determine what issues need to be investigated. Such guidance should 

also require that staff obtain all relevant documentation related to such 

complaints. 

(5) Provide training to staff to ensure they are aware of the guidelines 

contained in Section 3.2.5 of the Enforcement Manual and Title 17 of the 

Code of Federal Regulations, Section 202.10 for obtaining information 

from media sources. 

(6) Annually review and test the effectiveness of its policies and 

procedures with regard to its new tip and complaint handling system. 

Enforcement should also modify these policies and procedures, where 

needed, to ensure adherence and adequacy. 

(7) Put in place procedures to ensure that investigations are assigned to 

teams where at least one individual on the team has specific and sufficient 

knowledge of the subject matter (e.g. Ponzi schemes) and the team has 

access to at least one additional individual who also has such expertise or 

knowledge. 

(8)Train staff on what resources and information is available from the 

national specialized units and when and how assistance from these units 

should be requested. 

(9) Make it mandatory that planning memoranda be prepared during an 

investigation and that the plan includes a section identifying what type of 

expertise or assistance is needed from others within and outside the 

Commission. The plan should also be reviewed and approved by senior 

Enforcement personnel. 
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Report No. 467 

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(10) Require that after the planning memorandum is drafted, it is circulated 

to all team members assigned to the investigation, and all team members 

then should meet to discuss the investigation approach, methodology and 

any concerns team members wish to raise. 

(11) Establish procedures so that junior-level Enforcement attorneys who 

are having difficulty with obtaining timely assistance from outside offices 

are able to escalate their concerns to senior-level management within 

Enforcement. 

(12) Conduct periodic internal reviews of any newly implemented policies 

and procedures related to information sharing with Divisions and Offices 

outside of Enforcement to ensure they are operating efficiently and 

effectively and necessary changes are made. 

(13) Require that the planning memorandum and associated scope, 

methodology and timeframes be routinely reviewed by an investigator’s 

immediate supervisor to ensure investigations remain on track and 

determine whether adjustments in scope, etc. are necessary. 

(14) Ensure that sufficient resources, both supervisory and support, are 

dedicated to investigations upfront to provide for adequate and thorough 

supervision of cases and effective handling of the investigations. 

(15) Put in place policies and procedures or training mechanisms to 

ensure staff have an understanding of what types of information should be 

validated during investigations with independent parties such as the 

Financial Industry Regulatory Authority, Depository Trust Company, and 

Chicago Board Options Exchange. 

(16) Include in its complaint handling guidance proper procedures for 

ensuring complaints received even if an investigation is pending closure, 

are properly vetted. 

(17) Conduct periodic internal reviews to ensure that MUIs are opened in 

accordance with any newly developed Commission guidance and examine 

ways to streamline the case closing process. Enforcement should also 

ensure staff have adequate time in which to complete these types of 

administrative tasks. 

(18) Put in place a process to periodically remind staff of their 

responsibilities regarding impartiality in the performance of official duties 

and instruct staff where they can find additional information regarding 

impartiality. 
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Report No. 467 

Page vi 

(19) Establish or utilize an existing working group to analyze the OIG 

survey information regarding staff concerns over communication of 

program priorities and make recommended improvements to the Director 

of Enforcement. 

(20) Establish or utilize an existing working group to analyze the OIG 

survey information regarding staff concerns regarding case handling 

procedures within Enforcement and make recommended improvements to 

the Director of Enforcement. 

(21) Establish or utilize an existing working group to analyze the OIG 

survey information regarding staff concerns over working relationships 

within Enforcement and make recommended improvements to the Director 

of Enforcement. 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page vii 

Table of Contents 

Executive Summary ............................................................................................... ii 

Table of Contents ...................................................................................................vii 

Background and Objective ....................................................................................1

Findings and Recommendations..........................................................................3 

Finding 1: Enforcement Staff Lacked Adequate Guidance on How to 

Appropriately Analyze Complaints ................................................................4 

Recommendation 1.......................................................................4 

Recommendation 2.......................................................................5 

Recommendation 3.......................................................................5 

Finding 2: Enforcement Staff Did Not Always Exercise Due Diligence in 

Their Handling of Critical Information Regarding Madoff ..............................5 

Recommendation 4.......................................................................6 

Recommendation 5.......................................................................6 

Recommendation 6.......................................................................7 

Finding 3: Enforcement Staff Assigned to Investigate the Madoff 

Complaint Were Inexperienced in Investigating Ponzi Schemes 8 

Recommendation 7.......................................................................8 

Recommendation 8.......................................................................8 

Recommendation 9.......................................................................9 

Recommendation 10.....................................................................9 

Finding 4: Enforcement Staff Investigating Madoff Did Not Always Seek 

Assistance From Other Offices and Divisions as Needed.............................9 

Recommendation 11...................................................................11 

Recommendation 12...................................................................12 

Finding 5: The Madoff Investigation Suffered From a Lack of Supervision ......12 

Recommendation 13...................................................................13 

Recommendation 14...................................................................13 

Finding 6: Enforcement Staff Failed to Verify Information Provided by 

Madoff with Independent Sources ..............................................................14 

Recommendation 15...................................................................14 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

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Finding 7: Enforcement Staff Did Not Adequately Evaluate Additional 

Information Received by the SEC While the Madoff Investigation Was 

Inactive Pending Official Closure ................................................................14 

Recommendation 16...................................................................15 

Finding 8: Enforcement Staff Did Not Timely Complete Administrative 

Tasks Associated with Opening and Closing the Madoff Investigation .......15 

Recommendation 17...................................................................16 

Finding 9: Other Opportunities for Programmatic Improvements within 

Enforcement ...............................................................................................17 

Finding 9A: Enforcement Staff Are Not Always Aware of Where to 

Find Information Regarding Impartiality and a Troubling Number 

Have Been In Situations They Felt Lacked Impartiality....................17 

Recommendation 18...................................................................19 

Finding 9B: Program Priorities Are Not Always Clearly Established 

and Communicated to Enforcement Staff ........................................19 

Recommendation 19...................................................................22 

Finding 9C: Case Handling Processes Could Be Improved .................22 

Recommendation 20...................................................................25 

Finding 9D: Enforcement Staff Expressed Concern Over Working 

Relationships within the Division......................................................25 

Recommendation 21...................................................................27 

Appendices 

Appendix I: Acronyms. .....................................................................................28 

Appendix II: Scope and Methodology...............................................................29 

Appendix III: List of Recommendations............................................................30 

Appendix IV: Management Comments.............................................................33 

Appendix V: OIG Response to Management’s Comments...............................34 
Background and Objective

Background 

The primary mission of the Division of Enforcement (Enforcement) is to 

investigate and prosecute violations of the federal securities laws. These 

violations involve conduct ranging from fraudulent offering of securities, market 

manipulation, financial statement fraud and insider trading to violative activities of 

regulated entities such as exchanges, broker-dealers, investment companies, 

and investment advisers. This program currently is administered by 

approximately 1,200 enforcement staff members in the Commission’s 

headquarters and eleven regional offices. 

The Commission reported in its 2008 Performance and Accountability Report 

that, in enforcing the securities laws, the SEC focuses on early detection of 

potential problems or issues in the securities markets, preventing violations of 

securities laws and sanctioning violators. For FY 2008, the SEC reported that it 

focused more than half its resources toward achieving this goal, which totaled 

approximately 2,300 staff (including 1,169 Enforcement staff) and more than 

$595 million in funding. 

On December 11, 2008, the Securities and Exchange Commission (SEC) 

charged Bernard L. Madoff (Madoff) with securities fraud for a multi-billion dollar 

Ponzi scheme that he perpetrated on advisory clients of his firm. Subsequently, 

the Commission learned that credible and specific allegations regarding Madoff’s 

financial wrongdoing, going back to at least 1999, were repeatedly brought to the 

attention of SEC staff but were never recommended to the Commission for 

action. As a result, former Chairman Christopher Cox requested that the Office 

of Inspector General (OIG) conduct an investigation into the past allegations 

regarding Madoff and his firm and the reasons these allegations were not found 

to be credible by the Commission. In June 2009, as a result of issues identified 

during this ongoing OIG investigation, the OIG launched a survey questionnaire 

to Enforcement staff and management in headquarters as well as the regional 

offices. The questionnaire was designed to obtain feedback from Enforcement 

staff on topics such as allocation of resources, performance measurement, case 

management procedures, communication, adequacy of policies and procedures, 

employee morale, and management efficiency and effectiveness. 

Objective 

Based on the key issues identified in the OIG’s Madoff investigation, together 

with feedback obtained from Enforcement staff regarding where improvements 

are needed in the Enforcement program, we identified potential systemic issues 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

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Page 2 

that may prevent Enforcement from efficiently and effectively accomplishing its 

mission of enforcing the securities law and protect investors. 
Findings and Recommendations 

Based on a review of the SEC’s handling of the Madoff investigation and a June 

2009 OIG survey of management effectiveness in Enforcement, we identified 

several areas within Enforcement that are problematic with regard to complaint 

handling processes, fostering of relationships inside and outside the Division, 

verification of information with industry experts outside the Commission, resource 

issues, timely handling of administrative matters related to opening and closing 

investigations, effective supervision over investigations, communication of 

program priorities, and case handling processes. More specifically, we found 

that: 

1) Enforcement staff lacked adequate guidance on how to appropriately 

analyze complaints; 

2) Enforcement staff did not always exercise due diligence in its handling 

of critical information regarding Madoff; 

3) Enforcement staff assigned to investigate the Madoff complaint were 

inexperienced in investigating Ponzi schemes; 

4) Enforcement staff investigating Madoff did not always seek assistance 

from other offices and divisions as needed; 

5) The Enforcement Madoff investigation suffered from a lack of 

supervision; 

6) Enforcement staff failed to verify information provided by Madoff with 

independent sources; 

7) Enforcement staff did not adequately evaluate additional information 

received by the SEC while the Enforcement Madoff investigation was 

active pending closure; 

8) Enforcement staff did not timely open or close its Madoff investigation; 

9) Program priorities have not always been clearly established and 

communicated to Enforcement staff; 

10) Case handling processes can be improved; 

11) Enforcement staff are not always aware of where to find information 

regarding impartiality and many have been in situations they felt lack 

impartiality; and 

12) Enforcement staff expressed concern over working relationships within 

the Division. 

This review recommends that Enforcement implement additional management 

controls to address the deficiencies identified to help ensure the Enforcement 

program efficiently and effectively fulfills its mission. 

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Finding 1: Enforcement Staff Lacked 

Adequate Guidance on How to Appropriately 

Analyze Complaints 

We found that Enforcement staff did not conduct a thorough 

review of a complaint brought to their attention regarding 

Madoff. 

The OIG Madoff investigation found that in response to a 2001 complaint 

regarding Madoff from Harry Markopolos (Markopolos), an industry source, which 

was forwarded to the New York Regional Office (NERO) from the Boston District 

Office (BDO), NERO made an expedient decision not to investigate the 

complaint. NERO’s Regional Director assigned the complaint to an Assistant 

Regional Director for initial inquiry. Despite the compelling circumstantial 

evidence in the complaint, the Assistant Regional Director e-mailed the Regional 

Director a day later, after having performed minimal follow-up and stated that she 

did not think NERO should pursue the matter further. Later, the Assistant 

Regional Director testified that she would have needed to consult with someone 

with greater options expertise to determine the full extent to which the complaint 

could be investigated. She also testified that she could not recall if she had 

consulted anyone, but had hoped she did. 

This situation illustrates the need for guidance and training on appropriate 

complaint handling procedures. In particular, we found that no formal guidance 

exists within Enforcement to assist staff in determining what information is 

needed to adequately assess the legitimacy of a complaint, including for 

example, what specific information should be gathered related to a potential 

Ponzi scheme. Additionally, there was no readily available information regarding 

what procedures the Assistant Regional Director performed in reviewing the 

complaint and whom she may have consulted in making her decision not to 

pursue the matter further. 

Recommendation 1: 

Enforcement should establish formal guidance for evaluating various types 

of complaints (e.g., Ponzi schemes) and train appropriate staff on the use 

of the guidance. The guidance should address the necessary steps and 

key information required to be collected when conducting preliminary 

inquiries of various types of complaints, specify what information should 

be documented, and list whom should be consulted in other offices within 

the SEC with relevant expertise in various subject matters and other 

pertinent data. 
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Recommendation 2: 

Enforcement should ensure the SEC’s tip and complaint handling system 

provides for data capture of relevant information relating to the vetting 

process to document why a complaint was or was not acted upon and who 

made that determination. 

Recommendation 3: 

Enforcement should require tips and complaints to be reviewed by at least 

two individuals experienced in the subject matter prior to deciding not to 

take further action. 

Finding 2: Enforcement Staff Did Not Always 

Exercise Due Diligence in Their Handling of 

Critical Information Regarding Madoff 

We found that the Enforcement staff did not sufficiently 

review the evidence that Markopolos provided them. Further, 

Enforcement staff rebuffed Markopolos’ offers of additional 

information related to his complaint. 

The OIG Madoff investigation found in 2005, Markopolos provided the NERO 

Enforcement staff with a detailed complaint that included approximately 30 red 

flags indicating that Madoff was operating a Ponzi scheme, a scenario he 

described as “highly likely.” We found that NERO Enforcement staff did not 

sufficiently review the evidence that Markopolos provided them and discounted 

much of the information in his complaint because Markopolos was not a Madoff 

employee or an investor. We also found that Enforcement staff questioned 

Markopolos’ motives as being a competitor of Madoff’s in the industry. 

Additionally, we found that in December 2005, Markopolos e-mailed the Branch 

Chief assigned to the Madoff investigation stating that he was willing to meet with 

Enforcement staff and share his observations regarding Madoff’s operations and 

provide them additional information and materials relevant to his complaint. He 

also made suggestions regarding sources within the media who would be willing 

to share information with the Enforcement staff as well. The Enforcement staff 

failed to adequately follow-up with Markopolos and obtain the information he was 

seeking to provide. 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

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This situation demonstrates a lack of due diligence in the handling of critical 

information regarding Madoff and the need for additional policies, procedures 

and training in Enforcement to ensure these types of issues do not reoccur. 

The SEC has recently taken steps to improve its ability to handle tips and 

complaints. In February 2009, the SEC retained the Center for Enterprise 

Modernization to begin work on a comprehensive review of internal procedures 

to evaluate tips, complaints, and referrals. The OIG has learned that the project 

is intended to be significant in scope and has not yet been completed. On 

August 5, 2009, Enforcement announced the creation of an Office of Market 

Intelligence. The Office of Market Intelligence will be Enforcement’s liaison to the 

Agency’s Tip, Complaint and Referral (TCR) process and system which is 

responsible for the collection, analysis, risk-weighing, triage, referral and 

monitoring of the hundreds of thousands of tips, complaints and referrals that the 

Commission receives each year. By analyzing each tip according to internallydeveloped risk criteria and making connections between and among tips from 

different sources, Enforcement hopes to be able to better focus its resources on 

those tips with the greatest potential for uncovering wrongdoing. The Office of 

Market Intelligence will also utilize the expertise of the Agency’s other Divisions 

and newly created specialized units within Enforcement to help analyze the tips 

and identify wrongdoing. 

While the SEC has begun the process of developing policies and procedures to 

improve the manner in which they evaluate tips and complaints, these 

procedures, when finalized, need to be tested to ensure they operate effectively. 

Recommendation 4: 

Enforcement should establish guidance to require that all complaints that 

appear on the surface to be credible and compelling be probed further by 

in-depth interviews with the sources to assess the complaints validity and 

to determine what issues need to be investigated. Such guidance should 

also require that staff obtain all relevant documentation related to such 

complaints. 

Recommendation 5: 

Enforcement should provide training to staff to ensure they are aware of 

the guidelines contained in Section 3.2.5 of the Enforcement Manual and 

Title 17 of the Code of Federal Regulations, Section 202.10 for obtaining 

information from media sources. 
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Recommendation 6: 

Enforcement should annually review and test the effectiveness of its 

policies and procedures with regard to its new tip and complaint handling 

system. Enforcement should also modify these policies and procedures, 

where needed, to ensure adherence and adequacy. 

Finding 3: Enforcement Staff Assigned to 

Investigate the Madoff Complaint Were 

Inexperienced in Investigating Ponzi Schemes 

We found that the Enforcement staff assigned to the Madoff 

investigation team were inexperienced in investigating Ponzi 

schemes. 

As a result of information from Markopolos received by NERO in 2005, 

Enforcement initiated an investigation into Madoff. The investigation was 

assigned by an Associate Director for Enforcement to a team of individuals 

(Assistant Director for Enforcement, Branch Chief, and Staff Attorney) that had 

virtually no experience in investigating Ponzi schemes. 

The Staff Attorney, who had established a reputation for being smart and hardworking, had not been the lead Staff Attorney on any investigation and had been 

involved in very few investigations overall. Additionally, she had no experience 

investigating Ponzi schemes. Also, her supervisors, the Assistant Director and 

Branch Chief, testified that they also had no, or limited experience investigating a 

Ponzi scheme. There were also questions about the level of planning that was 

conducted by the Enforcement team for the Madoff investigation. This lack of 

experience and planning had consequences for the investigation they conducted 

of Madoff. 

This situation illustrates the need for Enforcement to ensure that investigations 

are assigned to a team where at least one individual on the team has specific 

and sufficient knowledge of the subject matter and the team has access to at 

least one additional individual who also has such expertise or knowledge. 

Additionally, Enforcement should require planning memoranda to be prepared 

and approved by management during investigations which outline the steps to be 

taken to complete the investigation, identify other offices and or particular 

individuals with requisite expertise that should be consulted during the 

investigation, and identify staffing resources needed and estimated timeframes to 

complete the work. 
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In response to a June 2009 OIG survey of management effectiveness in 

Enforcement, many Enforcement staff expressed that they would like to see the 

idea of specialization introduced and one respondent commented that he is 

usually halfway through a new investigation before he has a clue about “what he 

should be doing or looking for.” Another proponent of specialization commented 

that “...we need to be able to focus our efforts more strategically....” Still others 

expressed that they thought specialization was a bad idea as many times until 

you get into an investigation you do not know what statute has been violated or if 

more than one statute has been violated. Others pointed out that it would make 

their positions redundant and boring. 

Enforcement advised the OIG that they plan to introduce the creation of national 

specialized units dedicated to particular highly specialized and complex areas of 

securities laws. An intended outcome of these units is to allow staff to “get 

smart” about certain products, markets, regulatory regimes, practices and 

transactions. Additionally, it will allow investigators to be more efficient and less 

likely to be misled by those who use complexity to conceal their misconduct. 

Initially, there will be five specialized units including: Asset Management, Market 

Abuse, Structured and New Products, Foreign Corrupt Practices Act, and 

Municipal Securities and Public Pension Unit. Each specialized unit will be 

headed by a Unit Chief, and will be staffed across the nation by people in the 

Division who already have expertise in the topics, or have a desire to learn. They 

will receive specialized and advanced training. Additionally, individuals with 

practical market experience and other expertise, whether from private industry, 

other SEC Divisions, or elsewhere, will be hired into these units. 

Once Enforcement introduces these specialized units, they need to ensure that 

they train staff on what resources and information is available and when and how 

assistance from these units should be requested. Enforcement should also 

periodically evaluate the operations of these units to ensure their efficiency and 

effectiveness. 

Recommendation 7: 

Enforcement should put in place procedures to ensure that investigations 

are assigned to teams where at least one individual on the team has 

specific and sufficient knowledge of the subject matter (e.g. Ponzi 

schemes) and the team has access to at least one additional individual 

who also has such expertise or knowledge. 

Recommendation 8: 

Enforcement should train staff on what resources and information is 

available from the national specialized units and when and how assistance 

from these units should be requested. 
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Report No. 467 

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Recommendation 9: 

Enforcement should make it mandatory that planning memoranda be 

prepared during an investigation and that the plan includes a section 

identifying what type of expertise or assistance is needed from others 

within and outside the Commission. The plan should also be reviewed 

and approved by senior Enforcement personnel. 

Recommendation 10: 

Enforcement should require that after the planning memorandum is 

drafted, it is circulated to all team members assigned to the investigation, 

and all team members then should meet to discuss the investigation 

approach, methodology and any concerns team members wish to raise. 

Finding 4: Enforcement Staff Investigating Madoff 

Did Not Always Seek Assistance from Other 

Offices and Divisions As Needed 

We found that Enforcement staff did not always seek 

assistance from other divisions and offices as needed during 

its investigation of Madoff. 

Although the Enforcement staff had difficulty understanding some aspects of 

Madoff’s operations, including his purported trading overseas, they did not 

sufficiently consult with other divisions and offices within the SEC. Specifically, 

Enforcement did not consult with the SEC’s Division of Trading and Markets for 

assistance in understanding issues relating to broker-dealer operations. 

Similarly, upon learning of Madoff’s purported trading with European 

counterparties, the staff did not seek assistance from the Office of International 

Affairs (OIA) for help in investigating this aspect of Madoff’s operations. The 

Enforcement staff expressed concern that external offices were often to slow in 

providing assistance to them. 

A June 2009 OIG survey regarding management effectiveness within 

Enforcement indicates that a certain percentage of the Enforcement staff did not 

feel they were receiving adequate support from offices and divisions outside of 

Enforcement. Our survey polled Enforcement staff on whether they felt they 

received adequate support from external offices and divisions when requested. 

Out of 759 respondents to this question, 66 percent agreed that they received 

adequate support. However, 24 percent (180 respondents) disagreed that they 

received adequate support. The remainder said that the question was not 

applicable to their jobs. Of those respondents that disagreed, many provided 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

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written comments expressing their concerns over the difficulty in getting timely 

guidance or information from other divisions and offices. We selected a 

representative sample of those comments and have provided them below: 

 

External offices and divisions should be able to advise in 

their respective areas of expertise. They generally do 

cooperate and provide helpful and useful responses, albeit 

through a cumbersome and time consuming process. The 

current memo circulation process effectively gives these 

offices and divisions a veto power over our work, which I 

think is both inappropriate and inconsistent with our mission 

of investor protection. If these offices and divisions were 

given an opportunity to comment, in a much shorter time 

frame, without the authority to withhold an unneeded 

approval, our mission, and investors generally would be 

better served. 

Other Divisions typically take far too long to respond to our 

requests for guidance or information. For example, I sought 

guidance from an office within Market Reg over 3 months 

ago and did not get a response until two weeks ago and that 

only came after leaving numerous phone messages, e-mails 

and even standing outside of the relevant person's office. 

Some Divisions are better than others. It depends on the 

group and the people involved but overall it is too slow and 

Enforcement management typically does not want to make 

decisions without the relevant responses from the other 

offices so it slows the entire process down and frustrates the 

process. 

Historically - no. During Chairman Cox's tenure, the other 

divisions were not supportive of the Division of Enforcement. 

Throughout his tenure, the other divisions took on an 

adversarial role towards Enforcement and used the 

comment process on memoranda to slow down 

recommendations and prevent them from reaching the 

Commission for decision. I had one high-profile matter that 

was 18 months in the comment process with repeated 

rounds of comments from two external divisions. The case 

was not allowed to go to the Commission for that time and 

aged badly. 

Despite an individual’s personal perception of whether seeking out assistance 

from other offices would be helpful or take too long, Enforcement staff should 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

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Page 11 

work on establishing more effective relationships with other divisions and offices 

and ensure they are consulted on matters within their areas of expertise. 

In a August 5, 2009 Memorandum to all Enforcement staff regarding the recent 

approval of delegated authority for formal orders, Enforcement management 

emphasized the importance of consulting with other applicable Divisions/Offices 

at the onset of an investigation and at appropriate times thereafter to ensure that 

Enforcement does not miss significant legal or policy issues. During the piloting 

of this new delegated authority, Enforcement will need to show that they can 

successfully tap into the expertise of other Commission Divisions and Offices 

without these parties having a formal role in reviewing many formal order 

requests. 

Enforcement has also included in its newly drafted streamlining guidance for 

action memos a requirement that all action memos be circulated to other 

Divisions no later than eight weeks following completion of the initial draft of the 

action memo by the assigned staff member, with more routine or noncontroversial matters being circulated within four weeks after the initial draft is 

prepared. In basic cases, an action memo will be required to be circulated within 

two weeks. Like the formal order process, the action memo process will rely on 

Enforcement staff to reach out to appropriate Divisions and Offices at the onset 

of the investigation (and at key decision making points thereafter) so that 

important issues are not identified for the first time when the action memo 

circulates. Relatedly, the draft streamlining guidance states that Enforcement 

contemplates that staff in other Divisions and Offices will escalate questions 

raised during an investigation to senior officers with decision-making authority so 

that Enforcement can rely on Division guidance in shaping the investigation and 

the subsequent recommendations in the action memo. 

As effective information sharing is critical to the Enforcement Staff being able to 

adequately perform their functions, Enforcement will need to evaluate adherence 

to newly drafted policies and procedures on a periodic basis to ensure they are 

operating as intended. This would include assessing whether Enforcement is 

obtaining adequate and timely assistance and support from outside offices and 

ensuring that junior-level attorneys are supported in their efforts to obtain such 

assistance. To help identify potential problems in this area, Enforcement should 

implement procedures that require junior-level attorneys to report problems 

involving obtaining assistance from outside offices to senior-level management. 

Recommendation 11: 

Enforcement should establish procedures so that junior-level Enforcement 

attorneys who are having difficulty with obtaining timely assistance from 

outside offices are able to escalate their concerns to senior-level 

management within Enforcement. 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page 12 

Recommendation 12: 

Enforcement should conduct periodic internal reviews of any newly 

implemented policies and procedures related to information sharing with 

Divisions and Offices outside of Enforcement to ensure they are operating 

efficiently and effectively and necessary changes are made. 

Finding 5: The Madoff Investigation Suffered 

From a Lack of Supervision 

We found that in addition to a lack of experience with 

investigating Ponzi schemes, the Madoff investigation 

suffered from a lack of supervision. 

The OIG found that there were questions about the level of supervision provided 

to the staff attorney on the Madoff Enforcement investigation with regard to 

providing guidance in how to conduct the investigation. There were also 

concerns expressed about the lack of resources available to the Enforcement 

staff in connection with its Madoff investigation. 

When reflecting on the SEC’s failure to uncover Madoff’s Ponzi scheme, the 

Assistant Director commented that one problem was the administrative burdens 

that occupied much of the Branch Chief’s time. The Assistant Director explained: 

 . . . she [the Branch Chief] had inherited a branch where 

everybody had left and left these old cases in shambles, and 

you had to go back to the court records, pulling all these 

court files, and recreating files to close them...Then you had 

to have six month memos on cases, whether or not you 

should keep them open, memos to write. The joke that we 

had in the office was that you had to write a memo to get 

permission to write a memo. You know, a lot of this was to 

make the performance measurable, which is great, and it 

should be measurable, but you have to provide people the 

resources to do it. 

We also found in response to the June 2009 OIG Enforcement survey that 

Enforcement staff had concerns about lack of resources and the resulting 

administrative burdens they had to perform. More specifically, we surveyed 

Enforcement staff regarding their thoughts on resources by asking “Do you have 

adequate resources to successfully perform your job?” Out of 776 respondents 

to this question, 54 percent stated they did not have adequate resources to 

successfully perform their job. Many of the Enforcement staff cited the lack of 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page 13 

support resources (e.g., secretaries, paralegals and document clerks) as a major 

problem with investigations. Many stated that they spend a considerable amount 

of time copying, scanning files, faxing documents, and preparing cases for 

closing instead of reviewing and analyzing evidence, and paying attention to 

whether cases further the division’s mission in the best ways. 

Enforcement has recently taken actions to begin to address concerns related to 

routine monitoring of Enforcement cases and the hiring of additional support 

staff. Enforcement provided the OIG a memorandum drafted by its newly 

created Management Advisory Group to show that they intend to implement a 

requirement that management conduct quarterly case reviews using data from 

Enforcement’s case management system (HUB). The reviews would target 

certain types of investigations (e.g. aged and inactive investigations, Top Ten, 

etc.) with the objective of moving the investigations toward resolution. The case 

reviews will be at the Associate/Office Head level. Also, to the extent the 

periodic case reviews identify critical action items for specific cases, the action 

items will be required to be documented in writing for effective follow-up. 

While quarterly case reviews will help ensure periodic involvement by upper 

levels of management, they do not replace the need for effective continuous 

monitoring of cases by an investigator’s immediate supervisor. 

With regard to adding additional support staff resources, the Director of 

Enforcement recently stated in a speech before the New York City Bar that 

Enforcement has committed to more than triple the current number of full-time 

paralegals and support personnel in the Division. Additionally, Enforcement has 

taken the necessary steps to identify and justify in its recent budget request the 

number and type of support staff positions needed. 

Recommendation 13: 

Enforcement should require that the planning memorandum and 

associated scope, methodology and timeframes be routinely reviewed by 

an investigator’s immediate supervisor to ensure investigations remain on 

track and determine whether adjustments in scope, etc. are necessary. 

Recommendation 14: 

Enforcement should ensure that sufficient resources, both supervisory and 

support, are dedicated to investigations upfront to provide for adequate 

and thorough supervision of cases and effective handling of the 

investigations. 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page 14 

Finding 6: Enforcement Staff Failed to Verify 

Information Provided By Madoff with 

Independent Sources 

We found that the Enforcement staff working on the Madoff 

investigation failed to verify information provided by Madoff 

through the use of independent third-party sources. 

In conducting an investigation of the allegation that Madoff was operating a Ponzi 

scheme, it would have been critical to verify Madoff’s purported trading with 

independent third-parties such as the Financial Industry Regulatory Authority 

(FINRA), Chicago Board Options Exchange (CBOE), and/or the Depository Trust 

Company (DTC). Yet, we found that the Enforcement staff conducting the 

Madoff investigation failed to sufficiently and adequately follow up with 

independent third-parties in order to verify whether Madoff actually engaged in 

trading. 

Particularly in an investigation of fraud, it is very important to verify 

representations made by the individual or firm being investigated. In an 

investigation of a possible Ponzi scheme, independent third-party verification is a 

critical component of conducting a thorough and comprehensive investigation 

Recommendation 15: 

Enforcement should put in place policies and procedures or training 

mechanisms to ensure staff have an understanding of what types of 

information should be validated during investigations with independent 

parties such as the Financial Industry Regulatory Authority, Depository 

Trust Company, and Chicago Board Options Exchange. 

Finding 7: Enforcement Staff Did Not 

Adequately Evaluate Additional Information 

Received by the SEC While the Madoff 

Investigation Was Inactive Pending Official 

Closure 

We found that Enforcement failed to adequately evaluate 

additional troubling information received by the SEC after 

Madoff agreed to register as an investment advisor in August 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page 15 

2006, but before the case was officially closed in January 

2008. 

In June 2007, Markopolos e-mailed the Branch Chief on the Enforcement Madoff 

investigation stating that he had attached some very troubling documents that 

showed the Madoff fraud scheme was getting even more brazen. Additionally, 

the e-mail stated that Madoff could not possibly be managing the billions in his 

strategy that he claimed. 

Despite the additional information, we found no documentation to show that any 

analysis was done or contact was made with Markopolos by the Enforcement 

staff to follow up on the e-mail or attached documents. The Branch Chief 

testified that she did not recall whether the e-mail attachments were given 

significant analysis. Further, the Staff Attorney opined that she did not believe the 

e-mail provided any new information. 

Similarly, the Enforcement staff received a letter regarding Madoff from an 

anonymous source including allegations about Madoff’s investment firm. We 

found that the Enforcement staff failed to appropriately analyze this letter 

complaint as well. 

This situation illustrates the need for Enforcement staff to thoroughly evaluate 

complaints and tips and encourage additional information from complainants 

even if an investigative matter is pending closure. 

Recommendation 16: 

Enforcement should include in its complaint handling guidance proper 

procedures for ensuring complaints received even if an investigation is 

pending closure, are properly vetted. 

Finding 8: Enforcement Staff Did Not Timely 

Complete Administrative Tasks Associated 

with Opening and Closing the Madoff 

Investigation 

We found that there were delays in completing 

administrative tasks related to opening a matter under 

inquiry (MUI) on Madoff, as well as closing the investigation. 

In the OIG Madoff investigation, we found that there were delays in the 

Enforcement staff opening a MUI in its Madoff investigation. According to the 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page 16 

SEC’s Enforcement Manual, the process of opening a MUI helps to ensure 

efficient allocation of resources to investigations. The Assistant Director 

acknowledged that one of the reasons why one should open a MUI immediately 

is to ensure that if a complaint regarding the same entity or matter comes in to 

another office within the SEC, that person can determine if there is already an 

open investigation by searching the appropriate SEC database and can forward 

the relevant information to that office. 

We found that due to the delay in opening the MUI, the Enforcement staff 

conducting the Madoff investigation never received an e-mail complaint regarding 

Madoff, which would have been useful in connection with their investigation. 

Similarly, we found that although the Madoff investigation was effectively 

completed in August 2006, after Madoff agreed to register as an investment 

advisor, the matter was not officially closed until January 2008 which was almost 

18 months later. Enforcement staff commented that the substantial lag is not 

uncommon due to the paperwork burden involved with closing cases. 

Enforcement has begun to streamline processes related to the MUI process by 

drafting an initiative to discontinue Deputy-level review when opening a routine 

MUI. Instead when opening a MUI in Enforcement’s case activity tracking 

system (CATS), staff will include a short narrative in the comments field 

indicating the nature of the case and the geographic or other nexus to the 

investigating office. The data is then pulled into the HUB system and the 

headquarters Enforcement office will generate weekly reports to be provided to 

Senior Officers showing MUI openings. 

Similarly, Enforcement should also examine ways to streamline the case closing 

process and devote adequate resources to do so. 

Recommendation 17: 

Enforcement should conduct periodic internal reviews to ensure that MUIs 

are opened in accordance with any newly developed Commission 

guidance and examine ways to streamline the case closing process. 

Enforcement should also ensure staff have adequate time in which to 

complete these types of administrative tasks. 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page 17 

Finding 9: Other Opportunities for 

Programmatic Improvements within 

Enforcement 

While not directly related to the Madoff investigation, we identified through a June 

2009 OIG survey of management effectiveness in Enforcement, other areas 

where opportunities exist for making programmatic improvements within 

Enforcement, including: (1) ensuring staff are periodically reminded of their 

responsibilities regarding impartiality in the performance of their duties, 

(2) enhancing case handling processes, (3) encouraging groups within 

Enforcement to work more cohesively with one another, and (4) clearly 

establishing and communicating program priorities. In our survey results relating 

to these particular matters, we received a large amount of detailed comments by 

Enforcement staff expressing concern in response to these survey questions. 

We believe that the considerable number and detailed nature of comments on 

these and other issues demonstrates the significance of these matters to survey 

respondents within Enforcement. Addressing these areas of concern will help 

Enforcement to more effectively achieve its program goals. 

Finding 9A: Enforcement Staff Are Not Always 

Aware of Where to Find Information Regarding 

Impartiality and a Troubling Number Have Been In 

Situations They Felt Lacked Impartiality 

While the majority of Enforcement staff stated that they have 

not known of or been involved in a situation where they felt 

there was a lack of impartiality, a troubling number of 

Enforcement staff stated that they felt they had been in a 

situation where there was a lack of impartiality. Additionally, 

a large percentage of Enforcement staff stated that they did 

not know where to find information regarding impartiality in 

the performance of official duties (e.g., improper preferential 

treatment and external influences). 

Our survey polled respondents on three questions regarding impartiality in order 

to determine if staff knew where to find information on impartiality in the 

performance of their official duties, whether staff had ever been in a situation 

where they felt there was a lack of impartiality, and whether staff believed that 

management promptly and sufficiently addressed situations involving lack of 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page 18 

impartiality. The questions and response percentages for each answer are 

depicted below: 

Q1). Do you know where to find information regarding impartiality in the 

performance of official duties? 

Yes No

Total 

Respondents

447 302 749 

59.7% 40.3% 

Q2). Do you know of or have you ever been involved in a situation where you felt 

there was lack of impartiality or the appearance of lack of impartiality in 

performance of your official duties? For example, preferential treatment toward 

the opposing lawyer who once worked at the Commission, improper external 

influences, etc. 

 

Yes No

Total 

Respondents

99 653 752 

13.2% 86.8% 

Q3). Do you believe that the Division of Enforcement's management promptly 

and sufficiently addresses situations involving the lack of impartiality or improper 

influence? 

Yes No

Don’t 

Know 

Total 

Respondents

191 60 508 759 

25.2% 7.9% 66.9% 

The survey found that while 60 percent of respondents (447) indicated they knew 

where to find information regarding impartiality, 40 percent of respondents (302) 

do not know where to find such information. Also, while it is a positive sign that 

only 13 percent of respondents (100) have been or felt that they had been in a 

situation involving the lack of impartiality, any situation where there may have 

been a lack of impartiality is a cause for concern. 

The survey also found that while 67 percent of respondents did not know if 

management promptly and sufficiently addressed situations involving the lack of 

impartiality, 25 percent of respondents thought that management did adequately 

address these situations. 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page 19 

Recommendation 18: 

Enforcement should put in place a process to periodically remind staff of their 

responsibilities regarding impartiality in the performance of official duties and 

instruct staff where they can find additional information regarding impartiality. 

Finding 9B: Program Priorities Are Not 

Always Clearly Established and 

Communicated to Enforcement Staff 

While the majority of Enforcement staff believes that 

program priorities are clearly established and 

communicated, a large percentage expressed concern over 

workload priorities. 

Our survey polled respondents on five questions regarding communication of 

workload priorities and alignment of priorities with the performance goals and 

measures in the SEC’s Performance and Accountability Report (PAR) and 

Enforcement’s mission to protect investors and the markets by investigating 

potential federal securities law violations and litigating the SEC’s enforcement 

actions. The goal was to determine if management had clearly established and 

communicated program priorities and that those priorities aligned with 

Enforcement’s mission and strategic goals. 

The survey found that out of 795 respondents, 59 percent agreed that 

Enforcement clearly communicated its workload priorities while 41 percent 

disagreed. Additionally, out of 780 respondents, 57 percent agreed that 

management provides staff adequate guidance on how to achieve program 

priorities, while 43 percent disagreed that staff was provided adequate guidance. 

Further, more than 50 percent of respondents (420) were not familiar with the 

performance goals and measures in the SEC’s performance and accountability 

report. 

There was a widespread feeling among the respondents (81 percent) that 

Enforcement’s workload priorities aligned with its mission to protect investors and 

the markets by investigating potential federal securities law violations and 

litigating the SEC’s enforcement actions. 

While 59 percent of respondents agreed that Enforcement program priorities 

were clearly communicated, 18 percent of respondents strongly disagreed that 

Enforcement workload priorities were clearly communicated to staff and many 

provided detailed and specific comments explaining their concerns. We selected 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page 20 

a sample of those comments to illustrate common concerns and have provided 

them below: 

Overall I find that workload priorities are not communicated 

to the staff in a clear and concise manner. Moreover, such 

priorities are overall not communicated to the staff in a 

cohesive, unified fashion. Rather, priorities are 

communicated in a haphazard fashion by various managers 

at various times. Moreover, in my view the branch chief will 

often not have an understanding or knowledge of the 

priorities of his or her manager. 

Managers are extremely reluctant to set priorities because 

they're afraid they will focus on the wrong thing and be 

caught unprepared if someone senior to them asks about a 

case they haven't identified as a priority. As a result, staff 

are told to make every case a priority and it's extremely 

inefficient and unproductive. 

While management's workload priorities are laid out, they 

are subject to constant change from day to day. Staff 

Attorneys are not allowed to prioritize and manage their 

investigations as they see fit. Attorneys are constantly being 

pulled from one task to another at the whim of their 

manager. It makes the Staff Attorney's job exceedingly 

difficult. Part of the problem is that the Staff Attorney is 

supervised by multiple layers of management, all of whom 

have different priorities at different times and none of whom 

coordinate amongst themselves in order to set out an overall 

vision of how the attorney should proceed with all of their 

cases as a whole. 

Priorities change like the flavor of the day. Whatever's "hot 

in the news" becomes our priority. Often it feels like we're 

the dog chasing its own tail. 

Priorities of the enforcement division appear to change over 

time and that change does not seem to be rapidly 

communicated down the chain to line attorneys. At the 

current time, I do not have 100% confidence I could 

accurately identify with any specificity--i.e., beyond a general 

statement of a desire to see cases related to the financial 

meltdown--the types of cases enforcement management 

would like to see brought. 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page 21 

There appears to be no prioritization of cases or workload. 

In addition, I have no idea who is required to review my work 

product or even which work product must be reviewed. 

Certain branch chiefs completely micromanage and do not 

allow any communication by Staff Attorneys with anyone 

external to the office (including even AUSA's) while others 

do not even want to see document requests before they go 

out. The same is true of assistants and associates. 

Management appears to get no direction or instruction on 

what their duties are as a supervisor. I have never even 

been in the same room as my associate - I'm not sure I 

would be recognized by sight. Considering the fact that I am 

the person most knowledgeable about my cases, it seems 

incredibly ill-advised that communication with individuals up 

the chain does not include the Staff Attorney. Sometimes I 

have an idea about how to proceed or difficulties that I 

believe we will encounter with our case. I provide the idea to 

my branch chief and I hear nothing back. I assume that 

whatever ideas or suggestions I make are completely 

ignored but I have no way of knowing one way or the other 

because I'm not included in conversations between the 

branch chief/assistant/associate. 

As an agency, priorities have been continuously ambiguous 

and ever-changing depending on the shifting winds in 

Washington politics and/or the make-up of the Commission. 

I'm not sure exactly what you mean by "workload priorities" 

but I can tell you that I don't know quite what is expected of 

me. Because there are no quantifiable metrics used to 

evaluate my effectiveness in my role, it is virtually impossible 

to communicate to me what is expected of me. Only vague 

generalizations can be expressed. What I do is, admittedly, 

very complicated, but measurements can be made. Even a 

simple directive such as, "you are expected to bring two 

insider trading cases and one market manipulation case to 

successful conclusion each year" would be an improvement. 

These comments show that some Enforcement staff are concerned about 

communication of information up and down the chain of command, constantly 

changing workload priorities, and lack of clear expectations. 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page 22 

Recommendation 19: 

Enforcement should establish or utilize an existing working group to 

analyze the OIG survey information regarding staff concerns over 

communication of program priorities and make recommended 

improvements to the Director of Enforcement. 

Finding 9C: Case Handling Processes Could 

Be Improved 

While the majority of the feedback received from 

Enforcement staff with regard to its case handling processes 

was positive, a considerable number of staff expressed 

concerns in this area. 

Our survey polled respondents on the following seven questions related to 

Enforcement’s case selection process, assigning resources to cases and 

rewarding employees for their work on cases to determine their satisfaction with 

current processes. The relevant questions and answers are provided below. 

Q1). Do you believe that Enforcement management has an effective process in 

place for selecting cases such as determining the number of high profile cases it 

will take on, versus cases that are less significant (i.e. balancing the workload)? 

Strongly 

Disagree 

Somewhat 

Disagree 

Somewhat 

Agree 

Strongly 

Agree 

N/A to 

my job 

Total 

Respondents 

107 202 188 45 196 738 

14.5% 27.4% 25.5% 6.1% 26.6% 

Q2). Do you believe the Division of Enforcement selects cases based on 

appropriate risk factors? 

Strongly 

Disagree 

Somewhat 

Disagree 

Somewhat 

Agree 

Strongly 

Agree 

N/A to 

my job 

Total 

Respondents 

41 142 271 67 204 725 

5.7% 19.6% 37.4% 9.2% 28.1% 

 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page 23 

Q3). Do you believe that Enforcement staff are improperly influenced or directed 

by Division management or supervisors to take on certain or specific types of 

cases? 

Strongly 

Disagree 

Somewhat 

Disagree 

Somewhat 

Agree 

Strongly 

Agree 

N/A to 

my job 

Total 

Respondents 

255 162 127 50 158 752 

33.9% 21.5% 16.9% 6.6% 21.0% 

Q4). Do you believe that Enforcement management assigns cases fairly among 

staff such as high visibility cases? 

Strongly 

Disagree 

Somewhat 

Disagree 

Somewhat 

Agree 

Strongly 

Agree 

N/A to 

my job 

Total 

Respondents 

114 128 220 123 158 743 

15.3% 17.2% 29.6% 16.6% 21.3% 

Q5). Do you believe that Enforcement assigns cases to staff based on an 

individual's skills and experience? 

Strongly 

Disagree 

Somewhat 

Disagree 

Somewhat 

Agree 

Strongly 

Agree 

N/A to 

my job 

Total 

Respondents 

68 118 283 144 130 743 

9.2% 15.9% 38.1% 19.4% 17.5% 

Q6). Do you believe that the Division of Enforcement's management allocates 

resources primarily with the goal of maximizing investor protection? 

Strongly 

Disagree 

Somewhat 

Disagree 

Somewhat 

Agree 

Strongly 

Agree 

Total 

Respondents

65 139 357 165 726 

9.0% 19.1% 49.2% 22.7% 

Q7). Do you believe there is a culture within Enforcement's management that 

rewards the "quantity" of cases versus the "quality" of cases that its staff 

undertakes? For example staff that complete work on several smaller, simple 

cases (quantity), are recognized or rewarded more often than staff who work on 

larger cases that are complex and lengthy (quality). 

Strongly 

Disagree 

Somewhat 

Disagree 

Somewhat 

Agree 

Strongly 

Agree 

N/A to 

my job 

Total 

Respondents 

138 182 191 119 119 749 

18.4% 24.3% 25.5% 15.9% 15.9% 

The survey found that a troubling number of Enforcement staff dislike the current 

case selection processes. Specifically, 42 percent of respondents (309) do not 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page 24 

believe that Enforcement has an effective process in place for selecting cases, 

25 percent of respondents (183) do not believe that Enforcement selects cases 

based on appropriate risk factors, and 24 percent of respondents (177) felt that 

cases were improperly influenced or directed by Enforcement management. To 

better illustrate concerns expressed by staff related to case selection processing, 

the OIG selected a sample of the written comments provided by Enforcement 

staff and have provided them below. 

Everyone is afraid of making a mistake, so they take on 

every case, then make every case a priority and, a year 

later, when the dust settles, they have to close the cases 

they never looked at on the grounds that they don't have 

sufficient resources. No real decision-making is done at the 

outset. 

There is no process for anything. And there is no review to 

make sure that the staff's workload is balanced. There are 

staff attorneys who are completely swamped (who are in a 

busy line) while there are other staff attorneys that are 

completely slow (who are in a slow line). Staff attorneys are 

not shared across reporting lines, for no apparent reason. I 

suspect it has something to do with "points" that individual 

members of management are accruing for their own review 

purposes. 

 . . . . we are not "looking" at risk factors and selecting cases 

based upon them (to my knowledge). I think we should. 

Where are the top three areas the SEC sees the next big 

fraud coming from? I have no idea, but I should. Someone 

in enforcement should be thinking about this and instructing 

the staff accordingly. 

There is no process. Often years of investigation go down 

the tube because a litigator doesn't like the case. Why 

couldn't we know that a few YEARS earlier. 

We did find that 46 percent of respondents (343) believe that management 

assigns cases fairly among staff, such as high visibility cases. In addition, 58 

percent of respondents (427) believe that cases are assigned based on an 

individual’s skills and experience. Further, 72 percent of respondents (522) 

believe that Enforcement management allocates resources primarily with the 

goal of maximizing investor protection. 

With respect to rewarding employees for their work on cases, 41 percent of 

respondents (310) of Enforcement staff believe that management rewards 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page 25 

employees for the “quantity” of cases they perform versus the “quality” of cases 

that staff undertakes. 

Recommendation 20: 

Enforcement should establish or utilize an existing working group to 

analyze the OIG survey information regarding staff concerns regarding 

case handling procedures within Enforcement and make recommended 

improvements to the Director of Enforcement. 

Finding 9D: Enforcement Staff Expressed 

Concern Over Working Relationships within 

the Division 

In addition to concerns over obtaining assistance from 

outside divisions and offices, Enforcement staff does not 

always believe that different groups within the Division work 

together effectively. 

The survey asked Enforcement staff whether they believed that different groups 

worked effectively with one another within the Division. The survey found that 

out of 736 respondents to this question, 61 percent of respondents (452) agreed 

that groups work effectively with each other and 39 percent of respondents (284) 

disagreed with the statement. Several members of Enforcement staff that 

disagreed, provided comments explaining their concerns. We selected a sample 

of those comments to illustrate common concerns and have provided them 

below. 

Management does not understand the work of the 

examination groups in the office and rarely acknowledge the 

benefit to the program that could be obtained by working 

more closely with those groups, particularly on more timely 

market and other issues pertaining to regulated entities. 

They appear to arrogantly dismiss the greater expertise of 

the examination groups in certain critical market and 

regulatory issues that could be tapped to prevent serious 

market issues if there were a coordinated effort between the 

two sides of the office. Instead they compete with the exam 

staff to find leads on past violations and then ignore the 

ability of the exam staff to obtain information in a timely 

manner in order to keep the cases and, I guess the 

"rewards" to themselves. Moreover, the Enf Associates 

ignore the referrals of the examination program. As a result, 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page 26 

the Enf program is almost entirely reactive to problems that 

may arise, when the whole program could take a proactive 

approach by relying on and supporting its proactive divisions 

on the examination side of the office. 

There should be better coordination with the accounting and 

market surveillance staffs and the investigative and litigation 

staff. These different sections do not always work together 

well. 

Our current severely hierarchical structure tends to create 

fiefdoms -- managers tend to want to control everything on 

their turf, including outside contacts and consultations. 

Veteran staffers cross lines to consult when necessary, but 

do so quietly. 

At least in OIE, I feel that we are segregated out from the 

rest of Enforcement. We don't often work with other groups 

in Enforcement. However, I think we should, especially 

given that we currently investigate all types of cases, cases 

that require a certain level of knowledge and experience not 

readily available to us within the group. 

Turf battles between regional office and Home Office. 

Previously, senior leadership in the Division routinely favored 

staff in the Home Office and did not effectively manage such 

conflicts. 

We could do a lot more to put accountants and attorneys on 

equal footing in order to allow the expertise of the staff to be 

put to full use. The kind of specialized knowledge we have 

been lacking on some high-profile failures of ours can be 

obtained through empowering our accounting and market 

surveillance staff to take a greater role in investigations and 

deciding their course. 

The trial unit has always had problems working with the 

investigative side. Some attorneys get better than others but 

still there are tensions between groups. Management has 

made no effort to correct this. 

I believe that different branches are totally separate entities 

and the Division of Enforcement does almost nothing to 

foster teamwork between different groups. 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page 27 

There is almost no cross-group interaction, but again, this 

should change with the new specialization program. Right 

now it's very unusual for the staff of one AD group to know 

that a different AD group has a similar case, or has faced a 

similar issue, let alone knowing that someone in a different 

region has done so. Once we have a national program of 

specialized groups, sharing information and working together 

should come much more regularly and naturally. 

Dealing with other enforcement groups is often a hassle, 

because every office is primarily motivated to guard their 

own territory and make sure the other office isn't trying to 

poach the good cases. That said, informal, relationship 

based contacts with staff in other offices about particular 

matters is frequently helpful and rewarding. 

Sometimes I am discouraged from working with other groups 

because it is viewed as relinquishing control of "our case.” 

The survey results and comments demonstrate that Enforcement can do more to 

foster coordination and cooperation among the different working groups within 

the Division. 

Recommendation 21: 

Enforcement should establish or utilize an existing working group to 

analyze the OIG survey information regarding staff concerns over working 

relationships within Enforcement and make recommended improvements 

to the Director of Enforcement. 
 Appendix I 

Acronyms

BDO Boston District Office 

CATS Case Activity Tracking System 

CBOE Chicago Board Options Exchange 

DTC Depository Trust Company 

Enforcement Division of Enforcement 

FINRA Financial Industry Regulator Authority 

HUB Case Management System 

Madoff Bernard L. Madoff 

MUI Matter Under Inquiry 

NERO New York Regional Office 

PAR Performance and Accountability Report 

OIA Office of International Affairs 

OIG Office of Inspector General 

SEC or Commission U.S. Securities and Exchange Commission 

Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page 28 
Appendix II 

Scope and Methodology

This review was not conducted in accordance with the government auditing 

standards. 

Scope. We examined Enforcement program activities covering the period Fiscal 

Year 2000-2009. This included reviewing information and documentation related 

to an OIG investigation of Madoff and his firm and the reasons allegations were 

not found to be credible by the Commission and the results of a survey 

questionnaire launched by the OIG in June 2009 that was sent to the Division of 

Enforcement staff and management to obtain information regarding management 

effectiveness. 

Methodology. In order address the audit objective, we analyzed information 

from OIG Investigative Report No. 509, Investigation of Failure of the SEC to 

Uncover Bernard Madoff’s Ponzi Scheme, to identify systemic issues that would 

prevent the Division of Enforcement from accomplishing its mission to enforce 

the securities law and protect investors. 

We also developed a 50 question survey consisting of 42 multiple choice 

questions and 8 open-ended questions to which respondents could write a 

response. The questionnaire was designed to obtain feedback from 

Enforcement staff on topics such as allocation of resources, performance 

measurement, case management procedures, communication, adequacy of 

policies and procedures, employee morale, and management efficiency and 

effectiveness. The survey was launched in June 2009 to Enforcement staff in 

headquarters and the Commission’s eleven regional offices. Of the 1,242 staff 

that were emailed questionnaires, 838 respondents (67%) completed some 

portion of the survey and 750 respondents (60%) completed the entire survey. 

The survey results were summarized in different formats including spreadsheets 

and a database format to show the response rate for all questions in the survey. 

We also conducted phone interviews with Enforcement staff that asked to be 

contacted regarding their survey responses. 

Prior OIG Coverage. The OIG previously conducted an investigation into 

Madoff and his firm and the reasons allegations were not found to be credible by 

the Commission and issued OIG Investigative Report No. 509, Investigation of 

Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme.

Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

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Appendix III 

List of Recommendations

Recommendation 1: 

Enforcement should establish formal guidance for evaluating various types of 

complaints (e.g., Ponzi schemes) and train appropriate staff on the use of the 

guidance. The guidance should address the necessary steps and key 

information required to be collected when conducting preliminary inquiries of 

various types of complaints, specify what information should be documented, and 

list whom should be consulted in other offices within the SEC with relevant 

expertise in various subject matters and other pertinent data. 

Recommendation 2: 

Enforcement should ensure the SEC’s tip and complaint handling system 

provides for data capture of relevant information relating to the vetting process to 

document why a complaint was or was not acted upon and who made that 

determination. 

Recommendation 3: 

Enforcement should require tips and complaints to be reviewed by at least two 

individuals experienced in the subject matter prior to deciding not to take further 

action. 

Recommendation 4: 

Enforcement should establish guidance to require that all complaints that appear 

on the surface to be credible and compelling be probed further by in-depth 

interviews with the sources to assess the complaints validity and to determine 

what issues need to be investigated. Such guidance should also require that 

staff obtain all relevant documentation related to such complaints. 

Recommendation 5: 

Enforcement should provide training to staff to ensure they are aware of the 

guidelines contained in Section 3.2.5 of the Enforcement Manual and Title 17 of 

the Code of Federal Regulations, Section 202.10 for obtaining information from 

media sources. 

Program Improvements Needed Within the Division of Enforcement September 29, 2009 

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Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

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Recommendation 6: 

Enforcement should annually review and test the effectiveness of its policies and 

procedures with regard to its new tip and complaint handling system. 

Enforcement should also modify these policies and procedures, where needed, 

to ensure adherence and adequacy. 

Recommendation 7: 

Enforcement should put in place procedures to ensure that investigations are 

assigned to teams where at least one individual on the team has specific and 

sufficient knowledge of the subject matter (e.g. Ponzi schemes) and the team 

has access to at least one additional individual who also has such expertise or 

knowledge. 

Recommendation 8: 

Enforcement should train staff on what resources and information is available 

from the national specialized units and when and how assistance from these 

units should be requested. 

Recommendation 9: 

Enforcement should make it mandatory that planning memoranda be prepared 

during an investigation and that the plan includes a section identifying what type 

of expertise or assistance is needed from others within and outside the 

Commission. The plan should also be reviewed and approved by senior 

Enforcement personnel. 

Recommendation 10: 

Enforcement should require that after the planning memorandum is drafted, it is 

circulated to all team members assigned to the investigation, and all team 

members then should meet to discuss the investigation approach, methodology 

and any concerns team members wish to raise. 

Recommendation 11: 

Enforcement should establish procedures so that junior-level Enforcement 

attorneys who are having difficulty with obtaining timely assistance from outside 

offices are able to escalate their concerns to senior-level management within 

Enforcement. 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

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Recommendation 12: 

Enforcement should conduct periodic internal reviews of any newly implemented 

policies and procedures related to information sharing with Divisions and Offices 

outside of Enforcement to ensure they are operating efficiently and effectively 

and necessary changes are made. 

Recommendation 13: 

Enforcement should require that the planning memorandum and associated 

scope, methodology and timeframes be routinely reviewed by an investigator’s 

immediate supervisor to ensure investigations remain on track and determine 

whether adjustments in scope, etc. are necessary. 

Recommendation 14: 

Enforcement should ensure that sufficient resources, both supervisory and 

support are dedicated to investigations upfront to provide for adequate and 

thorough supervision of cases and effective handling of the investigations. 

 

Recommendation 15: 

Enforcement should put in place policies and procedures or training mechanisms 

to ensure staff have an understanding of what types of information should be 

validated during investigations with independent parties such as the Financial 

Industry Regulatory Authority, Depository Trust Company, and Chicago Board 

Options Exchange. 

Recommendation 16: 

Enforcement should include in its complaint handling guidance proper 

procedures for ensuring complaints received even if an investigation is pending 

closure, are properly vetted. 

Recommendation 17: 

Enforcement should conduct periodic internal reviews to ensure that MUIs are 

opened in accordance with any newly developed Commission guidance and 

examine ways to streamline the case closing process. Enforcement should also 

ensure staff have adequate time in which to complete these types of 

administrative tasks. 
Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

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Recommendation 18: 

Enforcement should put in place a process to periodically remind staff of their 

responsibilities regarding impartiality in the performance of official duties and 

instruct staff where they can find additional information regarding impartiality. 

Recommendation 19: 

Enforcement should establish or utilize an existing working group to analyze the 

OIG survey information regarding staff concerns over communication of program 

priorities and make recommended improvements to the Director of Enforcement. 

Recommendation 20: 

Enforcement should establish or utilize an existing working group to analyze the 

OIG survey information regarding staff concerns regarding case handling 

procedures within Enforcement and make recommended improvements to the 

Director of Enforcement. 

Recommendation 21: 

Enforcement should establish or utilize an existing working group to analyze the 

OIG survey information regarding staff concerns over working relationships within 

Enforcement and make recommended improvements to the Director of 

Enforcement. 
Appendix IV 

Management Comments

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Report No. 467 

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Program Improvements Needed Within the Division of Enforcement September 29, 2009 

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Appendix V 

OIG Response to Management’s Comments 

The Office of Inspector General (OIG) is pleased that the Division of Enforcement 

(Enforcement) concurred with all 21 recommendations in this report. We believe 

that these recommendations are crucial to ensuring that Enforcement is able to 

conduct thorough and effective investigations in the future. As the OIG Report 

entitled “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi 

Scheme” dated August 31, 2009 detailed, Enforcement received three versions 

of a very specific complaint entitled “The World’s Largest Hedge Fund is a Fraud” 

detailing approximately 30 red flags indicating that Bernard L. Madoff (Madoff) 

was operating a Ponzi scheme. Moreover, on the first two occasions this 

complaint was brought to Enforcement’s attention, no efforts were made to 

conduct an investigation. While an investigation was eventually conducted, 

Enforcement never really investigated the possibility of a Ponzi scheme. 

We believe that the immediate implementation of these recommendations should 

be Enforcement’s top priority. We are encouraged that Enforcement is 

acknowledging that significant changes are necessary in its operations and that it 

intends to implement all of our recommendations. 

The mission of the SEC is to protect investors, maintain fair, orderly, and efficient 

markets, and facilitate capital formation. Crucial to the SEC's effectiveness in all 

areas is its enforcement authority. The public needs to be able to rely upon the 

SEC to conduct thorough and comprehensive investigations where it is provided 

detailed complaints outlining a potential fraud. 

We believe that these recommendations would ensure a basic level of 

competence in Enforcement investigations and can be fully implemented in short 

order. The OIG plans to follow-up to ensure that all 21 recommendations are 

implemented in full and report back to the Congress on the status of these 

efforts. We also plan to conduct a follow-up audit to determine if the changes to 

Enforcement’s operations are having the desired and appropriate effect. 

Program Improvements Needed Within the Division of Enforcement September 29, 2009 

Report No. 467 

Page 36 
Audit Requests and Ideas

The Office of Inspector General welcomes your input. If you would like to 

request an audit in the future or have an audit idea, please contact us at: 

U.S. Securities and Exchange Commission 

Office of Inspector General 

Attn: Assistant Inspector General, Audits (Audit Requests/Ideas) 

100 F Street, N.E. 

Washington D.C. 20549-2736 

Tel. # 202-551-6061 Freedom of Information Act (FOIA) 

Fax # 202-772-9265 

Email: oig@sec.gov 

Hotline To report fraud, waste, abuse, and mismanagement at 

Commission, contact the Office of Inspector General at: 

Phone: 877.442.0854 

Web-Based Hotline Complaint Form: 

 www.reportlineweb.com/sec_oig