" ! COMMITTEE PRINT 

111TH CONGRESS

1st Session 

COMMITTEE

Print 111–B 

MEETING ON 

ASSESSING THE MADOFF PONZI 

SCHEME AND THE NEED FOR 

REGULATORY REFORM 

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JANUARY 5, 2009 


Congress.#13
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63–127 

" ! COMMITTEE PRINT 

111TH CONGRESS

1st Session 

COMMITTEE

2011

Print 111–B 

MEETING ON 

ASSESSING THE MADOFF PONZI 

SCHEME AND THE NEED FOR 

REGULATORY REFORM 

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JANUARY 5, 2009 


Congress.#13
(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS MCCOTTER, Michigan 

KEVIN MCCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIC PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Meeting held on: 

January 5, 2009 ................................................................................................ 1 

Appendix: 

January 5, 2009 ................................................................................................ 85 

WITNESSES 

MONDAY, JANUARY 5, 2009 

Frankel, Tamar, Professor of Law, and Michaels Faculty Research Scholar, 

Boston University School of Law ........................................................................ 62 

Goldstein, Allan, retiree and investor, Bernard L. Madoff Investment Securities ......................................................................................................................... 60 

Harbeck, Stephen P., President and CEO, Securities Investor Protection Corporation (SIPC) ..................................................................................................... 21 

Kotz, H. David, Inspector General, U.S. Securities and Exchange Commission 17 

Metzger, Leon M., Adjunct Faculty Member, Columbia University, Cornell 

University, New York University, and Yale University ................................... 64 

APPENDIX 

Prepared statements: 

Frankel, Tamar ................................................................................................. 86 

Goldstein, Allan ................................................................................................ 96 

Harbeck, Stephen P. ......................................................................................... 99 

Kotz, H. David .................................................................................................. 102 

Metzger, Leon M. .............................................................................................. 114 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kanjorski, Hon. Paul E.: 

Written statement of the Investment Adviser Association ........................... 132 

Bachus, Hon. Spencer: 

Letter to Chairman Barney Frank, dated December 17, 2008 ..................... 137 

Hinojosa, Hon. Ruben: 

Complaint, ‘‘United States of America v. Bernard L. Madoff, Defendant.’’ .. 138 

Assorted newspaper articles ............................................................................ 143 

Goldstein, Allan: 

Account statements of Bernard L. Madoff Investment Securities LLC ....... 154 

Harbeck, Stephen P.: 

Letter to Hon. Gary L. Ackerman, dated January 12, 2009, providing 

additional information for the record .......................................................... 163 

(1) 

ASSESSING THE MADOFF PONZI SCHEME 

AND THE NEED FOR REGULATORY REFORM 

Monday, January 5, 2009 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 2:08 p.m., in room 

2128, Rayburn House Office Building, Hon. Paul Kanjorski presiding. 

Members present: Representatives Frank, Kanjorski, Maloney, 

Watt, Ackerman, Sherman, Meeks, Capuano, Hinojosa, McCarthy 

of New York, Lynch, Miller of North Carolina, Scott, Green, 

Cleaver, Hodes, Klein, Perlmutter, Donnelly, Foster, Speier, Childers; Bachus, King, Paul, Manzullo, Biggert, Capito, Hensarling, 

Garrett, Neugebauer, McCarthy of California, and Heller. 

Mr. KANJORSKI. [presiding]. The committee will come to order. 

Without objection, the rules of the House and of the Committee on 

Financial Services for the 110th Congress will apply to today’s proceeding. The committee is meeting today to discuss assessing the 

Madoff Ponzi scheme and the need for regulatory reform. Without 

objection, all members’ opening statements will be made a part of 

the record. 

Mr. BACHUS. Mr. Chairman, reserving the right to object, I do 

not intend to object. And I am glad you raised the issue of process 

because the 110th Congress has officially concluded and the new 

Congress will not be sworn in until tomorrow. Today’s proceeding 

is being held in what I would call a parliamentary grey area because the Financial Services Committee as a technical matter does 

not exist. Any record of today’s proceedings will not count as an official record of the committee. And while all of us want to get to 

the bottom of the Madoff scandal as quickly as possible—and I 

commend the chairman for calling for this hearing. 

In fact, immediately following the stories breaking about it, I 

asked Chairman Frank to hold a hearing as soon as possible after 

the 111th Congress convened. And we all also want to follow regular order if at all possible and operate in a way that does not cast 

doubt on the legitimacy of our proceedings. For that reason, I wish 

we had waited until after tomorrow’s swearing-in of the new Congress and for the formal organization of the committee to hold this 

hearing. 

But having said that, I don’t object to conducting today’s proceeding as if it is an official hearing of the committee, and I therefore withdraw my objection to the committee’s unanimous consent 

request. 

2 

The CHAIRMAN. Mr. Chairman, I reserve the right to object, although if—I am not sure of the procedure, given what the gentleman said. Reserving the right to object would appear to be in a 

positive sense with just a bunch of guys talking, and women. But 

I am glad we are because that is important. 

First of all, I don’t see any possible harm that could come from 

having this meeting. I don’t see even the suggestion of procedural 

irregularity. The gentleman said regular order. We are a group of 

members, we are voluntarily members. Those who don’t want to 

participate can leave. He says that the record will have no formal 

role. Frankly, I haven’t seen that it has had yet, even though we 

have hearings. I am not sure what it would be unless you were trying to prosecute someone for perjury, and we have never sworn 

people in during the chairmanship here. 

The other thing I would say is this, as the gentleman said, wait, 

here is the real point I wanted to make. In January of 2007, we 

were not officially constituted as a committee with our new members until January 31st; that is, we would not have overcome the 

obstacle the gentleman raised to it being the regular committee if 

we had waited until tomorrow or the day after because the swearing-in of the members does not constitute the committee under the 

rules of the House. We don’t yet know who the new members will 

be on our side. I am not sure—I am told on the Republican side 

they may not pick their new members until next week. So I want 

to say this was the initiative of the gentleman from Pennsylvania 

who was chairman of the Capital Markets Subcommittee in the 

last Congress, and I will go on and predict will be chairman of that 

subcommittee in the next Congress, although I acknowledge that is 

an open question. 

I don’t want to prejudice things, but I think he is well in the lead 

now for that job. And if we had not done it today at his initiative, 

we would not have been able to do it for several weeks, possibly, 

to meet that requirement. So for that reason, I just wanted to say 

that I think what the gentleman from Pennsylvania did was very 

appropriate, and nothing here will prevent us from reconvening at 

a later time or convening as the official committee for whatever we 

want to do. 

Mr. WATT. Would the gentleman yield on his— 

The CHAIRMAN. Yes. 

Mr. WATT. I would just observe that everybody else here is overdressed for this occasion. It is obvious that I thought it was less 

than formal, so— 

The CHAIRMAN. Taking back my time, could I get a testimony 

from the gentleman, in writing, that I showed up overdressed? 

Mr. WATT. I think I would ask unanimous consent that we recognize that. 

The CHAIRMAN. I thank the gentleman and I withdraw my reservation. 

Mr. BACHUS. Yes. Mr. Chairman, I would like unanimous consent 

to introduce my letter of December 17th calling for a hearing, not 

a meeting. But having said that, I think the meeting is great. 

Mr. KANJORSKI. Without objection, it will be entered into the 

record. 

3 

But a little note on the gentleman from Alabama’s question. It 

is the intent of the Chair that, as soon as our committees are constituted, to make the appropriate motions to incorporate by reference this meeting today to make it have the full force and effect 

of a committee hearing. I think that is possible under the rules. So 

we were aware of the fact, but quite frankly and in all honesty, I 

was hoping we didn’t lose the time, that there seems to be a great 

deal of information that could be gained now and a lot of insight 

if we start very early. That is why we took these unusual steps. 

I think we are also proving to the American people that the Congress has the capacity to work even when we are not officially constituted as a body or as a committee. 

Mr. BACHUS. Thank you. Mr. Chairman, all I was pointing out 

is that technically, the hearing is just not a hearing. 

Mr. KANJORSKI. It will be in the future. 

Mr. BACHUS. And I commend the chairman for calling this meeting. 

Mr. KANJORSKI. Thank you. We meet today to begin to understand how Bernard Madoff allegedly swindled thousands of innocent investors, effectively stole billions of dollars and evaded securities regulators already tipped off about this unprecedented alleged 

Ponzi scheme. 

The allegations that Mr. Madoff stands at the center of a $50 billion scam simply shocked the conscience. These deeply disturbing 

events have raised even more troubling questions about the effectiveness of our regulatory system. I have long stressed a need for 

pursuing comprehensive regulatory reform and I have convened 

hearings to advance these initiatives in the past. But before we act 

on legislation in the 111th Congress to restructure the regulatory 

system for the financial services industry and enhance investor 

protection, we need to understand how Mr. Madoff organized his 

many business operations and how he perpetrated his alleged 

fraudulent acts. 

Today, we will hear from experts in the financial world, including 

the Inspector General, the head of the Securities Investor Protection Corporation, and academics. They will help Congress begin to 

unravel this tangled web. We will also hear from a Madoff victim 

to help us all understand the dire implications this ruse has had 

for individual investors, charitable organizations, and pension 

funds. 

This meeting to discuss the Madoff affair will also be the first of 

several public proceedings. At future hearings, we will hear from 

senior officials of the Securities Exchange Commission and from 

Harry Markopolos, who has asked us to temporarily postpone his 

testimony so that he can better prepare for our questions. 

We will need to hear from other financial services regulators as 

well. We also need to hear from auditors and their overseers to this 

elaborate Ponzi scheme that fell through the cracks of our regulatory system. From what we have all learned in the press, it now 

appears that regulators should have detected the Madoff wrongdoing earlier because of red flags raised by others. Authorities received information about potential problems when outsiders like 

Mr. Markopolos could not create a model that matched the results 

of Mr. Madoff’s purported strategy. Others published articles as 

4 

early as 2001 raising questions about Mr. Madoff’s firm. Other red 

flags included unrealistically steady investment returns and an 

auditor the size of a mouse examining a fund the size of an elephant. 

Perhaps most shocking, after Mr. Madoff misled government examiners and after he was then forced to register as an investment 

adviser, the Commission did not conduct any subsequent inspections. Moreover, in its prior examinations, the Commission failed 

to effectively use its subpoena powers to obtain any records other 

than those voluntarily offered. 

In the wake of this unprecedented financial crisis, we now know 

that our securities regulators have not only missed opportunities to 

protect investors from massive losses from the most complex financial instruments like derivatives, but they have also missed the 

chance to protect them against the simplest of schemes, the Ponzi 

scheme. Clearly, our regulatory system has failed miserably and we 

must rebuild it now. 

As we resurrect our regulatory structure we must ensure that 

regulators have the resources they need to get the job done. A 

former Chairman of the Commission, Arthur Levitt, has noted that 

the agency’s enforcement unit is chronically understaffed. Whereas 

it had 433 people in the Office of Compliance and Examinations, 

looking at 8,000 advisers 2 years ago, today it has 400 people looking at 11,000 advisers and thousands of mutual funds. Moreover, 

the number of investment advisers subject to the Commission’s 

oversight has doubled since 1997. 

While we do not know if the Commission’s oversight in this case 

can be blamed on a lack of resources, we can certainly work to 

make sure adequate staff and powers are available in the future. 

As an adjunct to that comment, may I point out—and this is 

done for the purposes of our recognition—that sometimes our overzealousness has caused us a major problem. And that overzealousness was caused in 2001 when this committee entertained legislation and adopted that legislation at the committee level, sent it to 

the House and passed it, where we cut appropriations and fees 

paid to the Commission over 10 years of $14 billion when it was 

said by the Majority at that time that these funds were not necessary, that there was sufficient staffing at the Securities and Exchange Commission and now we see that is not the case. 

I point that out not from a blame standpoint or a political standpoint, but I point it out that all of us better check our memories 

and remember what we did these last 10, 12 or 15 years and how 

this committee, perhaps even the Congress, but certainly some people who are responsible for oversight and control, perhaps missed 

the boat in this situation. I hope we don’t do that again and that 

is the reason I want us to consider that. 

We must also take action to better protect all investors, from elderly widows to sophisticated market participants. There are many 

ideas on how we can accomplish this objective. The Congress will 

review these options. In the Madoff case, legal authorities will be 

tasked with finding a way to help the aggrieved investors. 

Finally, it is important to note that this is a real crisis with real 

victims. I for one was saddened to learn of a gentleman who, because he lost the money of his family and his clients in the Madoff 

5 

financial scandal, took his own life. Life is always more precious 

than money. I therefore hope we will see no more tragic fallouts 

from this messy sort of affair. 

In closing I thank our witnesses and my colleagues for joining me 

here today. Together, I hope that we can learn from this terrible 

event, figure out how we can improve our regulatory structure and 

undertake the most substantial rewrite of the laws governing the 

U.S. financial markets since the Great Depression. 

The gentleman from Alabama is recognized for 5 minutes. 

Mr. BACHUS. I thank the chairman for convening this meeting to begin the committee’s examination of an alleged $50 billion Ponzi 

scheme perpetrated by Bernard Madoff. The Ponzi scheme designation in connection with his activities is not a recent coinage. It was 

first used by Harry Markopolos some 10 years ago in a complaint 

to the SEC. And it would have only taken one staffer pursuing that 

claim to have uncovered quite a lot of fraud. 

Let me respond to one thing that the chairman said and that is 

about a reduction of money for the SEC. There was no reduction 

of money for the SEC. That money had been diverted by the Appropriations Committee to the general fund. So the money was not 

getting to the SEC. It didn’t get to the SEC before that action. In 

fact, the year after that action, the SEC received greater funding 

than they did the year before that action. 

So this is not a question of funding. One thing we do know about 

the Madoff affair and one agreement that I have with the chairman 

and the chairman of the full committee is that the Madoff affair 

is yet another indication that what is needed is a statutory and 

regulatory structure for the 21st Century. We don’t have that. If 

we had that in place, I think we may not have been having this 

hearing today. And I hope this hearing will not only be about the 

Madoff affair, but it will also be about a new regulatory structure. 

As we learned earlier this decade when the Enron episode was 

followed in short order by WorldCom and other corporate scandals, 

events like Mr. Madoff’s scam do not typically occur in isolation. 

More recently, the troubles at Bear Stearns were indicative of similar troubles at other investment banks. We were told it was a onefirm event. It obviously wasn’t, and there is no reason to think that 

this time is different. It seldom is, and therefore there is every reason to believe that other cases of fraudulent investment schemes 

may exist. 

At a time when the government is trying to stabilize markets, 

the Madoff affair and concern that other similar frauds lurk over 

the horizon or under the surface threaten to further undermine investor confidence. It is for that reason that I wrote Chairman 

Frank 4 days after the scandal broke to request that the committee 

convene hearings early in the 111th Congress to examine the effectiveness of government in self-regulatory efforts to protect investors 

and police fraud. And every day brings more news of devastating 

impact of the Madoff affair on charities, private foundations, and 

government entities as well as individual and corporate investors. 

Although every detail about the Madoff scandal has yet to 

emerge, enough is known at this time to conclude that the factor 

that allowed his alleged fraud to continue as long as it did was the 

differential regulatory treatment of broker-dealers and investment 

6 

advisers. The Financial Industry Regulatory Authority, FINRA, inspected Madoff’s broker-dealer which supported his market making 

and proprietary trading operations at least every other year beginning in 1989. But because FINRA’s jurisdiction is limited to brokerdealers, it had no authority to inspect his affiliated investor adviser, and that shop is where the fraud was perpetrated and operated from. And while the SEC has authority to inspect investment 

advisers it typically inspects only a small percentage of the 11,000 

federally registered firms in any given year. In fact, Mr. Madoff’s 

firm was never subjected to such an examination. And that is despite the fact that Mr. Markopolos had in some detail described to 

the SEC the operation as a Ponzi scheme. 

And in the Blueprint for Regulatory Reform issued last March, 

the Treasury Department highlighted, ‘‘The rapid and continued 

convergence of the services provided by broker-dealers and investment advisers and the resulting regulatory confusion due to a statutory regime reflecting the brokerage and investment advisory industries of long ago’’—and they asked for change in statutory 

changes from this committee and from others. 

Independent studies have reinforced this conclusion, finding that 

many investors simply cannot distinguish between the obligations 

and responsibilities of brokers, investment advisers, financial planners, financial advisers or consultants. 

As part of its consideration of reforms to our financial regulatory 

structure, this committee should examine whether the Madoff scandal argues for harmonizing the regulation of broker-dealers and investment advisers so that schemes such as the Madoff scheme do 

not go undiscovered, and are limited in their scope, before causing 

such catastrophic consequences. All parties must commit to making 

every good-faith effort to see that this alleged fraud of epic proportions is not repeated. 

Chairman Cox should be commended for immediately commissioning an investigation into the SEC’s handling of this matter. 

And we look forward to hearing today from the Inspector General 

who is conducting that probe. One of the Inspector General’s tasks 

will to be assess the performance of the SEC’s Office of Compliance, Inspections and Examinations, which appears to have missed 

several red flags that might have led to earlier detection of the alleged fraud. 

The fact that the accounting firm responsible for auditing 

Madoff’s $50 billion enterprise of complex trading activities was a 

three-person shop operating out of a suburban New York storefront 

should have been one very large red flag. 

Let me conclude, Mr. Chairman, with a word of caution. While 

the failures of regulatory and private sector due diligence exposed 

by the Madoff matter are obvious, they do not lead me to conclude 

at this stage of the inquiry that what is needed are broad new legislative or regulatory mandates on the rest of the securities industry. What we may have in the Madoff case is not necessarily a lack 

of enforcement and oversight tool, but a failure to use them. What 

we certainly have is yet another indication, as I said in my earlier 

statement, that what is needed is a statutory and regulatory structure for the 21st Century, one that the Minority has urged for 2 

years now. 

7 

I thank our witnesses for being here today. We look forward to 

your testimony. 

Mr. KANJORSKI. Thank you very much. Now, we will hear from 

the chairman of the full committee, Mr. Frank of Massachusetts. 

The CHAIRMAN. Thank you, Mr. Chairman-to-be. I would note 

that since we are into procedural regularity here, I have in fact 

been selected by the Democratic Caucus as the chairman of the 

committee, even though I will concede that I do not at this point 

technically have a committee to chair, but I anticipate one very 

soon in the regular order. 

First, I want to elaborate on the position of Harry Markopolos, 

who appears to be the hero in this, who is a man who early on notified the Boston office of the Securities and Exchange Commission 

of the problem. And maybe with a little provincial pride on behalf 

of my fellow New Englanders on the panel, I will note that Mr. 

Markopolos reports that the Boston office responded appropriately, 

that they took him seriously and forwarded it on, and at some 

point later on there was a failure. 

I also want to say, because I have spoken to people who are in 

the enforcement division of the SEC in the Boston office and elsewhere, no one should infer from this terrible situation that the 

working personnel at the SEC were at fault. There is no suggestion 

that any of them were less than diligent. There were some structural flaws here, but in my experience it would not be appropriate 

to blame any of them. And we will be talking further about the 

funding situation. 

I will note that in 2003, when I became the ranking member on 

the Minority side of the full committee, we had just passed, and 

President Bush had signed into law, the Sarbanes-Oxley bill which 

came out of this committee under the chairmanship of Mr. Oxley, 

and we felt there wasn’t adequate funding for it. And we had, 

frankly, some partisan fights on the Floor in 2003 and 2004 in 

which several of us tried to add funding for SEC enforcement. We 

were defeated a couple of times. 

Finally, I believe in 2005—Mr. Wolf was then the chairman of 

the appropriations subcommittee with jurisdiction here—agreed. So 

there was then a further move up. I also just want to note that we 

invited, of course, Mr. Markopolos to be here, and he had originally 

said he was going to do it. And I will frankly say that I was 

pleased that he indicated that he thought coming to this committee 

to have these conversations was a useful way to advance his interest, that he felt that we would be a hospitable and useful forum 

for the conversations. And as my two colleagues have mentioned, 

our focus here is not so much to find out who is to blame for what 

happened—there will be other institutions of the government that 

will do that. Our main job is to do what we can to see that this 

doesn’t happen again. 

We are a legislative body and our goal will be in part to see 

whether the mistakes—and you have to look at why it happened 

to be able to prevent it from repetition. But that is what we are 

working on. But Mr. Markopolos did write back and say, first of all, 

that he is understandably physically a little bit worn down. We will 

release his letter. He has been through a great deal of stress. 

8 

He also has been talking to lawyers and this is a very complex 

subject, and he asked for more time to prepare. Actually, the staff 

of the gentleman from Pennsylvania did respond to him to assure 

him that we would be completely cooperative in meeting these conditions. 

As I read Mr. Markopolos’ letter and our conversations, he will 

be testifying. And I want to make that clear. This is not a refusal 

to testify. But on a subject of this importance, he wants to make 

sure that he is in good condition himself and that he has been able 

to do the appropriate amount of preparation. 

Finally, I will say that there had been arguments previously in 

our public policy that investor protection could be confined to people of lower income, not directly relevant, but analogous. When we 

talked about hedge funds for example, the main defense we have 

had in place legally regarding hedge funds has been the requirement that you had to have at least $1 million to invest to be eligible to invest in hedge funds. That was an SEC rule. Mr. Cox explained that. The theory was for others, the principal caveat investor could apply if people had more than a million dollars. What we 

have seen here and we saw it also—sadly, although not in nearly 

as negative an impact in the auction rates securities market, that 

it is not simply people who have less than $1 million to invest who 

need to have rules put in place by the government that ensure fairness. Investors are at risk and they have to make judgments about 

what is or isn’t a good idea. But it is not reasonable to expect them 

in every individual case to be the detectors of fraud. 

So there is a requirement, I believe, if the system is to work, for 

the government to act. And I will just add, finally, this Madoff situation is an example of why regulation done properly is very promarket. The Madoff damage inflicted on so many innocent people, 

and in turn on many of the causes that many of these innocent people who were very charitable tried to help out—clearly we have 

people who are worried about investing anywhere. This country 

will not work if we are not able to restore the confidence of investors, that there are places that they can put their money that will 

be both remunerative to them and productive to the society, allowing the money to be put in productive places. So this is one more 

example of why we need to adopt in this coming Congress a set of 

rules that will give investors in America the confidence that many 

of them have lost, unfortunately, because of these scandals, and 

which has to be restored if we are to have a return to the prosperity that the market functioning well can give us. 

Mr. KANJORSKI. I now recognize the gentleman from Texas for 2 

minutes, Mr. Paul. 

Dr. PAUL. Thank you, Mr. Chairman. The ranking member made 

some important points early on about the timing of these hearings, 

but nevertheless I am glad we are having these hearings because 

it gives me an opportunity to make a few points regarding this 

whole system and the tragedies that we have faced here in this 

past year especially. And, of course, symbolically the Madoff scandal is a glaring example of something seriously wrong. But unfortunately, I don’t think too many people will gather the same answer 

from this problem that I and others have gotten. And that is for 

a good many years now since the 1930’s, every time a problem like 

9 

this comes up, like in the Depression, we think that it is a lack of 

regulations. We introduce regulatory agencies like the SEC. And 

like after Enron, that was a major problem. So we appropriate 

more money and hire more people. It doesn’t do any good. But this 

circumstance I think really makes my point that the approach is 

completely wrong, that the regulatory agencies and preempting 

people from doing bad things just doesn’t work. There are millions 

and millions and millions of transactions; you can’t do it. All they 

do is give a false sense of security. This is a perfect example of it. 

The SEC was involved with Madoff over the last decade. And 

that sort of gives the stamp of approval: Oh, it must be okay. So 

everybody’s guard is let down. This creates the moral hazard that 

allows people to make these mistakes and not to assume responsibility for themselves. 

Does that mean that we should ignore the problem? No. The 

problem comes because people commit fraud and fraud laws are on 

the books. All the people involved with Enron were prosecuted 

under State laws of fraud and the market took care of the stocks. 

But just adding on new regulations and spending millions and millions if not billions of dollars on regulating enterprise doesn’t do 

any good. It contributes to it. It is the problem. We should look 

more to how the atmosphere is created by the Congress. 

If you look at the principle of fractional-reserve banking, that in 

a way is a Ponzi scheme. This gets people doing things and building a mountain of debt. Debt on debt is done in this manner. Also, 

if you really want to look at a big Ponzi scheme—and it is said too 

often that people end up doing what governments do if we set examples—and believe me, everybody knows that the Social Security 

system is a Ponzi scheme. So, yes, $50 billion is horrendous. But 

what about an $8 trillion loss in the stock market? So what do we 

do? We rush and pump in $8 trillion. Where do we get the money? 

We create it out of thin air. 

Furthering this whole idea of moral hazard and believing that we 

can create an unmanageable system is not the fault of the individuals at the SEC. They have an impossible job and they have to pretend they are doing something to feel relevant, the same way we 

do here in the Congress. We have to feel relevant in this. Instead 

of saying what we need is the market to work, we need to get rid 

of the bad policies, the monetary system and these mountains of 

debt. We say, we are relevant because we are going to hire more 

bureaucrats and we are going to appropriate more money that we 

don’t have and we are going to solve all our problems. We have 

been doing this for 78 years and we will do it again. But believe 

me, this will not solve our problems. 

We need to think about eliminating this whole regulatory process. And actually, we don’t need the SEC at all and we could thrive 

even better and we would dwell on self-reliance, self-policing, and 

the idea that people can’t commit fraud but that the government 

should not commit fraud either. We should not set an example. I 

yield back. 

Mr. KANJORSKI. The gentleman from New York, Mr. Ackerman, 

is recognized for 2 minutes. 

Mr. ACKERMAN. Thank you, Mr. Chairman, or whatever you are. 

Bernard Madoff’s victims collectively paid hundreds of millions of 

10 

dollars in Federal and State taxes. Yet the Federal Government did 

not use any of this tax or any other tax dollars to properly oversee 

or discover any deceitful, fraudulent activity in the Madoff empire 

in time to mitigate potential losses or to protect investors. In fact, 

the government stands to become the ultimate beneficiary of ill-gotten gains. 

After having failed to protect the American public from Mr. 

Madoff’s scheme, while simultaneously taxing the phantom profits 

on unreal investments by real people and charities, many whose 

life savings, whose actual lives and dreams are now in ruins. So 

you thought your brokerage account was insured for $500,000? 

Wrong. With the collapse of Madoff’s Ponzi scheme, thousands of 

investors lost that half-million dollar bet along with their life savings, and along with millions of others of Americans, their trust in 

their government. 

Under SIPC’s liquidation plan, claims related to Madoff’s fraudulent scheme may be limited to only those investors who can prove 

they sent money to Madoff after December 11, 2007. The SIPC plan 

is simply inadequate. 

Forget the Steven Spielbergs and Kevin Bacons who are not worrying that the bank is going to foreclose on their house at the end 

of the month. What about people like Allan Goldstein who is testifying before our committee today? The Allan Goldsteins of our 

country, who lost everything to Mr. Madoff, aren’t billionaires with 

seaside villas or tropical islands or more money than anyone could 

spend in a lifetime. The Allan Goldsteins of this country put their 

entire life savings, their diversified—they thought—account for 

years, dependent on their dividends that they received to pay for 

their mortgages and their medical bills. 

Mr. Chairman, the inability of the SEC to detect any wrongdoing 

at Madoff Securities for well over a decade undoubtedly has had a 

significant impact on investor confidence at an already difficult 

time in our financial markets. The SEC’s failure and the inequity 

of SIPC’s plan, the refusal or the inability by SIPC or the Federal 

Government to provide comprehensive fair insurance to the victims 

of the fraud will only serve to exacerbate cynicism among the investors and further discourage our economy and its recovery. 

I thank you for calling this meeting today and I look forward to 

hearing from all of our witnesses. I yield back the balance of my 

time. 

Mr. KANJORSKI. The Chair thanks the gentleman from New York 

and will now hear from the gentleman from Illinois, Mr. Manzullo, 

for 2 minutes. 

Mr. MANZULLO. Thank you, Mr. Chairman. As I go over and review exactly what happened here, at least what I think happened, 

there are plenty of red flags. There are plenty of indications that 

there were problems going on, but somebody just didn’t do their 

job. You can add resources and personnel and money, but when the 

red flags were there and people weren’t doing their jobs, how do we 

know they will do their jobs in the future if you just throw money 

at the situation? You can’t create competence by spending money. 

That is not the issue. 

Perhaps the issue here, or the larger issue, is with a myriad of 

organizations and commissions, government entities that are supVerDate Nov 24 2008 13:25 Jan 24, 2011 Jkt 063127 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\63127.TXT TERRIE
11 

posedly involved in protecting the investor. Perhaps we need to 

take a look at the big picture from the eyes of the investor and not 

from the eyes of the investment house to see how the protection of 

the investor can be made paramount to trying to accommodate the 

investment houses, even though it is possible to do the same. 

So I hope that we have the opportunity in this committee or 

meeting, or whatever we want to call it today, to begin a new look 

at how we do the regulatory process. And that is all we need on 

top of the fact that we have a crushing economy, 111⁄2 percent unemployment in the largest city of my congressional district; the 

Chrysler plant that really is smarting, with thousands of people 

who look to Washington for guidance each day. Perhaps we can 

straighten this out in a matter consistent with the fundamentals 

of free enterprise and also protect the small investors who are out 

there. 

Mr. KANJORSKI. The gentleman from California, Mr. Sherman, is 

recognized for 2 minutes. 

Mr. SHERMAN. Thank you, Mr. Chairman. The Madoff scheme 

would still be in operation today and perhaps for decades into the 

future had it not been for the meltdown on Wall Street that 

brought it to public notice. 

Chairman Arthur Levitt announces that the SEC should be a law 

enforcement agency or have a law enforcement agency. This is a 

proposal that he resisted when he was Chairman of the SEC and 

all of his successors continue to oppose. Four-fifths of the Commissioners in the SEC insist upon staying on, even after the SEC 

failed with regard to mortgage-backed bonds and now has failed 

with regard to Madoff. You would think that all the members of 

the SEC would at least offer President Obama a resignation and 

have him decide whether this agency needs a complete change. 

There is a myth that Madoff’s only falsehoods were on the 17th 

floor in its investment adviser business. Nothing could be further 

from the truth. His broker-dealer business filed financial statements with the SEC and with FINRA every year and they were off 

by about $17 billion. The SEC has briefed me privately and has 

said for many years, the Madoff broker-dealer operation filed annual statements with both the SEC and FINRA. These financial 

statements showed $17 billion in assets, and a one-man accounting 

official. That means that if somebody glanced at that statement for 

even a couple of minutes, the fraud is there on its face, because 

there are ethics rules dealing with public accountants that say that 

if they are going to be regarded as independent public accountants, 

they can’t get more than 5 or 10 percent of their revenue from any 

one client. So to look at this financial statement, you would have 

to believe that somebody can audit a $17 billion enterprise, one guy 

can do it in a couple of weeks. Either that is true or the statements 

are fraudulent on their face. But the SEC never bothered to read 

the financial statements, not even for half an hour. Neither did 

FINRA. 

SIPC is with us today. They are well known because you go into 

your broker’s office and you see that you are protected by SIPC up 

to half a million dollars. I know that for many of the Madoff clients 

that may be a problem, but I have investors in my district, $10,000, 

$20,000 or $30,000 at the broker-dealer. What they are not told by 

12 

that decal is that SIPC has virtually zero net worth. You are insured by an insurance company that has nothing in the safe. Because while they had $1.5 or $1.6 billion, virtually all of that is 

going to be wiped out by the Madoff claims. And, of course, if some 

individual investors are able to claim it, the SIPC may owe them 

many billions more. I yield back to the chairman. 

Mr. KANJORSKI. The gentleman from New Jersey, Mr. Garrett, is 

recognized for 3 minutes. 

Mr. GARRETT. And I thank the chairman for holding this important hearing this afternoon. I also want to thank Ranking Member 

Bachus for his diligence in requesting that this hearing be held as 

soon as this issue came to light. I think it is safe to say that Mr. 

Madoff put together the largest Ponzi scheme in history. I doubt 

that even the Ponzi scheme’s namesake, who is Charles Ponzi, ever 

foresaw that someday somebody would be hoodwinking investors to 

the tune of $50 billion. Maybe it is appropriate that due to the 

breadth, size and longevity of the scheme, we change the name of 

the Ponzi scheme that we all use in the future to the ‘‘Madoff 

scheme.’’ 

Unfortunately, the media has portrayed the story as one that has 

only affected the wealthy, multi-millionaires and those who socialized with the Madoffs at lavish charity events and such. As we 

heard before and will hear today at this committee hearing, that 

is unfortunately not the case. And I have heard it personally at 

home as well. 

On Friday, I received a call from a constituent. Her 86-year-old 

mother suffering from illness has had her life savings invested with 

Mr. Madoff. Now, due to how long it may take to unwind this matter, she faces the very real possibility of never receiving any of it. 

And what is most unfortunate is that the SEC regulators had numerous chances to uncover the scheme and that they continually 

either didn’t see the multiple warning signs, didn’t follow up on 

them, or simply chose to ignore them. 

I think there are three takeaways that you can take from what 

is about to happen in the committee in going forward in Congress 

on this. First of all, to those who will advocate that there is a need 

for increased Federal regulations in the hedge fund industries from 

this occurrence, let me remind them that there were a number of 

hedge funds that did in fact become victims of this. So I think it 

is a stretch to believe that the same SEC regulators who were directly tasked with overseeing Mr. Madoff’s firm would have been 

able to uncover this scheme had they been simply reviewing the 

books of those very same hedge funds. 

Furthermore, to those who advocate, as we have heard here already, for more regulation and increased budget and increased 

spending—you know there was an article just the other day in the 

Wall Street Journal that addresses this. They say in there, how can 

it be that if the two sons of Mr. Madoff apparently did not become 

aware of this, despite the fact that they were working in the firm 

for some 2 decades, if they were not aware of it, how then can we 

call for increased regulations and think that some outside regulator 

would have been able to become aware of it? 

The third takeaway is from the comment made by the chairman 

of the committee when he says that he finds no fault with SEC perVerDate Nov 24 2008 13:25 Jan 24, 2011 Jkt 063127 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\63127.TXT TERRIE
13 

sonnel, specifically with regard to this situation. While I certainly 

sit here and hope that is not the case, quite honestly I think it is 

premature for any of us to jump to any conclusions as to who is 

or who is not responsible for failure to act on the red flags that 

came up numerous times. 

In conclusion, I look forward to our witnesses’ testimony today 

and learning more on this scheme and how it was able to continue 

for so long. But also, very importantly, I look forward to figuring 

out just how we can help those people, those poor—not poor, but 

those middle-class people such as the elderly lady I mentioned, how 

they can recoup as much as they can as quickly as possible. I yield 

back the balance of my time. 

Mr. KANJORSKI. Thank you. The gentlelady from New York, Mrs. 

Maloney, is recognized for 1 minute. 

Mrs. MALONEY. Thank you very much. 

In contrast to the seeming ease with which Bernard Madoff vastly overstated the contents of his clients’ account, it would be almost 

impossible to overstate the pain his scheme has caused. The loss 

accrues not only to Madoff’s client, but to literally millions of others, who in one way or another had depended on the false promise 

of his financial stewardship. 

I just came back from meeting with unions that invested their 

pension funds. I would like to place in the record letters from constituents who lost their entire life savings, investors large and 

small. 

Two have taken their lives and I—my sympathy really goes out 

today to one of our witnesses, Mr. Goldstein, a retired New Yorker 

who also lost his life savings. I believe that markets run as much 

on confidence as they do on capital and this is a serious blow to 

investors’ confidence at a critical time in our economic challenges. 

I thank you for holding this hearing and I look forward to working 

with you for better oversight and regulation. 

Mr. KANJORSKI. Thank you, Mrs. Maloney. 

The gentleman from New York—or I am sorry. The gentleman 

from Nevada, Mr. Heller, for 3 minutes. 

Mr. HELLER. Thank you very much, Mr. Chairman, and to the 

ranking member for holding today’s meeting and focusing our attention on this issue, the Madoff scandal. 

This scandal has serious effects, not only on affected investors, 

but the enforcement and oversight failures also rattled the confidence of investors everywhere when our financial system is already racked with problems. 

I see three major failures here. First, clearly, the SEC had a 

major failure of huge proportions. According to testimony, the SEC 

was warned about this problem and ignored it for years if not decades. In fact, I took a look back at their highest profile investigation for 2008, and it was a $750,000 inside trading case; $750,000 

was the biggest case that I am aware of or at least the highest profile case for the SEC last year. That versus a $50 billion Ponzi 

scheme was the decision I can only assume someone on the SEC 

does not like the Dallas Mavericks. 

Second, State regulators. They call themselves the local cops on 

the beat. They like to take a tremendous amount of credit for the 

work they do. And some of them—and most of them do a great job, 

14 

but they also failed. And my question is, why were they not doing 

their job? 

And finally, not all individual investors did their due diligence. 

Manners and expensive suits do not necessarily equate to honesty 

and integrity, and we must always trust but verify, and clearly, 

that failed. 

Like all Ponzi schemes, this one crashed, even if it took decades. 

I would like our witnesses to suggest how these three levels—Federal, State, and individuals—can work to prevent scandals like this 

one in the future. 

Thank you. I look forward to the testimony, and I yield back. 

Mr. KANJORSKI. Thank you very much, Mr. Heller. 

The gentleman from New York, Mr. Meeks, is recognized for 2 

minutes. 

Mr. MEEKS. Thank you, Mr. Chairman. I thank you and the 

ranking member for conducting this hearing today. I guess we can 

call it a hearing. 

To me, what we are confronted with today is a situation, first of 

all, when we talk about the Madoff scandal, what we are really 

dealing with is a crook. We are dealing with an individual who took 

people’s money and lost it. He is a crook. He deserves to go to jail. 

And to the degree that we can make any individuals whole who 

lost their money, as in any other fraud case, we need to figure out 

how we get that done. That is the bottom line here. 

Now, in the course of that investigation, and what I am looking 

to hear and why I think these hearings that we are having are tremendously important, is, what can we learn from it? As in any 

kind of crime that has been committed, there should be something 

that we can learn from it so that we can prevent it from happening 

again and to make sure that we shore up our rules and laws and 

regulations if it will help prevent it. You don’t get rid of the laws. 

If somebody commits bank robbery, you don’t say, okay, we are 

going to get rid of all the laws with reference to bank robberies. 

We don’t do that. We figure out how we make them stronger so 

that we don’t have another bank robber. And that is what we are 

dealing with here today. 

We have to figure out and listen. Now, if there is an investigation and we find that someone within the SEC was complicit with 

it, then that person is a crook and needs to go to jail. But if we 

find that there is some other—that they were not properly trained 

or they were inexperienced or we didn’t put the appropriate 

amount of money in there, then it is our job as Members of the 

United States Congress to fix that. If we find, through the hearing 

and listening and learning from people, what takes place, that 

there are new rules and regulations that we can put in place so 

that no one else is scandalized again, it is our jobs to do that. And 

the only way to do that, because I know I am not the ultimate expert, is to have the kind of witnesses that the chairman has decided is necessary to be here today so that we can listen, we can 

learn, we can evaluate, and we can do something intelligent to try 

to make sure that a crook like Madoff can’t get away with it again. 

I yield back. 

Mr. KANJORSKI. The gentleman from Missouri, Mr. Scott. 

15 

Mr. SCOTT. Thank you very much, Mr. Chairman. I am delighted 

you are having this meeting. 

I think the fundamental issue has to be, what went wrong, how 

it went wrong, and what we are going to do about it. But I think 

that we have to look at these red flags that just came: First, the 

stability of getting 10 to 12 percent of return when the economy is 

going up and down. The fact that they use relatively obscure small 

auditing firms when most sizable brokerages use auditors that are 

sanctioned by the public accounting oversight, another red flag. Mr. 

Madoff himself kept several books, false documents. He even lied 

to regulators when they questioned him in previous examinations 

of his firm. 

Why did investigators never use subpoena powers to obtain 

truthful information? Instead, they only relied upon the information voluntarily produced by Mr. Madoff. That is sort of like asking 

a thief if he is stealing. The thief is going to tell you, no, I am not 

stealing. It just begs the question of time after time after time 

when the SEC was looking at these things, even the case down in 

Florida with two accountants that had called, there was a possibility of a $400 million fraud case there. They looked at it, gave a 

wink and a nod, and it was gone. We have a credibility problem 

with the SEC. We have to find out exactly what happened. 

The American people are expecting the confidence. Confidence is 

the key buzzword going forward. We have to get confidence and reclaim our economic system. And this is a way to start, Mr. Chairman. I appreciate this hearing, and I look forward to the questions 

as we go forward. 

Mr. KANJORSKI. Thank you very much, Mr. Scott. 

The gentleman from Florida, Mr. Klein, is recognized for 2 minutes. 

Mr. KLEIN. Thank you, Mr. Chairman, and I thank the ranking 

member for holding this committee meeting today and certainly reflect on a lot of the good comments that have already been made. 

I come from a part of the country, south Florida, which was hit 

particularly hard. Mr. Madoff spent a lot of time down there and 

preyed through his social engagements on a lot of people who 

bought into what he was doing and, unfortunately, a lot of charitable organizations. We had a large group called the Picower Foundation that had over a billion dollar of assets that funded everything from educational philanthropies, school systems, science, all 

the things that everyone in this country believes in and knows that 

government can’t do everything, but we rely on philanthropy to 

help with that; it is now closed. And there are many other organizations which I think we are all familiar with. 

And I think the question is, not what was lost, we understand 

that or are beginning to understand that, but why, what went 

wrong? I think, as you have already heard, and I certainly agree 

with this and my background is as a securities lawyer, there were 

red flags that were presented to the SEC, probably red flags to investors as well. The question, of course, that has been raised is, 

why did the SEC not follow up on these? The SEC has admitted 

that it received credible allegations about fraud 9 years ago, but 

nothing was really done with them. 

16 

So if there is anything we have learned from the Madoff scandal, 

we certainly know that in a global economic crisis as we have right 

now, we need smarter regulation and greater oversight to restore 

confidence of investors in the market. This doesn’t mean that government will be checking up on every move of every investor or 

every seller of an investment, but this does mean that someone like 

Madoff should never, ever, be able to get away with this type of activity again. 

And finally, there is the human question of how much money can 

Bernie Madoff’s victims expect to recover? A couple that I know 

from Boynton Beach, Florida, who lost their retirement savings 

from Madoff and now have only enough money to live on by Social 

Security, they are saying, how much, and when? These are obviously scary times, and I think we do need to get to the bottom of 

this, not only for what went wrong in the past, how much money 

can be recovered and how much money can be given back to the 

people who lost it in the charitable organizations, but also what we 

can do to prevent it in the future. 

Thank you, Mr. Chairman. 

Mr. KANJORSKI. Thank you, Mr. Klein. 

Now, the gentleman from Texas, Mr. Green, is recognized for 1 

minute. 

Mr. GREEN. Thank you, Mr. Chairman, for hosting this hearing. 

Mr. Chairman, I don’t know what should happen to members of 

the SEC. But I do know what would happen to members of the District Attorney’s Fraud Division, Welfare Fraud Division, if welfare 

mothers were able to perpetrate a similar kind of circumstance. My 

suspicion is that members of the Welfare Fraud Division, not having caught welfare mothers perpetrating fraud, they would be dismissed. 

I don’t want to prevent investors from investing. I don’t want to 

make it difficult for them. I do want to make it difficult for criminals to steal. We make it difficult for welfare mothers to steal. I 

think we have to make it difficult for people who perpetrate these 

kinds of fraud to do it. 

I yield back the balance of my time. 

Mr. KANJORSKI. Thank you very much. 

And now, finally, for 1 minute, Mr. Perlmutter of New Hampshire. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. 

In Colorado, we had—our fire and police pension fund was one 

of the entities that lost money, and they were an investor through 

Fairfield Greenwich. So when Congressman Paul was talking about 

the enforcement side of this doesn’t make sense and we really don’t 

need it, lots of money from many, many individual investors, policemen, firemen from Colorado into another fund into this and 

without an enforcement mechanism that is really solidly in place, 

the confidence, as Mr. Heller said, in the system as a whole is shot. 

Now, obviously Mr. Madoff was a confidence man. He gained the 

confidence of many investors and he gained the confidence of the 

regulators. The regulators have to have the tools, and they have to 

be no-nonsense, and they have to be regulators, and they can’t be 

conned, as we see so many other entities were. So I hope the testimony we are going to hear from you gentlemen today talks about 

17 

putting some teeth back into this regulatory system so people 

aren’t conned in the way they were this time. 

With that, I yield back. 

Mr. KANJORSKI. Thank you, Mr. Perlmutter. 

I just want to assure you that I know you are from Colorado, but 

I got confused on the great skiing in New Hampshire. 

Mr. PERLMUTTER. New Mexico is a nice State, too. 

Mr. KANJORSKI. The gentleman from New Hampshire, Mr. 

Hodes. 

Mr. HODES. Thank you, Mr. Chairman. And I thank you and the 

ranking member for holding this hearing. 

Ponzi schemes aren’t new and neither are crooks and shysters. 

What is new, I think, are the conditions under which this Ponzi 

scheme occurred. We have the complexity of modern securities 

markets and an explosion of global wealth combined with our regulators, who over the past few years haven’t been doing their jobs. 

Arthur Levitt in the Wall Street Journal argues persuasively 

today that risk assessment must be central to the SEC’s efforts. 

There has to be robust oversight and inspection capability and effective enforcement, which requires a commitment of appropriate 

resources. 

And without going into the numbers of what those appropriate 

resources are, I am interested to hear my colleagues on the other 

side of the aisle apparently arguing that we don’t need more regulations or oversight. I don’t know what world they might be living 

in because in the world we are living in with the global financial 

collapse, people who have lost their life savings, the Madoff scandal 

is really like the cherry on a bad sundae. And it is time that we 

have a 21st Century regulatory scheme for the 21st Century. 

So I look forward to the testimony which will enlighten us about 

how and what we need to do in the SEC, and then we are going 

to move on to what we need to do for the rest of the financial markets. 

Thank you. 

Mr. KANJORSKI. I thank the gentleman from Colorado. 

I think that is fair. 

Mr. HODES. New Hampshire, New Mexico, Colorado, they all 

have snow, Mr. Chairman. 

Mr. KANJORSKI. The chairman makes the point, Mr. Obama carried them all. 

I will now introduce the panel and thank you all for appearing 

before the committee today. 

Without objection, your written statements will be made a part 

of the record. You will each be recognized for a 5-minute summary 

of your statement. 

First, we have Mr. David Kotz, Inspector General of the U.S. Securities and Exchange Commission. 

Mr. Kotz. 

STATEMENT OF H. DAVID KOTZ, INSPECTOR GENERAL, U.S. 

SECURITIES AND EXCHANGE COMMISSION 

Mr. KOTZ. Good afternoon. Thank you for the opportunity to testify today before this committee on the subject of assessing the 

18 

Madoff Ponzi scheme as the Inspector General of the Securities and 

Exchange Commission. 

I appreciate the interest of the chairman as well as the other 

members of this committee and the SEC and the Office of Inspector 

General. In my testimony today, I am representing the Office of Inspector General, and the views I express are those of my office and 

do not necessarily reflect the views of the Commission. 

I would like to begin my brief remarks this afternoon by discussing the role of my office and the oversight efforts that we have 

undertaken since I was appointed as the Inspector General of the 

SEC approximately 1 year ago in late December 2007. The mission 

of the Office of Inspector General is to promote the integrity, efficiency, and effectiveness of the critical programs and operations of 

the SEC. I firmly believe that this mission is best achieved by having a vigorous and independent Office of Inspector General to investigate and audit Commission activities and to keep the Commission and Congress informed of significant issues and findings. 

The office has staff in two major areas: audits; and investigations. Our audit unit conducts, coordinates, and supervises independent audits and evaluations relating to the Commission’s internal program and operations. The office’s investigative unit responds to allegations of violations of statutes, rules, and regulations and other misconduct by Commission staff and contractors. 

I am proud to report that, notwithstanding a small staff, the Office of Inspector General at the SEC has issued numerous reports 

over the past year involving issues critical to SEC operations and 

the investing public. Two examples of recent audit reports are an 

analysis of the Commission’s oversight of the SEC’s Consolidated 

Supervised Entity Program, which included Bear Stearns, Goldman 

Sachs, Morgan Stanley, Merrill Lynch, and Lehman Brothers, that 

provided a detailed examination of the adequacy of the Commission’s monitoring of Bear Stearns, including the factors that led to 

its collapse, and a review of the Commission’s Broker-Dealer RiskAssessment Program. 

We also have a vibrant and vigorous investigative unit that is 

conducting or has completed over 50 comprehensive investigations, 

several of which involve senior-level Commission employees and 

represent matters of great concern to the Commission, congressional officials, and the general public. 

It is with this background in mind that I wish to discuss our 

planned efforts to investigate matters related to Bernard Madoff 

and affiliated entities. 

On the late evening of December 16, 2008, SEC Chairman Christopher Cox contacted me and asked my office to undertake an investigation into allegations made to the SEC regarding Mr. Madoff 

going back to at least 1999 and the reasons that these allegations 

were found to be not credible. 

The Chairman also asked that we investigate the SEC’s internal 

policies that govern when allegations of fraudulent activity should 

be brought to the Commission, as well as staff contact and relationships with the Madoff family and firm and any impact such relationships had on staff decisions regarding the firm. 

Early on December 17, 2008, we opened an official investigation 

into the Madoff matter. Since then, we have been working at a 

19 

rapid pace to begin this important work. On December 18, 2008, 

we issued a document preservation notice to the entire agency, informing them that we had initiated an investigation regarding all 

Commission examinations, investigations, or inquiries involving 

Bernard Madoff and any related individuals or entities. We formally requested that each employee and contractor in the Commission preserve all potentially responsive electronic and paper records 

in their original format. 

Over the next few days, we met with senior officials from the 

Commission’s Division of Enforcement and the Office of Compliance 

Inspections and Examinations, known as OCIE, to ensure their cooperation in our investigation and our ability to gain access to their 

files and records. We also met with the Chairman’s office to seek 

information and documentation relevant to the investigation. 

On December 24, 2008, we sent comprehensive document requests to both the Division of Enforcement and OCIE, specifying 

the documents and records we required to be produced for the investigation. In addition, we made several formal expedited requests 

to the SEC’s Office of Information Technology for searches of the 

e-mails of former and current employees for information relevant 

to the investigation, both at headquarters and at the New York and 

Boston regional offices, and have already received and are in the 

process of reviewing these e-mails. 

We have also begun identifying the particular issues that need 

to be investigated and are reviewing and updating daily the list of 

witnesses that we plan to interview. We intend to begin conducting 

these interviews immediately and, for example, have already scheduled a meeting with Harry Markopolos for later this month for an 

in-depth interview on the record. We have also already met and 

spoken with numerous individuals informally as part of our initial 

investigative efforts. 

It is our opinion that the matters that must be analyzed may go 

well beyond the specific issues that Chairman Cox has asked us to 

investigate. And we believe our oversight efforts must include an 

evaluation of broader issues regarding the overall operations of the 

Division of Enforcement and OCIE that would bear on the specific 

questions we are examining and provide overarching and comprehensive recommendations to ensure that the Commission fulfills 

its mission and goals. 

At this early stage, I thought it would be useful to identify the 

specific issues related to Bernard Madoff that, as a preliminary 

matter, we intend to investigate or review. Obviously, as the investigative efforts are just beginning, I am not in a position to provide 

any conclusions or findings with respect to the allegations that 

have been raised and do not wish to make any preliminary judgments before we have had a chance to analyze all the information. 

In addition, as underlying evidence could also be relevant to the 

pending criminal or SEC investigations into possible violations of 

the securities laws, I am being mindful not to comment on anything that may affect or interfere with those investigations. 

The following are specific issues that we currently intend to investigate: 

One, the SEC’s response to all complaints it received regarding 

the activities of Bernard Madoff. We plan to trace the path of these 

20 

complaints through the Commission from inception, reviewing 

what, if any, investigative or other work was conducted with respect to these allegations and analyze whether the complaints were 

handled in accordance with Commission policies and procedures 

and whether further work should have been conducted. 

Two, allegations of conflicts of interest regarding relationships 

between any SEC officials and members of the Madoff family and 

whether such relationships in any way affected the manner in 

which the SEC conducted its regulatory oversight of Bernard 

Madoff. 

Three, the conduct and examinations and/or inspections of Bernard Madoff’s firm by the SEC and an analysis of whether there 

were red flags that were overlooked by SEC examiners that could 

have led to a more comprehensive or timely examination. 

And four, the extent to which the reputation and status of Bernard Madoff and the fact that he served on SEC advisory committees, participated on securities industry boards and panels, and 

had social and professional relationships with SEC officials may 

have affected Commission decisions regarding investigations and 

examinations of his firm. 

In addition to these specific issues and depending upon the information that we learn during the course of our investigation, we 

plan to consider analyzing the following broader issues, as well: 

One, the complaint handling procedures of the Division of Enforcement, including a review of how complaints are processed, internal incentives that may affect the decision whether to take action with respect to a complaint, an analysis of which complaints 

are brought to the Commission’s attention, and whether tangible 

and specific complaints are actually being reviewed and followed up 

on appropriately. 

Two, the OCIE examination and inspection procedures, including 

an analysis of what policies and procedures were then and are currently in place, whether these policies and procedures are being followed, and/or whether there are gaps in these policies and procedures relating to operations involving private investment pools 

such as hedge funds because they are subject to limited oversight 

by the SEC and whether any such gaps may lead to fraudulent activities not being detected. 

And three, the relationships between different divisions and offices within the Commission and whether there is sufficient interagency collaboration between the agency components to ensure 

comprehensive oversight of regulated entities. 

Obviously, this is an ambitious investigative agenda, but I firmly 

believe that the circumstances surrounding the Bernard Madoff 

matter may very well dictate a more expansive analysis of Commission operations. 

Moreover, it is my view that at the end of these investigative efforts there needs to be more than just the potential identification 

of individuals who may have engaged in inappropriate behavior or 

potentially failed to follow up appropriately on complaints, but 

rather an attempt to provide the Commission with concrete and 

specific recommendations to ensure that the SEC has sufficient 

systems and resources to enable it to respond appropriately and effectively to complaints and detect fraud. 

21 

Of course, even with the limited staff and many of our auditors 

and investigators already engaged in ongoing matters, I understand that it is critical that our investigative efforts be conducted 

expeditiously. I fully understand that it is crucial for the Commission, the Congress, and the investing public that answers be given 

to the very serious questions regarding the SEC’s efforts relating 

to Mr. Madoff in a prompt and swift manner. 

For this reason, I am mobilizing additional resources to ensure 

that our office makes every possible effort to conclude our investigations and reviews as soon as possible. We are considering preparing reports on a rolling basis, assuming that we can identify 

discrete issues that may be resolved separately and expeditiously, 

so that some conclusions may be provided very shortly. 

Finally, I can assure you that our investigation and review will 

be independent and as hard-hitting as necessary. While we approach these efforts with an open mind, and at this stage of the 

investigation we have not reached any conclusions or made any 

findings, the matters that have been brought to our attention require careful scrutiny and review. We will conduct our work in a 

comprehensive and thorough manner. And if we find that criticism 

of the SEC is warranted and supported by the facts, we will not 

hesitate to report the facts and conclusions as we find them. I 

think that if you review the reports issued by our office over the 

past year, you will see that, where we have found that criticism of 

the SEC or SEC officials was warranted, we have reported our 

findings and concerns in a frank manner. 

In conclusion, we appreciate the chairman’s and the committee’s 

interest in the SEC and our office. I believe that the committee’s 

and Congress’ involvement with the SEC is helpful to strengthen 

the accountability and effectiveness of the Commission. We intend 

to conduct our investigative efforts promptly and thoroughly. 

Thank you. 

[The prepared statement of Mr. Kotz can be found on page 102 

of the appendix.] 

Mr. KANJORSKI. Thank you very much, Mr. Kotz. 

And next, we will hear from Mr. Stephen P. Harbeck, president 

of the Securities Investor Protection Corporation. 

Mr. Harbeck? 

STATEMENT OF STEPHEN P. HARBECK, PRESIDENT AND CEO, 

SECURITIES INVESTOR PROTECTION CORPORATION (SIPC) 

Mr. HARBECK. Thank you, Mr. Chairman. 

Chairman Kanjorski, Chairman Frank, Ranking Member Bachus, and members of the committee, thank you for the opportunity 

to appear before you today to discuss the work of the Securities Investor Protection Corporation, which is known as SIPC. 

My name is Stephen Harbeck, and I have been the president and 

CEO of SIPC for the last 6 years. I have worked at SIPC for 33 

years and was general counsel prior to becoming the president and 

CEO. 

SIPC was created by an act of Congress, the Securities Investor 

Protection Act of 1970; it is known as SIPA. It provides financial 

protection to customers of failed broker-dealers. Although created 

by a Federal statute, SIPC itself is not a government organization. 

22 

The statute provides that we are a membership corporation, the 

members of which are all brokerage firms, virtually all brokerage 

firms, which are registered as such with the Securities and Exchange Commission. Membership is not voluntary; it is required by 

law. 

In terms of our funding, we currently have a fund of $1.6 million 

of Treasury obligations. We have a commercial line of credit. And 

we have a $1 billion line of credit with the United States Treasury, 

which we have never used. 

SIPC has no authority to examine or investigate its members. 

We receive information from the Securities and Exchange Commission and from FINRA. And when either one of those organizations 

or, for that matter, a State regulator informs us that a brokerage 

firm has failed to meet its obligations to customers, we initiate a 

very specialized form of bankruptcy. SIPC uses funds to replace 

cash and securities missing from customer accounts within statutory limits. We can advance up to $500,000 per customer, of which 

as much as $100,000 can be based upon a claim for cash. 

I think it is important to note that no customer funds are ever 

used for payment of administrative expenses, lawyers’ fees, accountants’ fees, or the fees of a trustee in one of these specially 

narrow-focused bankruptcies. 

2008 was unlike any previous year in SIPC’s history. In addition 

to starting three small brokerage firm liquidations, we initiated the 

liquidation of Lehman Brothers. The holding company for Lehman 

Brothers filed for bankruptcy on September 15th. The holding company owned the SIPC-member brokerage firm Lehman Brothers, 

Inc. And on September 19th, in order to facilitate the transfer of 

customer accounts to other brokerage firms, including Barclays 

Bank’s brokerage firm arm, SIPC initiated a liquidation proceeding 

for Lehman Brothers, Inc. 

I am very pleased to report that, over the weekend—we initiated 

the proceeding on a Friday. The matter was immediately removed 

to a bankruptcy court for the Southern District of New York. And 

we transferred, over the weekend, pursuant to a bankruptcy court 

order, $142 billion worth of customer securities. And those customers had a rather seamless event, with respect to the failure of 

Lehman Brothers. Much remains to be done, but I am very proud 

of the initial opening situation there. 

With respect to Madoff, the situation could hardly be more different. Where Lehman Brothers began as a result of a systemic 

failure in the subprime securities markets, the Madoff failure is 

theft, pure and simple, and nothing more, nothing less. As a result, 

no transfer of customer accounts, as occurred in Lehman Brothers, 

was possible. 

I am pleased to report the trustee and SIPC have collaborated 

and published a claim form and a notice, which are available today, 

to the customers who have been victimized in the Madoff situation. 

Those claim forms are available on the trustee’s Web site, at 

SIPC.org, on our Web site, and we urge customers to fill them out 

and return them to the trustee immediately. 

This fraud was of a completely different order of magnitude of 

anything in SIPC’s history. We won’t know the extent or the call 

on SIPC’s resources for some time. The trustee has identified $29 

23 

million which he has recovered from a bank and further identified 

an additional $830 million that he seeks to recover in fairly short 

order. I can assure the committee that SIPC and trustees appointed under the Securities Investor Protection Act are exceedingly aggressive in recovering assets from wrongdoers. 

With respect to the claim form in the Madoff case, I would like 

to speak specifically to Congressman Ackerman, because he mentioned something that was widely reported in the New York Post, 

and that report was in error. 

When we went to the United States Bankruptcy Court for permission to publish a notice and send a mailing to customers, we received what we call a housekeeping order which grants us authority and instructs the trustee to make a mailing to every customer 

who had done business with the firm during the last calendar year. 

It was first reported in the New York Post and later misreported 

once again that there would be a limit on returns to customers only 

to people who did business with the Madoff firm in the last 12 

months. That is absolutely incorrect, and I just wanted to assure 

you and your constituents that is the case. 

The effects on SIPC of the Madoff case will be profound. I look 

forward to working with Congress and keeping Congress in touch 

with what we perceive as the ongoing matters in the case. And I 

would be pleased to take any questions from the committee. 

[The prepared statement of Mr. Harbeck can be found on page 

99 of the appendix.] 

Mr. KANJORSKI. Thank you very much, Mr. Harbeck. 

I will start the questions. In some respects, I may be a little too 

reserved here. I think I speak for all my colleagues on the committee, and I certainly speak for my constituents. They are absolutely shocked by this scandal. They want action. And I think I 

speak for that, too. 

Mr. Kotz, I applaud your methodical approach. You have analyzed what has to be done and the schedule on which it will be 

done. 

And, Mr. Harbeck, you sort of talk of it that way too. 

But I am not sure that, with a $50 billion price tag, with literally 

tens or hundreds of thousands of people who will suffer—but not 

only those directly that have lost their money. Think about all the 

charities that aren’t going to finance their research at labs and universities all over this country to cure everything from Alzheimer’s 

to cancer and, ultimately, the thousands of people who will suffer 

or die because of this activity. It seems to me, it seems to me what 

is being asked for is out of regular order, that they don’t expect the 

cop on the beat to take the normal process. 

And let me give you an example of what I am speaking to. The 

other day, I had the occasion to talk to one of our enforcement 

agencies on the environment. And there is an illegal occurrence 

going on somewhere in this country that was brought to my attention by affidavit form. So it was my obligation to forward it to the 

agency to see how this could be handled. 

After they had it for a few days and I hadn’t heard from them, 

I called the person who had the complaint, and I said, ‘‘How long 

will it take you to examine this and determine what is there?’’ He 

said, ‘‘I think we will have an answer in 2 years.’’ And I don’t know 

24 

if that is what I am hearing from your agencies. I think, under normal order, we will have a real bound volume of a study, an examination made 6 months or a year from now or 2 years from now. 

But really, gentlemen, I want to impress upon you, I don’t think 

the American people are going to want that. I, myself, don’t want 

that. 

The question I am directing to you, what can this Congress do 

to give you additional authority or additional funds to get this 

thing done as quickly as possible? And how fast is that ‘‘quickly as 

possible?’’ When do you think you can adequately complete these 

examinations so that we can start knowing what happened and 

when it happened? 

Because I think the ranking member pointed it out, and I fundamentally believe it, that if it were done in this instance when the 

water of the recession is still going down, the flood is going down, 

we are going to find a lot of disasters across this country. And it 

will be a lot more people, probably not as wealthy a group of people, who will be seriously hurt. We have to find out what is there, 

so that we can do our jobs, as Mr. Meeks pointed out earlier, and 

make sure that the laws and the authorities are in place and the 

funding is in place to see that this never happens again. 

Mr. Kotz, what is your answer to that? 

Mr. KOTZ. Sure. Certainly with respect to my area, which is looking at the SEC, looking at the potential red flags that were in place 

and how these things could have been missed, I absolutely agree 

that this matter has to be dealt with very expeditiously. There is 

nothing ordinary or normal about it, and we are acting in that 

manner. We are bringing in new people simply for this task. 

In terms of those issues, looking at the SEC’s different divisions, 

looking at the enforcement division as to complaints that came in, 

looking at the compliance division as to examinations, I believe we 

can do that with the resources we have in a swift manner. I would 

not think it would take 2 years to come up with some large— 

Mr. KANJORSKI. What do you think it will take? 

Mr. KOTZ. I am hesitant to give you an exact amount of time because we just started the investigation. We have come up with a 

very long list of potential witnesses, we have a lot of documents to 

review. It has only been a couple of weeks. But I would hope that 

we would be able to get something out in a matter of months, certainly not years. 

As I said, we are looking to try to issue reports on a rolling basis, 

so that if we can identify a particular discrete issue, we can have 

a report on that issue without waiting for something that is 500 

pages that comes out years from now. 

Mr. KANJORSKI. As you get these issues resolved, very quickly I 

assume, will you provide that information to this committee and to 

the Congress so we can act to close those loopholes or those problem areas or enforce and provide the funding for better enforcement at the SEC? 

Or do you anticipate that we are going to have—most studies— 

I have to be honest with you. I have been in Congress a few years 

now. Most studies come back that we make requests on urgent material, and it takes several years for us to get the study back to find 

25 

out what the Congress is expected to do to solve the problem. I 

don’t think the American people will tolerate that. 

Mr. KOTZ. I agree with you, absolutely. That is not the case in 

my office. It hasn’t been the case in the reports we have issued previously. That won’t be the case here. So, absolutely, as we can identify issues and we can thoroughly investigate them and come to a 

conclusion, we will absolutely issue a report. 

So I understand, definitely, that this is not something that can 

sit and we can work on for years and years and years and then 

issue some 500-page report many years down the road. I understand absolutely that this is a matter that has to be dealt with immediately. 

I think we have made progress already in 2 weeks, given that 

those 2 weeks included the week between Christmas and New 

Year’s. So I understand very much this matter has to be looked at 

very carefully but also very quickly, and we intend to do that. 

Mr. KANJORSKI. Okay. I know my time has expired. But to both 

of you gentlemen, are you appointees of the President, and will the 

change of Administration affect your position? Or can we rely on 

the fact that you will be there? 

Mr. KOTZ. No, I am not. The change in Administration won’t affect my position. 

Mr. KANJORSKI. Mr. Harbeck? 

Mr. HARBECK. SIPC is not a government organization, and I will 

be here as long as the board of directors allows me to serve. 

Mr. KANJORSKI. Very good. 

So I am going to turn it over to our hound dog from Alabama, 

the ranking member. 

Mr. BACHUS. Thank you. 

Inspector General, let me ask you about four areas for investigation. The first one, to me—I described it as a three-person shop but 

it is actually only one accountant who is employed by the auditor 

for Madoff. Will you be looking at whether that should have been 

a red flag? 

Mr. KOTZ. Absolutely. That is one of the most central issues here 

that we have to look at, which is, was that information known to 

SEC officials? And, if so, what did they do about it? How could it 

possibly be that they became aware of that—there have been certain reports about just Googling it would be able to find out that 

information. So that is something that we will absolutely look at 

very carefully and try to figure out how it could be possible that, 

if they were aware of that information, that wouldn’t have been a 

matter that they would have acted upon immediately. 

Mr. BACHUS. I appreciate that, because you couldn’t have a fraud 

of this magnitude without involvement of auditors or accountants. 

You have asked for document and e-mail preservation not only 

by Madoff but also by their contractors and related parties. Would 

that include the auditors? 

Mr. KOTZ. We are initially asking for SEC documents, so SEC 

employees and contractors. But, yes, we would certainly look to obtain other documents— 

Mr. BACHUS. Yes. I would ask you—again, I would urge you to, 

as soon as possible, to expand that to contractors, related parties 

or associates. 

26 

Mr. KOTZ. Sure, absolutely. 

Mr. BACHUS. Because that can obviously get away from you in 

a hurry. 

The custodial relationship was very odd, in that you had the 

same person functioning as a broker-dealer and as an investment 

adviser. Is that a red flag? 

Mr. KOTZ. Yes, that is something that we have to look at as well. 

There were forms that were filled out that identified specific information, including information related to that, from what I understand, and we need to look at to see whether those were something 

that should have immediately jumped out at you and required further review based on the examination work that was done. 

So, that is something, again, that, it seems on its face to be 

something that requires very careful scrutiny. 

Mr. BACHUS. It appears that is a red flag. And then when you 

couple that with the fact that, although he was an investment adviser obviously known to everyone, that he was managing billions 

of dollars worth of assets, he didn’t register, although he was managing, by public information, hundreds of times the assets which 

would have required him to register. 

So my next question was, is that not a red flag when you catch 

someone who has failed to register, although the operation would 

dictate him to register, obviously? Is there not an audit or examination at that time by people who failed to register? 

Mr. KOTZ. I think the issue of aggressive oversight, was there aggressive oversight in place such that, if information was brought to 

the attention of the examiners and auditors, action was taken immediately, the question of whether they took this individual’s word 

for it or whether they followed up appropriately. 

And, as I indicated, we are also going to look at whether Mr. 

Madoff’s stature and reputation had any impact. Was there a question of, ‘‘This is Bernard Madoff, and so we don’t have to worry 

about him not following up and giving us the documentation?’’ 

Mr. BACHUS. Right. I guess that would be my last red flag, in 

that Madoff claimed to do something that very few people claimed 

publicly to do, and that is a guaranteed high rate of return. And 

yet the SEC had people who actually laid out to them that this was 

impossible to do. And if you look at it, just the number of puts and 

calls that he was utilizing, the whole flow or the whole market for 

him was insufficient to have minimized a downturn. 

Are there people at the SEC who have the expertise and maybe 

what we might call ‘‘trading expertise’’ to realize that what he was 

claiming is impossible if you just looked at those documents published every day or those facts published in the Wall Street Journal 

on a daily basis? 

Mr. KOTZ. In my personal view, there should be folks at the SEC 

who have that expertise. And, as we look at it, we may look at the 

issue of whether there is that expertise or training in place and 

perhaps make recommendations for further training and to ensure 

that expertise. 

There has to be a situation in the SEC where those folks would 

be able to see the information that was provided and make determinations. And so we will look carefully, following complaints that 

were brought to the SEC’s attention and looking at how the SEC 

27 

dealt with it, who dealt with it, what was the expertise level of the 

individuals who dealt with it, and why the actions that were taken 

or not taken happened. 

Mr. BACHUS. I appreciate that. 

Do you have the authority to contact former employees as well 

as former Commissioners or Chairmen of the SEC? Or are your 

powers only to interview those people who are presently with the 

SEC? 

Mr. KOTZ. We could certainly contact and have on many occasions contacted former employees. We don’t have subpoena power 

per se to require them to appear like we do with current employees. But, generally, folks have been willing to cooperate. And there 

are certainly investigative methods you could use to ensure their 

cooperation. 

Mr. BACHUS. I hope you will, because some of this would extend 

back at least 10 years. 

Mr. KOTZ. Right. 

Mr. BACHUS. Mr. Harbeck, have you been able to identify any legitimate documents which are going to allow you to help process 

claims in this matter? 

Mr. HARBECK. One of the first things that we did with respect 

to this was to modify our standard claim form to make sure that 

we asked the claimants themselves what evidence they had in 

terms of money in and money out, because that is going to be one 

of the critical factors. In one of these situations where the books 

and records are completely unreliable, that is our best source. So 

we have urged people to give us as much documentation as they 

can. 

Mr. BACHUS. Have Madoff or his associates or the firm supplied 

you with what you would call legitimate documents? 

Mr. HARBECK. The trustee has taken over the books and records 

of the brokerage firm. And, by the way, the investment adviser and 

the brokerage firm were one legal entity. So we have the records 

of what was actually in the securities inventory, and we also have 

some semblance of an idea of what the customers thought they 

had, at least in aggregate figures if not in individual accounts. 

Mr. BACHUS. When they are one entity, does that create some opportunities for mischief? 

Mr. HARBECK. I am not an examiner; I am a bankruptcy attorney. I think you may be right, however. 

Mr. BACHUS. Okay. Thank you. 

You have a $1 billion line of credit with the Treasury? 

Mr. HARBECK. Yes, we do. 

Mr. BACHUS. You have had that since 1970, obviously. Is that— 

Mr. HARBECK. Adjusted for inflation—the number has never 

changed since 1970. Adjusted for inflation using the Consumer 

Price Index, that number would be somewhere in the vicinity of 

$4.3 billion. When you take into account the vast expansion of the 

securities markets themselves since 1970, that is certainly something we will look at as we determine how deep into SIPC’s resources this event will take us. 

Mr. BACHUS. Thank you. 

Mr. KANJORSKI. Thank you very much. 

28 

Something the ranking member brought up, the broker-dealer 

being required to register, they were using an auditing firm that 

is registered with the PCAOB, expired on December 31st of last 

year. I understand now that the broker-dealer must be audited by 

a registered firm, but there is no enforcement authority by the 

PCAOB for auditors of nonpublic broker-dealers. 

Are you aware of this, Mr. Kotz? And, if so, what do you think 

about it? 

Mr. KOTZ. Yes, I know that there has been an issue that has 

been raised of the limited authority of the PCAOB. And that is 

something that we would look into, as well. 

Mr. KANJORSKI. Isn’t this the very point, though, that the threeman auditing group that Mr. Ackerman talked about, that if they 

had to be registered, they wouldn’t have been allowed to be a party 

to this thing? 

Mr. KOTZ. Yes, it would certainly seem that, if the PCAOB had 

this information, that they would have been able to take action— 

Mr. KANJORSKI. But the SEC gave an exemption since 2003 three 

or four times. 

Mr. KOTZ. Right. No, absolutely there is an issue there about: 

number one, what was the reason for that rule; but also, number 

two, whether the SEC, even without the PCAOB, should have been 

able to see these red flags and take appropriate action. 

Mr. KANJORSKI. I understand. But what I am not gathering is, 

if you or your predecessor knew of this, isn’t the Inspector General 

supposed to notify the Chairman of the Commission that there is 

a failure here in the law as it is drafted and it will allow some important parties to escape registration? And if no action is taken or 

no request for additional change or authority of the Congress, 

wouldn’t you come to Congress and say, we have a gaping hole 

here, we have people with billions and billions and billions of dollars who don’t have a registered auditor? 

Mr. KOTZ. I can only speak for the time I was the Inspector General. But I agree that, certainly, if, in the context of this investigation and our audit that we conduct, we identify gaping holes like 

that, we would certainly put that in our report, and that would be 

brought to Congress’ attention. So I agree with you. 

Mr. KANJORSKI. But this gaping hole has existed for 5 years, and 

an exemption has been given 3 times, and nothing ever happened 

until this thing hit. If it had been changed, if the exemption 

weren’t there, it seems to me this couldn’t have happened. 

Mr. KOTZ. Yes, we have not looked carefully at that specific exemption issue, so it is difficult for me to comment. But I do agree 

with you that we need to look carefully at the regulatory gaps. And 

if there are regulatory gaps that we have looked at carefully and 

we have reviewed and find that they exist, that it would absolutely 

be incumbent upon us to bring that to your attention. 

Mr. KANJORSKI. The gentlelady from New York, Mrs. Maloney. 

Mrs. MALONEY. Thank you very much. 

My district is home to many of Madoff’s victims. And as a Representative from a State with millions of jobs dependent on the financial sector, I am mindful that protecting this industry’s reputation and integrity from predators and thieves like Madoff is absolutely crucial to maintaining our country’s economic leadership. 

29 

Some of our country’s most sophisticated investors were duped by 

Madoff. This leads me to ask you a few questions. 

Madoff’s firm was unusual in that it performed custody, trade 

clearing, and statement generation functions in addition to managing clients’ funds. If custodial clearing and statement reporting 

were done by a reputable third party or parties, would this not 

have made it far more difficult for Madoff to dupe his clients and 

to fool regulators? 

Mr. KOTZ. Yes, I think that is something that we would look at 

very carefully as part of our review. I don’t know that I could answer that question today before having completed the audits and 

investigations. But that is something, certainly, that must be carefully scrutinized. 

Mrs. MALONEY. Also, it has been suggested that Madoff’s tiny 

and little-known auditor was a red flag. What minimum standards 

should we set for qualifications of accountants to the money management business? 

Mr. KOTZ. Yes, I understand the point. And, as I indicated, we 

are going to look not only at the specific situation, but what rules 

we could recommend or policies such as you mentioned to ensure 

that where there are red flags potentially or information that is out 

there that they are responded to immediately. So I agree with you. 

Mrs. MALONEY. Now, additionally, many people threw up red 

flags. One of them was that Madoff’s returns typically hovered between 10 and 12 percent. People even wrote articles about ‘‘Don’t 

Ask, Don’t Tell,’’ raising concerns about his investment strategy. 

One in May 2001 by Erin Arvedlund, which was in Barron’s, it 

should have thrown up a red flag to investigators, to the SEC, to 

the general public. Why didn’t these questions that she raised alert 

the regulators? 

In addition, Harry Markopolos, he was in regular communications with the SEC, raising red flags, asking questions. He contacted them in 2000. In 2005, he sent the SEC a 19-page report entitled, ‘‘The World’s Largest Hedge Fund is a Fraud.’’ Why in the 

world didn’t anyone respond to his allegations? What happened to 

his report? And did the SEC investigate his allegations? 

Mr. KOTZ. Yes, that is exactly what I intend to find out. Certainly, the articles that you mentioned initially are things that we 

have to look at to see if the SEC examiners were aware of the articles, reviewed the articles, how they viewed the articles, and 

whether they factored that into their determinations. Or if they 

weren’t aware of the articles, why weren’t they aware of the articles? 

And certainly Mr. Markopolos, who, as I said, I am meeting with 

later this month, we need to trace that complaint through the different offices that it went to, to determine what individuals dealt 

with that, what were their determinations that were made, why 

was it that they took the action they took. 

So I will tell you that my investigation and audit efforts will get 

to the bottom of exactly those issues. 

Mrs. MALONEY. And when the key regulator is totally asleep, 

even when whistleblowers are calling and trying to alert them, as 

was the case before us with the Madoff case, we would like to think 

that there were some checks and balances in our complex reguVerDate Nov 24 2008 13:25 Jan 24, 2011 Jkt 063127 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\63127.TXT TERRIE
30 

latory system that would alert other regulators, the Administration 

or Congress. Why did that not happen in this case? 

Mr. KOTZ. Yes, absolutely. We need to look at what was the information that the individuals within the SEC were aware of, and 

why was it that they took or didn’t take the appropriate actions. 

So that is going to be the focus of my efforts. 

Mrs. MALONEY. Many of us have lost confidence in the SEC. It 

is pretty pathetic when a major newspaper, major periodicals, 

when whistleblowers issue reports and warnings when they have 

a system that they won’t explain to anyone and an auditor that no 

one ever heard of, that this should be raising some concerns. 

So my question is, for those of us who don’t trust the SEC anymore, what additional authority should be given to other regulators 

to provide a better safeguard against the sort of agency failure that 

occurred with the SEC? 

What is so frustrating about this, we could not do anything as 

a government to prevent 9/11. We could have prevented this if we 

responded to whistleblower complaints, articles raised by other investment bankers, and a model that no one understood and an 

auditor that no one ever heard of. 

So where can we go to get the proper oversight? I do not believe 

we got it in the past from the SEC. I don’t have trust in them for 

the future. 

Mr. KOTZ. I can certainly understand the concerns. And my efforts will be to find out exactly what happened, how it could be 

that where it was spelled out in such a way, the world’s biggest 

Ponzi scheme, that wouldn’t be sufficient information to look into 

a potential Ponzi scheme. 

So I can understand the concern about the credibility. All I can 

do is find out what happened, report back in terms of what failures 

were caused in this case, and then determine or make recommendations about what action should be taken as a result. 

Mrs. MALONEY. I look forward to your report—my time has expired—on why no one read the report on the world’s largest Ponzi 

scheme and now we have the world’s largest Ponzi scheme. 

Mr. KANJORSKI. Thank you, Mrs. Maloney. 

And now, we will recognize the gentleman from Texas, Mr. Paul. 

Dr. PAUL. Thank you, Mr. Chairman. 

I would like to follow up on my opening comments to Mr. Kotz. 

The contention is that the system didn’t work. It didn’t work. I 

don’t think there is any argument about it. But I go one step further, and I maintain it can’t work because it is a flawed system. 

The argument goes that, if we have to use a system, what we 

have to do is get more money, more people, and more efficiency. So 

the money will come, the people will come, and you will promise 

more efficiency, and the Congressmen will say we have to be more 

efficient. 

But my argument is that the approach is completely wrong. 

There is always a cost that we don’t talk about. There is a money 

cost, but of course there is a cost to regulation that injures businesses. In the Depression, the SEC actually helped prolong the Depression. Sarbanes-Oxley didn’t do anything to prevent this from 

happening. And we have been in a slump for a long time. So regulations aren’t the solution. 

31 

But does that mean that we have to be soft on fraud? No. Fraud 

we have to really crack down on, which we seem to ignore. But too 

often we have these regulations out there that sort of protect us, 

that say, ‘‘Oh, the SEC will take care of us. We don’t really have 

a responsibility.’’ 

A good analogy to this is where people are safe is in their homes. 

The least safe place in this country is where the most laws are and 

the most policemen are, in the inner city. The people who are the 

safest are the ones who assume responsibility for themselves, have 

their own weapons in their home and live in rural areas, and there 

is no policemen within miles. So that whole attitude is completely 

different. 

But the point I want to make and get you to respond on is, in 

some areas, we don’t do it this way. We don’t preempt with regulations. If we deal with habits or religious cults or intellectual pursuits, we are very protective of the first amendment and say, ‘‘Oh, 

yes, a lot of harm can come of it, but we are never going to regulate 

you.’’ When it comes to the press, the press can do a great deal of 

harm to any one of us. And frequently, politicians suffer from libel 

and slander. But we never go and say, ‘‘What we need is prior restraint to make sure that nobody is ever injured.’’ We don’t do that. 

We assume there is a recourse, and we don’t because there is a 

cost: There is a loss of liberty, in that sense. Because if we have 

people snooping around on everybody’s habits and anticipating it, 

then we have lost something. 

But on economic issues, all of a sudden we say, ‘‘Oh, this is okay. 

We can do this, and there is never a downside.’’ But what I don’t 

understand is, why don’t we treat economic liberty the same as we 

do with personal liberty and religious liberty, intellectual liberty? 

We even have the first amendment split in two. We talk about intellectual freedom of speech. But commercial freedom of speech 

needs regulation. Why is this not a unit? 

And so my question to you is, don’t you have any doubts whatsoever that regulations aren’t the answer? Why is it that we couldn’t 

monitor ourselves and our system with a determination to prevent 

fraud and deal with the fraud and the corruption and the Ponzi 

schemes within our own system? 

And pyramiding debt contributes to this, the financial system 

that we manage is—our fiat system contributes to it. All of the insurance programs that we have, it teaches people that it is okay 

and that we allow this moral hazard to occur. 

So instead of this being the answer, I see this as the problem, 

the cause, and not in a personal sense because I think people who 

work at the SEC are probably as determined as anything, but I 

think you have an impossible task. You might say, ‘‘Oh, no,’’ and 

you might be able to come up with some examples: ‘‘We did A, B, 

C, and we protected such and such.’’ But we could do that if we 

monitored religion and said, ‘‘Look at what we prevented.’’ 

Do you have a comment on this and why we couldn’t treat everything equally? 

Mr. KOTZ. Sure. I don’t go into this with any preconceived notions that increased regulation or increased resources or increased 

individuals is the answer. What we need to look at is a holistic and 

32 

comprehensive view as to whether the SEC can respond appropriately. 

So I certainly wouldn’t go into the process thinking that the answer is a particular matter, whether it is increased regulation or 

increased individuals. We need to look at the process, as you say, 

and see if the SEC is able to do the job that it needs to do. 

Dr. PAUL. The budget for the SEC probably doubled in the last 

7 or 8 years. I think in 2001 it was about $400 billion, and now 

it is over $900 billion. And the personnel went up about 20 percent, 

but we had, like, a 100 percent increase in the budget. 

Where did that money go if we didn’t hire more people? Do you 

have a general idea on where most of that money went if it wasn’t 

for hiring more personnel? 

Mr. KOTZ. I am not that familiar with the overall budget of the 

SEC. I could talk more about our office. But, certainly, we need to 

look at where money went and whether there were additional people or what was used with the resources. 

Dr. PAUL. Do we do contracting out? Could that have been hiring 

individuals where they were not called government employees? Do 

you think that might have been part of it? 

Mr. KOTZ. There is some contracting out in the SEC, yes. 

Dr. PAUL. I yield back. Thank you. 

Mr. KANJORSKI. Thank you, Mr. Paul. 

The gentleman from North Carolina, Mr. Watt. 

Mr. WATT. Thank you, Mr. Chairman. 

Mr. Kotz, were you in the Inspector General’s office prior to becoming the Inspector General? 

Mr. KOTZ. No. 

Mr. WATT. Okay. Is there anything that you, during your tenure, 

or your predecessor could have done that you can suggest to us 

that might have prevented this? 

Mr. KOTZ. I am not aware specifically. Obviously, I think it is the 

job of the Inspector General to be aggressive in their oversight and 

to be vigilant to the agency. And there have been reports that we 

have issued over the past year that— 

Mr. WATT. Yes, but on this issue, is there anything that you or 

your predecessor could have done? For example, could you have 

made sure that Mr. Madoff and his company didn’t exercise these 

exemptions that they were getting from the Investment Advisors 

Act? 

Mr. KOTZ. Yes, I don’t believe— 

Mr. WATT. Would that have been an appropriate role for the Inspector General? 

Mr. KOTZ. I am not—I don’t believe that there is something specifically we could have been done. Now, we could have done an 

audit of a particular area, and if we had done an audit of a particular area, we could have made recommendations regarding that 

area. 

Mr. WATT. Okay. I am not trying to blame you for any of this, 

but it just seems to me that everything that you have talked about 

today is kind of ‘‘I am going to take a look at the horse after the 

horse is gone from the barn.’’ And I am trying to find out what 

somebody could have done to have stopped this from happening. 

33 

Mr. Harbeck, I take it that your agency is pretty much like the 

FDIC of brokers? 

Mr. HARBECK. There are analogies, and there are also differences. 

Mr. WATT. Okay, I understand that. But you get appointed by 

the members that you supervise, right? 

Mr. HARBECK. No. First of all, we do not supervise anyone. 

Mr. WATT. Who is on your board? 

Mr. HARBECK. Our board of directors is composed of seven individuals, five of whom are Presidential appointees. Three must be 

in the securities industry; two are not permitted to be in the securities industry. There are also representatives from— 

Mr. WATT. Okay. Is there anything that came to your attention 

over the last 5 to 10 years about Mr. Madoff’s operation? Do you 

all do any audits of the people that you insure? 

Mr. HARBECK. No, sir, we do not. 

Mr. WATT. You are not required to do any audits— 

Mr. HARBECK. We are not permitted to. 

Mr. WATT. —or you are not expected to do any audits? 

Mr. HARBECK. We are not expected to or permitted to under the 

statute we administer. That role falls to the SEC and to FINRA. 

Mr. WATT. Okay. What happens if you exceed the $1 billion in— 

I think you testified that you have $1 billion in a Treasury account 

and a line of credit of $1.5 billion. What happens if the extent of 

the claims exceed that amount? 

Mr. HARBECK. I believe this committee would be among the first 

to know that. But we have $1.6 billion in treasuries. Our commercial line of credit is currently $1 billion. And then we also have a 

line of credit with the Treasury. We will not know— 

Mr. WATT. I am not asking you how much the claims will be. I 

know you don’t know that. But if you exceed the amount of assets 

that you have, what will be the recourse that you have? 

Mr. HARBECK. Speaking to your point about who is on our board 

of directors, we also have a director from the Treasury and from 

the Federal Reserve. And we— 

Mr. WATT. That is not the question I asked you, Mr. Harbeck. 

Mr. HARBECK. —will go there. 

Mr. WATT. That was the prior question. I am asking you a new 

question now. What will happen if the legitimate documented 

claims exceed the assets that you have? 

Mr. HARBECK. We will come to Congress. 

Mr. WATT. And so the taxpayers will end up being responsible for 

whatever that overage is on the claims, is that correct? 

Mr. HARBECK. That would be the case if we did come to Congress. We have not done so for 38 years and have never used government funds. 

Mr. WATT. Okay. But under the statute, is there either an explicit or an implicit guarantee by the Federal Government of what 

you do? 

Mr. HARBECK. There is nothing explicit beyond the $1 billion line 

of credit with the Treasury that is currently in the statute. 

Mr. WATT. Is there anything implicit or has anything been written about that over the years? 

34 

Mr. HARBECK. There really has not, and the reason is that this 

event is such a remarkable outlier in terms of its expense. We have 

liquidated 317 brokerage firms over 30 years— 

Mr. WATT. I appreciate you volunteering all that information, but 

I am trying to—would it be a good idea to give your agency audit 

authority or some kind of authority since you are writing the check 

if somebody ends up doing something like Mr. Madoff did, you have 

to write the check to cover it? What would be the downside of giving your agency the authority and responsibility for going in and 

policing these accounts? Doesn’t FDIC have that authority? 

Mr. HARBECK. Yes. And they are a regulator. 

Mr. WATT. Okay. All right. So is there a downside that you see 

to doing that? 

Mr. HARBECK. The question you have asked was asked in 1970— 

Mr. WATT. I didn’t ask you that now, Mr. Harbeck. I am already 

out of my time. I am saying, can you articulate for me a downside 

of doing what I just suggested? 

Mr. HARBECK. I don’t think we could do any better job than the 

people who are currently assigned to do it. We would hire— 

Mr. WATT. Which is the SEC? You are saying you couldn’t have 

done a better job, even though your money and taxpayer money 

was on the line, you couldn’t have done a better job in this case 

than the SEC did? 

Mr. HARBECK. I would have hoped anybody could have done it. 

But I am not confident, since it is outside our current area of expertise, that we could have done it. 

Mr. WATT. Thank you, Mr. Chairman. I yield back. 

Mr. KANJORSKI. Thank you, Mr. Watt. 

Mrs. Biggert? 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Mr. Kotz, looking over the number of the years that something 

came up, from 1999, 2004, again in 2005, and then November of 

2005, and then in 2006, it really troubles me. We have that the 

SEC investigators in New York meet with Harry Markopolos and 

has a 21-page presentation, which then seems like nothing happens 

to that. I think it troubles me and probably others that, how could 

we be sure that the SEC is really going to be able to accomplish 

an investigation now? 

Is there something in the protocol where if there is somebody 

outside of the examiners looking into a—or when they are looking 

at a group such as this, that they don’t take into account the outside information? 

Mr. KOTZ. I think we need to look at both of those issues. First 

of all, how could it have been that this information was brought to 

the SEC’s attention, to trace it throughout the process but also to 

look at what the policies and procedures were? 

I do think it is important to look at what were the policies and 

procedures in place at the time, were they violated. If they were 

violated, clearly we have to take action with respect to that. And 

if they were not violated, then the question is, why weren’t the 

policies and procedures different at the time in order to ensure that 

this be done correctly? 

35 

Mrs. BIGGERT. In your testimony you say that, ‘‘Where allegations of criminal conduct are involved, we notify and work with the 

Department of Justice and the FBI as appropriate.’’ 

Wouldn’t you think that the—first of all, do the FBI and the Department of Justice have the expertise to investigate and prosecute 

securities funds? 

Mr. KOTZ. When I mentioned that, I was talking about my office, 

the Office of Inspector General. For example, if we were to do this 

investigation that we are currently undertaking and we were to 

find criminal conduct on the part of someone in the SEC, vis-a-vis 

the Madoff matter, we would follow up with the FBI and the Department of Justice. 

I do believe that the Division of Enforcement, which is the entity 

that does investigations, such as what was brought to their attention by Harry Markopolos, does also coordinate with the FBI and 

the Justice Department. I couldn’t speak to what they do vis-a-vis 

the Justice Department and the FBI. 

Mrs. BIGGERT. Do you think they should be more involved in this 

investigation then? Wouldn’t it help if it seems to be that we have 

talked about you don’t have the people to do it, they don’t have the 

expertise. 

Mr. KOTZ. The investigation that the SEC Division of Enforcement is undertaking with regard to the criminal case against Mr. 

Madoff, certainly the FBI and the Department of Justice should be 

more involved. 

With respect to our investigation that we are undertaking with 

respect to what the SEC did or didn’t do when the Madoff allegations came in, we would certainly bring them in if there was a 

criminal-type issue that they would be able to assist us. I certainly 

would like to get assistance from whoever I could to try to unravel 

the situation. 

Mrs. BIGGERT. Thank you. 

Mr. Chairman, may I suggest that we invite the FBI and Department of Justice to testify before this committee about their efforts 

related to securities fraud as well as other forms of financial fraud? 

For example, mortgage fraud last year grew by 42 percent. Since 

2000, it has grown by an astounding 1,200 percent. I think that 

this might be something that would be of value to us, and I would 

request that. 

Mr. KANJORSKI. I think that is an excellent suggestion, and we 

will certainly take it under consideration. 

Mrs. BIGGERT. Just one other question. The focus about the relationship between the SEC staff and Mr. Madoff and his family, 

does the SEC have current rules and procedures governing permissible relationships and standards of conduct? 

Mr. KOTZ. Yes, I believe they do. And we have to look very carefully at those rules to see if any rules were violated; and again, 

even if rules were not violated, to see whether those rules must be 

supplemented. 

There are allegations in this case regarding potential conflicts of 

interest, and one of the areas that we will look at very closely is 

were there conflicts of interest, were the rules in place sufficient 

to deter those conflicts of interest, and whether further rules are 

necessary? 

36 

Mrs. BIGGERT. Thank you. 

I yield back. 

Mr. KANJORSKI. Thank you very much. 

And next, Mr. Ackerman of New York. 

Mr. ACKERMAN. Thank you, Mr. Chairman. 

I am trying to figure out what we have here. We have the president of the Securities Investor Protection Corporation. He has been 

that for the last 6 years, Security Investor Protection. It seems to 

me he hasn’t protected any of the security investors. And we have 

the Inspector General of the Securities and Exchange Commission, 

which is the inspector of the watchdog agency that didn’t watch out 

for anything, which makes you the Jacques Cousteau of the Keystone Cops. And looking at this whole program that we and so 

many investors thought that they had some modicum of protection, 

with some official eyes upon it with something called the Securities 

Investor Protection Corporation, I want to know who is responsible 

for protecting the security investor? Because I want to tell that person or those people whose job it is that they suck at it. So whose 

job is it to protect the security investor? 

Mr. HARBECK. Congressman, the Securities Investor Protection 

Corporation becomes involved only after it has been determined 

that a brokerage firm has failed. We have no role prior to that. 

Mr. ACKERMAN. So you are not protecting the consumer; so you 

are not protecting the security investor is what you just told me. 

And it was not until Mr. Madoff turned himself in or had his children turn himself in that you discovered that people were being defrauded and one of the members of the corporation that you are the 

president of this, whatever it is. 

Mr. HARBECK. With respect, I disagree with your characterization that we are not protecting— 

Mr. ACKERMAN. I have $50 billion of investors who would disagree with you, but go ahead. 

Mr. HARBECK. And we will use the maximum extent of the law 

to return funds to them. 

Mr. ACKERMAN. What funds? 

Mr. HARBECK. From SIPC funds. 

Mr. ACKERMAN. How much money is there in SIPC? 

Mr. HARBECK. We have $1.6 billion. 

Mr. ACKERMAN. I have $50 billion to cover. How are you going 

to do it? Do you have a scheme? 

Mr. HARBECK. A great deal of those funds are false profits that 

never existed. 

Mr. ACKERMAN. False profits? 

Mr. HARBECK. Yes, sir. 

Mr. ACKERMAN. So the government has been taxing people on 

false profits? 

Mr. HARBECK. I think your point is very well taken, and I believe 

there are tax remedies for people who pay taxes on those funds. I 

am not a tax expert. 

Mr. ACKERMAN. Mr. Inspector General? 

Mr. KOTZ. Yes. I could certainly understand what your concern 

is, and I am going to ask those very same questions. If the facts 

are as— 

37 

Mr. ACKERMAN. What do you do before the Bernie Madoffs and 

the mini-Madoffs turn themselves in? 

Mr. KOTZ. We need to make sure that the SEC has enforcement 

and examination divisions in place. 

Mr. ACKERMAN. Do they? 

Mr. KOTZ. That is what my investigation will determine. 

Mr. ACKERMAN. You don’t know that they have it or not? 

Mr. KOTZ. I don’t know. 

Mr. ACKERMAN. You have been doing this for over a year, and 

someone else has been doing it for a year before you and years and 

years before that, and we still don’t know if they have the ability 

do what we are paying them to do with taxpayer dollars? 

Mr. KOTZ. I can certainly say that if the allegations are as they 

say, then there is great concern that they do, I will report that 

back and— 

Mr. ACKERMAN. After the fact, we will know if you were able to 

do your job all these years and the SEC was able to do their job. 

This is worse than a nail in the coffin; this is a spike in the heart 

of investment communities that makes America run at a time that 

we can ill afford it. Confidence in government and its agencies are 

at stake here. 

Now, you had Mr. Madoff turn over a list of all of his assets. 

There are people with $50 billion worth of claims. Whether these 

are false profits or not, they are certainly real investments that 

built up to $50 billion, maybe more, maybe less. We don’t know the 

extent. This may be the tip of the iceberg besides how many other 

icebergs that might be floating that you won’t know about until 

someone confesses to the crime. 

Now, in the assets that you had him turn over on December 31st, 

at midnight, while much of America had no champagne bottles to 

pop, how much assets did he turn over that you have sealed, and 

why haven’t you turned that over to the bankruptcy court so that 

people can see what is happening as in normal bankruptcies? 

Mr. KOTZ. I didn’t have anything to do with the instructions 

about the assets. That was the— 

Mr. ACKERMAN. Good. Would you turn that over to this committee? 

Mr. KOTZ. I don’t have that information. But certainly everything 

that will be in my report I will seek to— 

Mr. ACKERMAN. Mr. Harbeck, do you have it? 

Mr. HARBECK. I know that the Securities and Exchange Commission has it. SIPC itself does not have the—what I can tell you, sir, 

is that the trustee will work with the SEC and get those assets, 

and we are very aggressive about liquidating assets. 

Mr. ACKERMAN. Will you turn it over to this committee? The public has a right to know. There is a bankruptcy which is a very public thing. There are legitimate investors who have a right to know 

what this is, what they might reasonably expect to have if they can 

do the math and divide by the number of them and the number of 

dollars. 

Mr. HARBECK. I can promise to you that if it is the committee’s 

pleasure to have that report, I will get it to you as soon as I receive 

it. 

38 

Mr. ACKERMAN. I am making that request. Will you get it to me 

and the committee as soon as you can? 

Mr. HARBECK. Yes, sir. 

Mr. ACKERMAN. Can you do that in a week, or have you turned 

it over to the court already? 

Mr. HARBECK. If the SEC has not given it to me, they will. 

Mr. ACKERMAN. And you will give it to us within a week? 

Mr. HARBECK. Yes, sir. 

Mr. ACKERMAN. Now, what happens to this clawback thing that 

is making a lot of people petrified? Why is there a difference between an investor who invested 6 months ago or 8 months ago and 

an investor who invested 6 years ago? Are we going to see the government go after them? I represent the north shore of Long Island, 

made famous in many novels as the gold coast, and I probably represent more people than—I know dozens of people who are absolutely destitute now who were the biggest philanthropists in this 

country, making the world of charity work, who now don’t know 

what to do. One guy called me up with tears in his eyes, his wife 

is dying of cancer, his kid has a debilitating disease. He is going 

to get through this somehow, but what is going to happen to the 

hospital he promised $12 billion to in his next contribution, a children’s hospital? 

Mr. HARBECK. Your question with respect to clawbacks is that 

under the law, all customers participate in what is known as a pool 

of customer property. It is the trustee’s duty to expand that pool 

and distribute it equitably. If a customer has received many times 

more than the customer put in, he is far more advantaged than 

someone who, for example—and this is a true example—someone 

who put in $10 million last week. 

Mr. ACKERMAN. My constituent put in $10 million the day before 

Mr. Madoff turned himself in, and people are telling him it doesn’t 

exist anymore. Does he get his money back? 

Mr. HARBECK. He is part of that common pool, and unfortu- nately, he will not get his $10 million back any more than someone 

who put it in— 

Mr. ACKERMAN. Is there a government clawback for his $10 million? 

Mr. HARBECK. No, those funds are already in the Madoff enterprise. 

Mr. ACKERMAN. The insurance that people have with SIPC, the 

$500,000 insurance that they think that they have, if they have put 

in $500,000, regardless of when, can they expect their money back? 

And you are going to hear a witness—if you care to stay here after 

you testify, you are going to hear a witness who can’t pay his mortgage next month. 

Mr. HARBECK. I have heard many such stories. The answer to 

your question is— 

Mr. ACKERMAN. Two and a half years. 

Mr. HARBECK. No, faster than that. 

Mr. ACKERMAN. Can he make his mortgage payment before he 

loses his house and has to go live with his children and grandchildren? 

Mr. HARBECK. If he can demonstrate that he put money in and 

did not take money out, we will get money back— 

39 

Mr. ACKERMAN. I ask unanimous consent with the witness-tocome’s permission, which I have, to put his statement of this last 

month in the record in its entirety. 

Mr. KANJORSKI. Without objection, it is so ordered. 

Mr. ACKERMAN. I yield back whatever time I may have. 

Mr. KANJORSKI. The gentleman from Nevada, Mr. Heller, for 5 

minutes. 

Mr. HELLER. Thank you very much, Mr. Chairman. And I want 

to thank the witnesses for attending. I know this can’t be easy at 

times. 

Inspector General, could you explain what a split-strike conversion strategy is? 

Mr. KOTZ. That is unfortunately not in my area of expertise. 

Mr. HELLER. Do you anticipate someone in your agency would 

know what a split-strike— 

Mr. KOTZ. Absolutely. There are certainly the areas within the 

agency, not the watchdog office, that would be involved in those 

matters, but unfortunately that is not me. 

Mr. HELLER. Because I believe this is the basis of it. I can’t ask 

you the question then if you don’t understand the strategy. Let me 

move in another direction. 

Besides marrying into the family, are you aware of any SEC employees who ever worked for Madoff Security Investments? 

Mr. KOTZ. I am not at the moment, but again, that is something 

we need to look at in the investigation and determine whether that 

happened. So that is something that is certainly within the list of 

matters we are going to look into. 

Mr. HELLER. Are you aware if there is a cool-down period for 

SEC employees working in the industry? 

Mr. KOTZ. I believe that the standard rules, standards of conduct 

apply to SEC employees like every other employee in the Federal 

Government. I am not specifically aware of special rules for the 

SEC; I am not an ethics officer. One of the things that we do need 

to look at, and one of the things that we already looked at, is that 

relationship between SEC employees when they leave SEC and 

when they go into private industry and the questions of whether 

their relationships caused by that have an impact on what the SEC 

folks do. 

And so as I said, we are going to look at the stature of Mr. 

Madoff, whether his reputation had any effect on the actions that 

were done here, and whether the different employees within the 

SEC had any expectations or even wished to go to private firms 

that could have impacted their decisions. 

Mr. HELLER. Right. I appreciate that comment, and I would hope 

that you would take a good, close look at that. 

I want to talk about your auditing process. What do you, in your 

opinion, consider to be an ideal period of time between audits of an 

investment adviser or a securities firm? Is it every 2 years, every 

4 years? Does the SEC or does your office have a goal? 

Mr. KOTZ. Our office is the watchdog Office of the Inspector General, so we don’t do audits of investment advisory firms. I know 

that there is an issue in this matter about the frequency of those 

audits and examinations. One of the things we are going to look 

at is how does the office that does those audits and examination— 

40 

what is their frequency; and is that an issue of resources, that they 

don’t have enough resources in order to do more frequent examinations, but also whether these examinations are done appropriately, 

so that even if you have further resources and you could do more 

examinations, if the examinations aren’t yielding the results, then 

additional examinations aren’t done. 

So that is not something our office does, but it is something we 

will look at to see what is the frequency of the audits and whether 

the frequency should be changed and the audits should be changed. 

Mr. HELLER. You are anticipating that you would propose some 

level of audit standards or frequency of audits in the future? 

Mr. KOTZ. Yes. We would make recommendations regarding the 

office’s policies potentially about the frequency of audits if we determined that those examinations or audits are fruitful. First, I 

think we need to determine that the examinations would find what 

they were supposed to find, and then if that becomes the issue, 

that it is just a matter of frequency, then we would make recommendations that they increase the frequency. 

Mr. HELLER. Thank you. I yield back. 

Mr. KANJORSKI. The gentleman from California, Mr. Sherman. 

Mr. SHERMAN. Thank you. 

Mr. Harbeck, I want to thank you for pointing out that we are 

dealing with one legal entity, because there is this myth that the 

16th floor was cool; the 17th floor was where the fraud was going 

on. The fact is it is one entity, one fraudulent entity, and that entity was filing financial statements with the SEC and with FINRA 

every year for many years. Those financial statements were obviously false on their face because they involved large amounts of 

money being reported by a tiny accounting firm or tiny auditing 

firm. And so I want to thank you for pointing that out. 

A number of my colleagues are questioning why you didn’t do the 

enforcement job. And as I understand it, you are basically like my 

life insurance company. You are not going to keep me alive, but if 

I die, you are supposed to pay off. 

Mr. HARBECK. That is correct, sir. 

Mr. SHERMAN. In contrast, it is FINRA and the SEC that are 

supposed to be doing the enforcing. They are the ones who received 

these financial statements that were obviously false on their face. 

They are the ones that the intelligent tipsters went to. They didn’t 

come to you and say, hey, there is fraud going on at Madoff. They 

were sophisticated enough to know they should go to the SEC. 

I look forward, Mr. Chairman, to bringing the SEC enforcement 

people and FINRA before this subcommittee. 

But, Mr. Harbeck, the one thing I count on my life insurance 

company to do is to stay solvent so they can pay off when I do die. 

I look to other people to keep me alive. 

Now, mentioning your lines of credit, but the right to borrow money is not net worth. Your net worth is about $1.5 billion, minus 

what you lose on this Madoff case. And do you have any reason to 

think that—we talked about this earlier. You are going to lose, 

under even a conservative estimate, a billion dollars off the Madoff 

case. 

Mr. HARBECK. It all depends on the claims we haven’t yet received, Congressman. 

41 

Mr. SHERMAN. But everybody who has one of these statements 

where they directly invested in Madoff, and they are secure—and 

the positions are here listing the securities they are supposed to 

have—is insured up to half a million dollars, correct? 

Mr. HARBECK. They are protected. We don’t use the word ‘‘insurance’’ because of the fact that we don’t protect against the underlying value of a securities portfolio. 

Mr. SHERMAN. But you do perform an insurance company function, and any insurance company regulator in this country who 

looked at the fact that you are standing behind well over a trillion 

dollars worth of accounts, and you have after this Madoff thing 

well less than a billion dollars, would close you down in a second 

as being an undercapitalized insurance company. There is no more 

obvious fraud than somebody selling insurance or claiming to be 

providing insurance who doesn’t have any capital to pay anybody 

off. 

Should your members put an asterisk by that decal that they all 

have on their in window saying, yes, SIPC Corporation provides 

the protection, but there is virtually no net worth. And we can 

argue here whether your net worth is $500 million or $800 million 

or negative $17 billion. Your net worth is trivial or negative compared to the well over a trillion dollars of security that you are supposed to be providing the investors in all of our districts, right? 

Mr. HARBECK. We look at the issue of our solvency every board 

meeting, and what I can tell you is— 

Mr. SHERMAN. I am not asking for solvency, I am asking for your 

net worth, your assets minus your liabilities, including the liabilities you have on the Madoff situation. Your net worth is less than 

a billion, and we have over a trillion dollars of accounts with securities brokers here in the United States, and I am only counting 

the ones under the half-million-dollar limit. 

Mr. HARBECK. The answer to your question is that historically 

these frauds have been found before it cost SIPC net $1 million in 

any given case. 

Mr. SHERMAN. That is ancient history. Now we are in the new 

history. The history of thousand-point drops in the markets on occasion, the history of Madoff at $50 billion losses to investors. And 

you have decals all over the 27th district telling my constituents 

that they have protection. And I am not asking you to be a law enforcement agency, that is other agencies; but you are supposed to 

write the checks to protect them, and your net worth is under a 

billion dollars. 

Mr. HARBECK. The first thing that happens when our fund falls 

below $1 billion is we automatically institute assessments on the 

securities industry based on their net operating— 

Mr. SHERMAN. But you haven’t done that yet even though you 

are clearly going to lose at least $500 million out of this Madoff 

thing. You are below a billion dollars, you just haven’t told your 

members that. 

Mr. HARBECK. I would expect our board will move on that in January, sir. 

Mr. SHERMAN. In January. Okay. Let me shift to Mr. Kotz. You 

are going to write this great report, and it will take you months 

or years to do it, but a couple of things are already obvious. One 

42 

is that the SEC did not do a good job when it got tips from outsiders, very sophisticated tips. And zero percent of the tips about 

Madoff were handled correctly. What assurances do you have as Inspector General that at least half of the tips that the SEC receives 

are handled correctly? 

Mr. KOTZ. That is right. And we are planning to not just look at 

the tips in the Madoff case, but the whole process. 

Mr. SHERMAN. We don’t know whether half of them are handled 

correctly or maybe zero percent. Right now, you don’t know. 

Mr. KOTZ. Right, and so we need to look at all the tips and the 

process. 

Mr. SHERMAN. Do you know whether the SEC even today is giving an extra half-hour scrutiny to financial statements where the 

auditor is not a PCAOB audit firm? 

Mr. KOTZ. I don’t know. 

Mr. SHERMAN. I would sure like to find out. 

I yield back to the chairman. 

Mr. KANJORSKI. The gentleman from Alabama. 

Mr. BACHUS. Thank you. 

Mr. Harbeck, I want to compliment you on good work over a very 

difficult year, first with Lehman and now with Madoff. 

I think it is important—you don’t insure against market loss. 

Mr. HARBECK. That is correct. 

Mr. BACHUS. And a lot of what has been lost as far as assets by 

investors will be due to market loss; will it not? 

Mr. HARBECK. We are looking at this as a missing asset case, because assets were put in; the assets aren’t there. So that is the 

kind of thing that we can protect people against. What we can’t 

protect people against is a 99 percent decline in any particular 

stock. 

Mr. BACHUS. He has acknowledged that he actually stole money 

from investors. 

Mr. HARBECK. Yes, he has. 

Mr. BACHUS. I think it is going to be very difficult and complex 

because you have no records. You don’t have accurate records. That 

is almost acknowledged in this case; is it not? 

Mr. HARBECK. Certainly, the records don’t match one hand with 

the other in terms of the actual securities inventory with what the 

customers expect to receive. 

Mr. BACHUS. Do you have auditors or forensic experts on staff? 

Mr. HARBECK. The trustee has hired forensic accountants and 

computer experts and attorneys who specialize in this kind of asset 

recovery to make sure that we know exactly what we have and 

what went where. 

Mr. BACHUS. All right. I guess it is going to be very hard in just 

a matter of weeks to start processing claims; is it not? 

Mr. HARBECK. It will be hard, and we are going to do it. 

Mr. BACHUS. What? 

Mr. HARBECK. It is going to be hard, and we are going to do it. 

That is why I certainly have urged customers to give us as much 

information as they can. If they do that, we will be able to move 

very rapidly. 

Mr. BACHUS. So there is some expectation on your part that some 

can start getting reimbursed within a matter of weeks? 

43 

Mr. HARBECK. We have a meeting with the Securities and Exchange Commission Division of Trading and Markets later in the 

week to hammer out exactly how best to do this, because I want 

their support as well. 

Mr. BACHUS. Small investors may actually have more promise of 

getting at least all or a greater percentage of their investments? 

Mr. HARBECK. The investors who are going to have the easiest 

trail are the people who have been in the scheme for the shortest 

amount of time. 

Mr. BACHUS. Okay. And let me close by asking you this: Mr. Ackerman asked you to share records with us, but this is a judicial 

proceeding that you are involved in akin to bankruptcy; is that 

right? 

Mr. HARBECK. It is a bankruptcy, and certainly if it is filed under 

seal, I cannot produce them. 

Mr. BACHUS. Not only that, but I think you also couldn’t produce 

it to us before you produce it to the court; could you not? 

Mr. HARBECK. I don’t know under what terms the Securities and 

Exchange Commission was given the authority to receive this report. 

Mr. BACHUS. I will point out the fact that the judicial proceeding 

is going to limit you somewhat, I would think. 

Mr. HARBECK. I will get it to the committee as soon as I legally 

may. 

Mr. BACHUS. Thank you. 

Mr. KANJORSKI. Mr. Meeks, the gentleman from New York. 

Mr. MEEKS. Thank you, Mr. Chairman. 

Let me find out from Mr. Kotz. I was recently looking, and we 

saw that Bayou Management, a Connecticut hedge fund that collapsed in the scandals of 2005, as well as Enron and others, they 

used nearly 900 offshore entities, mostly in the Cayman Islands, to 

conceal bogus trades and accounting fraud. And I know that some 

Federal prosecutors are looking more and more at some of the offshore business to see whether or not this is a mechanism that 

makes it easy or easier for individuals to conduct schemes to defraud the public. 

So I was wondering if, in fact, you could let us know or let this 

committee know whether or not the SEC has the capacity, first, to 

monitor the use of offshore fund operations, and also as to your 

knowledge of how many enforcement and oversight actions the SEC 

has taken to ensure investor protections from the manipulation of 

offshore fund operations since 2001. 

Mr. KOTZ. I can certainly look into what the SEC does vis-a-vis 

these offshore operations, and that is—I appreciate the information 

in order to follow up on that. But I could determine whether in this 

case the Enforcement Division had any issues related to offshore 

operations, or whether generally the Enforcement Division of the 

SEC treats accordingly and appropriately those kinds of issues. 

Mr. MEEKS. But you can’t—have you done any internal investigations thus far of the SEC with how they are currently monitoring 

some of the offshore funds and whether or not—giving them any 

guidelines or guidance to looking into whether or not they are 

doing it correctly, whether they are undermanned, or whether they 

44 

have the proper training or not? Have you as the Inspector General 

done that at all? 

Mr. KOTZ. I have not looked at that specific issue, no, but I certainly can. 

Mr. MEEKS. You are saying that is something you will do in the 

future, but it hasn’t happened in the past? 

Mr. KOTZ. Right. 

Mr. MEEKS. Also, if you look at the SEC’s annual report, the SEC 

cites that there have been 671 enforcement actions in Fiscal Year 

2008. Insider trading actions increased by 25 percent, and market 

manipulation actions increased by 45 percent. And between 2004 

and 2008, the SEC has ordered $12.9 billion of penalties and 

disgorgements. The largest group of this 3,500 employees assigned 

to enforcement, and then after that compliance, and then corporate 

compliance with Federal securities lawsuits. 

Given the explosive growth of the financial sector in both the 

United States and abroad, and the level of global financial market 

interconnectivity, and the rise of infractions and fraud, can you 

give us your opinion on whether the SEC is adequately prepared 

to face the challenges of the new millennium marketplace? 

Mr. KOTZ. I can’t today as we are sitting here. Part of the process 

of the investigation and audits that we are going to undertake is 

to look at the overall complaint procedures and the enforcement operations and to determine that very question, whether it is a question of resources, that they simply don’t have sufficient resources 

in order to look at all those issues given the multiplication that you 

indicated, or whether the process simply is broken such that, even 

with additional resources, it wouldn’t make a difference. 

Mr. MEEKS. So all of this will be what you are looking at now, 

and you will come back with us, Mr. Sherman has indicated, but 

we don’t know when, whether it is a month or 2-year process, because this is the kind of information, I think, that I know that we 

need in trying to determine whether or not there needs to be some 

new resources or what kind of regulation we should be putting in 

place. We need that kind of information. 

What about the fact that you look at the interconnecting individuals from various firms that go from one firm to another. Some say 

because of the status of Mr. Madoff, because he was the former this 

or—that had something to do with that people just accepted his reports without looking any deeper than they should have. Have you 

as the Inspector General looked into any interconnectiveness with 

reference to people in the industry who have gone from one position to the other and whether they just check off because they 

know somebody personally? 

Mr. KOTZ. That is an issue that has come up in other specific investigations, and that is an issue that has to be looked at very 

carefully. I think that is a great concern about the relationship of 

certain individuals. But there have been situations where we have 

issued reports where we have felt like the reputation of individuals 

had an impact on how the SEC did its job. We have reported that. 

We recommended action in those types of cases. And if we find that 

in the Madoff case, we find that generally we will do the same 

thing. 

45 

Mr. MEEKS. One last question, Mr. Harbeck. I know that in your 

testimony you have indicated that because of the Lehman Brothers 

holding, you discussed the liquidation and how you have protected 

a lot of the people that they control their portfolios. But as you 

know that in the Lehman Brothers procedures, there are still 

over—some say $700 billion stuck, because it hasn’t been so smooth 

in London where United States citizens and various funds are 

stuck there. Have you—and I am asking—I sent letters to the 

SECs inquiring about them because there are a number of individuals who have invested whose money is still stuck in London. Have 

you looked into that, or do you have any suggestions or recommendations how they can get access to their portfolio in London 

in that bankruptcy proceeding? 

Mr. HARBECK. The bankruptcy proceedings of LBIE, which is the 

European subsidiary of Lehman Brothers, are completely different 

and separate, but the trustee for Lehman Brothers, Inc., and the 

trustee for Lehman Brothers Holding meet frequently with the 

Lehman Brothers European branch conservators, I believe they are 

called, to try to iron this thing out. 

Those offshore funds were simply not under the control of either 

the Lehman Brothers holding company or the Lehman Brothers 

brokerage firm. So I don’t have a lot of hope that they can untangle 

the British scheme as fast as we were able to untangle the American. 

Mr. KANJORSKI. The gentleman from Texas, Mr. Hinojosa. 

Mr. HINOJOSA. Thank you, Mr. Chairman. Chairman Kanjorski, 

I want to thank you for holding this meeting. And I would like to 

take the opportunity to acknowledge all the work that your staff 

has done over the years to try to ensure that our capital markets 

remain vibrant and strong. I particularly want to thank you for 

holding this meeting in a solid effort to determine what changes 

your subcommittee or the full committee should make to the financial services regulatory system to ensure that this type of Ponzi 

scheme is detected much sooner than that of Mr. Madoff and his 

company. 

At this point, Mr. Chairman, I ask unanimous consent to enter 

into today’s record a copy of the complaint of the United States of 

America against Bernard L. Madoff. 

Mr. KANJORSKI. Without objection, it is so ordered. 

Mr. HINOJOSA. I would also like to insert into the record a copy 

of today’s Bloomberg, Wall Street Journal and Financial Times articles on this Ponzi scheme. 

Mr. KANJORSKI. Without objection, it is so ordered. 

Mr. HINOJOSA. Thank you. 

I have a question for Mr. David Kotz. Does your Office of Inspector General need extra Federal funding to ensure that this type of 

scheme is detected sooner rather than later? 

Mr. KOTZ. Our office is the one that looks at what happened with 

respect to whether these things were detected appropriately. So we 

don’t feel that I have asked for and I have received additional resources for our office to conduct the investigation. One of the things 

that we will determine in our investigation is whether the Division 

of Enforcement would require additional funds in order to detect 

these things, or whether the compliance divisions of the SEC would 

46 

require additional funds in order to identify issues, or whether it 

is a question of the processes that are in place that are simply broken and such that additional resources wouldn’t help. 

So in my office, in terms of my investigative component, we don’t 

need additional resources to conduct the investigation. 

With respect to whether the SEC as a whole needs additional resources in order to do its job, that is something we would look at 

in our report. 

Mr. HINOJOSA. I am sure you will do a good job, but as my colleagues pointed out, it will take time, maybe several months. It is 

odd that the organization, the entity that dropped the ball, which 

is the SEC, is investigating itself. How can we rely on them investigating themselves? Tell me about that. 

Mr. KOTZ. Sure. I think if you look at the track record of my office, Office of Inspector General, over the past year, you will see we 

issued critical reports where appropriate. There have been numerous occasions where we have issued reports that were very critical 

of the SEC; audit reports about the CSE program, Consolidated Supervised Entity programs, that found that there were flaws in the 

process involving the Bear Stearns collapse, that there were red 

flags that were not followed up on by the SEC. We have issued investigative reports that were very critical of the SEC employees 

and officials. 

I think if you look at what we have done over the years, you can 

be assured our office does not pull any punches. Our office is very 

aggressive, and our office issues candid and sometimes very critical 

reports. 

At the next stage, the effort will need to be to ensure that the 

SEC follows appropriately with respect to the reports that we 

issue, but our track record is very strong in terms of the reports 

we have issued that have pulled no punches and simply told the 

facts as we found them. And that is what we intend to do in this 

case. I can assure you that we will report the facts exactly as we 

find them. Then it will go to the SEC in order to implement those. 

Mr. HINOJOSA. At this point, Mr. Kotz, since you have already 

seen some of the information, are you aware of any collaboration 

between the SEC employees and Mr. Madoff that resulted in him 

managing to conduct his business as usual despite it being a Ponzi 

scheme? 

Mr. KOTZ. Yes. We haven’t gotten to the stage of the investigation that I can say definitively either way. I can say that is an 

issue that we will look at very carefully to see what the potential 

collaboration there was between SEC employees and Mr. Madoff’s 

firm. And if we find that was the case, we will recommend the 

strictest form of disciplinary action, potentially criminal action if 

we find that appropriate, whether it is existing employees or 

former employees. 

So these matters are very serious. We take them very seriously. 

We will not hesitate to recommend termination, refer matters for 

criminal prosecution, follow up on criminal prosecution to ensure, 

if the facts warrant, those who engaged in inappropriate actions 

pay for what they did. 

Mr. HINOJOSA. My time has run out, and I yield back. 

Mr. KANJORSKI. Thank you very much. 

47 

Mrs. McCarthy of New York. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. 

Mr. Kotz, the question I want to ask you is—because an awful 

lot of questions I was thinking of have already been asked and answered to some extent—how large was the corporation of Madoff? 

How large of a corporation was it? 

Mr. KOTZ. I wouldn’t know the answer to that question. 

Mrs. MCCARTHY OF NEW YORK. Ten, fifteen, twenty employees? 

Mr. KOTZ. I wasn’t involved in any of the issues relating to any 

actions taken against Mr. Madoff. 

Mrs. MCCARTHY OF NEW YORK. All right. With that being said, 

say it was a fairly large corporation, being that it seems to have 

an awful lot of money and customers, are there any SEC rules 

about the ruling of an accounting firm doing an accounting of the 

firm itself? 

Mr. KOTZ. Yes— 

Mrs. MCCARTHY OF NEW YORK. From what I understand, he only 

had a small firm with one or two people. 

Mr. KOTZ. I think there are some serious questions about whether the information about the accounting firm was known to the 

SEC officials, and, if that was the case, why they didn’t take any 

action. So absolutely, as I said, we are going to look into how it 

could possibly be that such a large entity involving so many dollars, high-level volume of dollars, could have an accounting firm 

that was so small without there being a red flag that would be 

clearly obvious to all who could see that it was an issue that needed to be further investigated. And if we find that, we will certainly 

report, as we have done in the past, that the SEC failed to follow 

up on a red flag. 

Mrs. MCCARTHY OF NEW YORK. I want to say thank you for your 

patience in front of this committee, and to the second committee, 

second panel that will be coming up. Unfortunately, I will have to 

leave, but the testimony of Mr. Metzger is excellent, and I advise 

people to actually read it. 

So basically both of you actually come in after the fact; after a 

crime has been done or a fraud has been done, you come into the 

investigation at that point. 

Mr. KOTZ. That is correct. The Office of Inspector General looks 

at matters after they have occurred to try to find lessons learned 

to ensure these things don’t happen again. 

Mrs. MCCARTHY OF NEW YORK. I think what is going to be interesting as we go forward, my husband worked for a brokerage firm 

most of his life. He was actually in compliance for a long time, and 

one of his biggest beefs was as he went around the country looking 

at the different brokerage firms is how much corruption was going 

on. His feeling was nobody should get a commission; pay them a 

good salary, but the commissions make you buy and sell and actually cheat the investor one way or the other. 

One of the other things which is common sense is if it sounds too 

good, it usually is too good. So you had an awful lot of smart people 

investing in this firm. When he was talking about 9, 9.5 percent 

constantly, no one, especially the SEC who had to know that he 

was giving out these particular amounts of money, saw or even felt 

there was something wrong? 

48 

Mr. KOTZ. Right. Absolutely, that is a very significant issue, and 

one could look at an investor perhaps not wanting to ask too many 

questions, not finding information. But certainly the SEC’s job is 

to find that information. The SEC’s job is to look at things that are 

too good to be true and to make that determination that if it is too 

good to be true, we have to audit, examine, and investigate it to 

determine that it is truly true. 

So it is something that is logically hard to understand, and that 

is why we need to look very carefully to see how the facts are as 

they say; how it could have happened that these returns, that this 

information which was—to the extent it was brought to the SEC’s 

attention, how could it have not have triggered an immediate, fullblown, full-scale investigation, audit and examination, all the tools 

that the SEC has in order to see how this could have happened. 

Mrs. MCCARTHY OF NEW YORK. My concern is being that this 

went on for so many years, how many other organizations, firms 

are actually doing the same thing and just haven’t gotten caught 

yet? 

Mr. KOTZ. Yes. As was indicated, the market collapse obviously 

had a lot to do with the circumstances at the end. So clearly— 

which is why we need to not just look at the Madoff matter, but 

we need to look at whether this situation could replicate itself. And 

if a situation like this that seemingly on its face was obvious in 

terms of red flags, we need to look at if there were other problems 

that occur as well. 

So we plan to do a comprehensive overview of both the enforcement division and the compliance unit to ensure that we don’t just 

at the end of the day say—have some findings with respect to Mr. 

Madoff, but that we look at the whole system in place to see if it 

can adequately detect fraud. 

Mrs. MCCARTHY OF NEW YORK. I think that also, as we go forward on the full committee and the subcommittees, obviously the 

SEC, even Wall Street and the investors, I don’t even think anybody knew the extent not only of this particular case, but the whole 

collapse. It looks like we are going to have to modernize or somehow look at the whole financial system, because nobody expected 

this, nobody. 

I yield back. 

Mr. KANJORSKI. The gentleman from Massachusetts. 

Mr. LYNCH. Thank you. 

With the greatest respect for my colleagues, let me just pick up 

from that point that nobody saw this coming, we have to modernize. The short sellers saw this coming. The short sellers saw 

this coming, and they invested in it, and they made billions. 

What is troubling here is that—and as you say, Mr. Kotz, it is 

the SEC’s job to find the information. In this case, though, in this 

case the SEC was given the information. The SEC had repeated reports. The SEC had a whistleblower with a very long analysis. We 

had repeated attempts to contact the SEC, and the analysis was all 

given to it, but in the end they really did nothing until it was too 

late. I don’t think you have to stay up late to figure out whether 

or not there were other occasions of this. 

There was a case earlier in the year, within the last year, so 

while you were there, Gradient Analytics came up and reported 

49 

about Washington Mutual’s problems. They pointed out that 

WAMU, over a year before it got in trouble, was not setting aside 

sufficient assets. A lot of short sellers came into the market, bet 

against them. AIG, their own auditor, Pricewaterhouse, again, long 

before problems developed there, they reported that the company 

had ‘‘significant shortcomings’’ because of the way they were valuing their credit default swaps. They reported it to the SEC. It was 

public information. 

That is the most troubling aspect of this for me. The cops were 

informed, the law enforcement was informed, and yet nothing happened. That is the difficult part. 

I am wondering, I have met with former SEC officials to ask 

them what is the real problem here. Some have suggested to me 

that they are overlawyered at the SEC, and they don’t have enough 

financial people. 

The short sellers, financial people, were able to diagnose this, bet 

on it in significant ways, and make a killing here, billions of dollars. And yet the SEC, with the same information, refused to act, 

and that is troubling. 

Some former SEC officials also suggested to me that in many 

cases the investigators are right out of school, very new, inexperienced, and they were simply—in this case with Mr. Madoff, they 

were overmatched. The guy was on the SEC Advisory Board. That 

must be very intimidating for those newer investigators coming 

into that situation. 

Now you have been there a year and have seen how the investigation goes, you know the personnel, and you know who is doing 

the investigations and how much experience they have. Are they 

lacking in experience? Is this one of the shortcomings we have? Do 

we have to shore this up? God knows there will be drastic change 

here. The SEC will be totally reformed, or maybe it is going to go 

away or will be merged with something else, because it is just inexcusable. Is that something that we have to look at? Are these investigators inexperienced, and is that costing us in the long run? 

Mr. KOTZ. I think that is absolutely something we need to look 

at. That is a major issue that we are going to consider ourselves, 

which is the expertise level: Are they equipped, and do they have 

the expertise and the training and ability to keep up with this? 

And it is very alluring sometimes to be dealing with somebody who 

is on this panel and that panel, very famous, very rich. One aspires 

to be like that person. The person is a junior-level SEC attorney, 

he sees this very impressive individual, and it is very easy to even 

subconsciously think this guy couldn’t be lying to me, this guy is 

a great man, he has made all this money, he is a genius. And so 

we need to look at whether they are equipped to ask the tough 

questions. 

Mr. LYNCH. Let me ask you one other thing, Mr. Kotz. In your 

investigations, a couple of weeks ago, we had five billionaires sitting at that table. A lot of them had made a lot of money, Mr. 

Paulson and others, on short selling against these type of deals. 

They recognized the weakness in the market in these firms and basically through credit-default swaps were able to make a killing. 

Have you thought about pulling in short sellers? They are really 

much more informed and seem to be investigating the strength of 

50 

these firms to a level of detail that I wish the SEC was investigating them. Did you ever think of pulling some of these people 

in? I am sure they would cooperate. Some of them would. Some of 

them are making too much money, but I am sure some of them we 

could lure away to help us strengthen this market, because we 

have lost our credibility here. This is all about restoring trust in 

the markets. That is your job, and that is our job. 

I do want to say I thank you for your patience in coming before 

the committee and helping us voluntarily, because this isn’t an official committee hearing. I do appreciate both of you gentlemen coming to help us with our work. 

I yield back, Mr. Chairman. 

Mr. KANJORSKI. Thank you very much, Mr. Lynch. 

Mr. Scott of Georgia. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Mr. Kotz, I have been sitting here trying to get my hands around 

what really seems to me to be the big problem, and that is the 

credibility of the SEC. It is amazing for anybody to sit here and 

think that there is not some level of complicity in this with the 

SEC. This is plain as the nose on your face. You have a situation 

here where 29 red flags came up, not one or two, but over and over 

again. This guy has been examined 8 times in the last 16 years, 

and every time you go in, you ask questions about this. You ask 

him a question, are you stealing? No, I am not stealing. And there 

is no further investigation of this. He knows the loopholes. He says 

he is a hedge fund operator and not a business investment adviser, 

and you accept that. He trades on foreign markets at certain 

amounts of time. You say, oh, yes, that is true, too. Okay, that is 

fine. 

How sure are you that it is not some complicity with an inside 

person or persons at the SEC that has enabled this man to do this? 

Mr. KOTZ. Yes, I am not sure, absolutely not. And that is something we will look at. I can tell you that when we complete our investigation, I will have the answers to those questions. But you are 

right; on its face, it certainly looks as if there may be that possibility. That is something that we have to look into. We have to look 

into the question of how it was that it seems as though the word 

of Mr. Madoff was taken; what were the tools that were used; why 

wasn’t subpoena power used, for example; why was it all voluntary, 

and whether that was because of his reputation or simply lack of 

aggressiveness or perhaps complicity, as you say. Those are answers that I am looking to provide. 

Mr. SCOTT. Also in each of the reports, when the SEC looked at 

some of this stuff, none of that was made public. 

So I think that there is something with this. I think that—and 

I would hope—I think one of the greatest justices that you can do 

at least—we may not be able to get all of the money back, and I 

want to ask you about that in my follow-up question, Mr. Harbeck, 

about the money—but there needs to be a singular effort to get the 

heads that enabled this guy to do this at the SEC. He could not 

have done it without some complicity with some people who work 

at the SEC. It goes in line with the greed of Wall Street that has 

been one of the primary factors as to why we are in the economic 

condition that we are in now. That needs to be the first order of 

51 

business of the SEC to get the confidence of the American people: 

Get the culprits. You have some folks working for you in the SEC 

who worked with Mr. Madoff to allow this to happen. Their heads 

have to roll. 

Now, Mr. Harbeck, let me ask you about the ability of trying to 

get some restoration for the investors. Is it an accurate figure of 

$50 billion? Is that an accurate figure? 

Mr. HARBECK. It is far too early to say. We believe the $50 billion 

figure includes the inflated profits that Mr. Madoff said. The best 

example I can give you is that Yeshiva University put $14 million 

into this scheme. This is publicly available knowledge. And the 

records that they had indicated that they held a securities portfolio 

of $110 million. So there is a gigantic gap between when was put 

in and reflected on the statements. Of course, the longer you were 

in this deal, the bigger that gap was. So having said that, and having said that the $50 billion figure 

is probably quite high, whatever it is, we will find it. The administrative expenses of that will not come out of customer property to 

find those assets, to find the accurate dollar amount, and then we 

will go try to get whatever we can. 

Mr. SCOTT. So we are talking about ill-gotten gains. We are talking about loss and gains that to some degree may be fakes. In the 

Ponzi scheme—I want to get this right—what happens is that he 

takes one investor’s money and uses that investor’s money to give 

some return to the investment on the other fellow’s money without 

it going through a trading process. Is that— 

Mr. HARBECK. That is correct. And the way this was perpetuated 

for so long is people did not withdraw their funds from this Ponzi 

scheme. They just kept letting him roll over the supposed profits 

into even further supposed profits. 

Mr. SCOTT. Now, there is a management firm for what is left of 

these assets. There is somebody that you have engaged or somebody is engaged to determine these, and I think the figure that is 

put on that expense has been about $28 million. 

Mr. HARBECK. No. The trustee has received $29 million back 

from a bank account. Some of that will be used for administrative 

expenses, but if that is determined to be customer money, SIPC 

will reimburse it. 

Mr. SCOTT. Is this the recovered liquidation cost? 

Mr. HARBECK. Yes. And that is not all costs that have thus far 

been incurred. That is more than what is thus far. 

Mr. SCOTT. So that is a false figure that is out there. 

Mr. HARBECK. It is somewhat correct in that is the amount of 

money that has been returned to the trustee from a bank account. 

Mr. KANJORSKI. Mr. Scott, your time has expired. 

Mr. SCOTT. Thank you, sir. 

Mr. KANJORSKI. The gentleman from Texas, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. Again, I thank you for 

hosting this event. 

Mr. Kotz, permit me to ask you a few questions, and I want to 

say from the outset I have had an opportunity to peruse your resume. It is quite impressive. You were with the Peace Corps before 

coming to this current position, and you have an outstanding 

record as a scholar and student of jurisprudence. 

52 

Let us start, if we may, with your comment that you investigate 

after the fact. I think you need to bring some clarity to what ‘‘after 

the fact’’ means because you received a letter from Senator Grassley on April 2nd asking that you look into Bear Stearns, and there 

has been no arrest or reported crime as it relates to Bear Stearns; 

is this correct? 

Mr. KOTZ. Yes. We were asked to do an audit of Bear Stearns 

to determine whether the SEC missed red flags in their oversight 

of Bear Stearns. 

Mr. GREEN. Exactly. Which means that you can receive intelligence from sources about inappropriate conduct at the SEC, and 

as a result you can look into whether or not the SEC is properly 

conducting itself, true? 

Mr. KOTZ. Right. 

Mr. GREEN. Is it true or not true that your office received some 

degree of intelligence prior to the arrest of Mr. Madoff with reference to reports that were sent to the SEC concerning the socalled Ponzi scheme? 

Mr. KOTZ. No, to my knowledge it is not true. There was never 

a complaint. We actually searched our records going back years beyond when I was there. There is no record of any complaint filed 

with our office about Madoff. In fact, the investigation that was 

begun, from what I understand, was not brought to the Commission’s attention. But certainly, nothing was brought to our office’s 

attention. 

Mr. GREEN. The investigation that was begun with respect to Mr. 

Madoff was never brought to the attention of the SEC? 

Mr. KOTZ. There is an enforcement investigation, not an investigation that our office does. 

Mr. GREEN. I understand, but you said that the investigation 

that was begun with reference to—and I am adding ‘‘with reference 

to’’—Mr. Madoff was not reported to the SEC, meaning the SEC 

Commissioners? 

Mr. KOTZ. Right. What the Chairman stated in his request for 

me to conduct an investigation was the concern—one of the things 

we have to do is determine whether that is true—but the concern 

that he had that the Madoff matter that was looked at by the Enforcement Division had been not been brought to his, the chairman, 

and the other Commissioners’ attention. 

Mr. GREEN. And the Enforcement Division of which you speak is 

one other than the Enforcement Division that you happen to head? 

Mr. KOTZ. Yes. I have the Office of Inspector General. That is 

separate from the Enforcement Division. 

Mr. GREEN. So the Enforcement Division of the SEC received its 

complaint, made its investigation, but did not give a report to the 

Commission itself. 

Mr. KOTZ. That is the allegation that the Chairman asked me to 

look into and what we will confirm, if it turns out to be the case, 

in our report. 

Mr. GREEN. So the allegation is made by whom? 

Mr. KOTZ. The Chairman of the SEC. When he asked me to conduct the investigation, he stated that one of the things he wanted 

me to look at was why or whether if the information— 

Mr. GREEN. There is a difference between ‘‘why’’ and ‘‘whether.’’ 

53 

Mr. KOTZ. You are correct, sir. 

Mr. GREEN. Which was it? 

Mr. KOTZ. Why. He asked why was it—in his view he did not believe that the information regarding the Madoff investigation conducted by the Enforcement Division was brought to his attention 

and therefore the other Commissioners’ attention. So he asked me 

to look at this specific question in the Madoff case, and in general 

why enforcement cases are decided not to be brought to the larger 

attention of the Commissioners and the Chairman. 

Mr. GREEN. To your knowledge, has there been any report or 

complaint, I should say, against the SEC with reference to the 

Madoff scheme that was forwarded to your agency? 

Mr. KOTZ. Yes, certainly there have been reports that Mr. 

Markopolos met with folks from the SEC to report information 

about Mr. Madoff. 

Mr. GREEN. And did Mr. Markopolos give his report—his report 

forwarded to your agency? 

Mr. KOTZ. To the agency in which I work, yes. Not my office, but 

agency. 

Mr. GREEN. This is not about you personally. It came to the attention of your office. 

Mr. KOTZ. The agency. 

Mr. GREEN. Your agency. All right, I am sorry. I will get my diction correct, because sometimes it is not superb. 

If it came to the attention of your agency, and all of things that 

you today contend were red flags for the SEC, why were not these 

things red flags for the watchdog of the watchdog? You are the 

watchdog for the SEC. The SEC is the watchdog for the public, the 

investors. 

Mr. KOTZ. Right. 

Mr. GREEN. Why were they not red flags for your office or your 

agency? 

Mr. KOTZ. Because we were never made aware of them. In other 

words, the SEC can’t undertake action— 

Mr. GREEN. You said that you received the report—the same report that we are contending the SEC should have acted upon, you 

have just indicated that your agency received that same report. 

Mr. KOTZ. My office never did. 

Mr. GREEN. Not your office, your agency. 

Mr. KOTZ. Right. It is a large agency. Because a particular division of the agency received a report wouldn’t mean that anyone in 

my office received it. The watchdog of the watchdog wouldn’t receive something before it happened. Once a complaint is brought to 

our attention, we can look into it. 

Mr. GREEN. So your office never received a report from Mr.— 

Mr. KOTZ. No, we didn’t receive it until now. 

Mr. ACKERMAN. Could I ask unanimous consent that the gentleman have 1 more minute so that the witness can clarify and 

make a distinction to us and the public the difference between the 

Inspector General’s Office and the enforcement office, because I 

think that is what we all assumed you were, or some of us assumed. You are not the enforcement office? 

Mr. KOTZ. Correct. 

Mr. ACKERMAN. It went to the inspector— 

54 

Mr. GREEN. I will yield that 1 minute that you have asked that 

I receive to you. 

Mr. ACKERMAN. I was just following up on your excellent, excellent question. So when you say your office, your office has nothing 

to do and the Inspector General doesn’t ever see these complaints? 

Mr. KOTZ. Right. Right. No, we are not the enforce— 

Mr. ACKERMAN. So they go to the enforcement, which is something completely different, which is basically an in-house—you are 

the outside auditor. Is it fair to characterize it, you are the outside 

auditor? 

Mr. KOTZ. Yes. 

Mr. ACKERMAN. And the enforcement guys are inside players 

with the SEC? 

Mr. KOTZ. Right. 

Mr. ACKERMAN. And they can decide to just bury the darn thing 

and not show it to you? 

Mr. KOTZ. Right. We would never see a document that suggests 

that there was securities fraud or a violation of securities laws. 

That would never come to us. That would come to the enforcement 

division, which is a very large, several thousand people division. 

Mr. ACKERMAN. Mr. Chairman, I would suggest that there is confusion here on the committee, that we would hope that you would 

initiate some legislation that could possibly require any complaints 

that are made in house to the inspectors, because the public doesn’t 

know who to complain to. Obviously they complained to somebody 

who had no interest, because they found nothing wrong in a $50 

billion scheme until the guy who did it confessed to it, that they 

share it with the outside auditors in effect and share that with the 

Inspector General’s office. 

Mr. KANJORSKI. I think it is a very good point taken, Mr. Ackerman. 

Mr. ACKERMAN. I yield the gentleman back his time. 

Mr. GREEN. Thank you. And I would adopt the comments of the 

gentleman. I have one final question, Mr. Chairman, just to make 

this absolutely clear. Your office, by whatever name, never received 

any report from Mr. Harry Markopolos? 

Mr. KOTZ. Right. Not that I—no. That is correct. We have now 

because we have initiated the investigation. 

Mr. GREEN. But prior to this investigation, Mr. Harry 

Markopolos or no other person concerning the Ponzi scheme of 

which we are here to investigate or look into today, no one ever 

gave—sent to your office any information concerning that? 

Mr. KOTZ. That is my understanding, right. 

Mr. GREEN. Thank you. 

Mr. KANJORSKI. The gentleman from Missouri, Mr. Cleaver. 

Mr. CLEAVER. Thank you, Mr. Chairman. Most of the questions 

that I was going to raise have already been raised. Actually, the 

follow-up was by Mr. Ackerman to Mr. Green’s comments is exactly 

where I was going to go with regard to some clarity. Though I understand that—and I think the frustration you hear is because people out in the world are angry and we actually probably would be 

better if we had SEC members in here instead of the Inspector 

General. But you are here and so this is the frustration of the pubVerDate Nov 24 2008 13:25 Jan 24, 2011 Jkt 063127 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K:\DOCS\63127.TXT TERRIE
55 

lic. P.T. Barnum once said, there is a sucker born every minute. 

And I am not a linguist, but that seems a little unfair. 

He is saying the victims are suckers and in most instances, particularly with Wall Street, the victims are the suckees and the 

Madoffs are the suckers. And we are trying to find out why the 

SEC seems soft on suckers. And it is not going to be answered by 

you. We need them here and it creates at least some frustration for 

me because they are not here to answer the question. And I don’t 

know—neither of you can probably answer the main question that 

I want to ask, which is do you believe that all of the SEC members 

ought to resign? I understand. Next question. You mentioned—is it 

Mr. ‘‘Kotz’’— 

Mr. KOTZ. ‘‘Kotz.’’ 

Mr. CLEAVER. We need a holistic and comprehensive approach, 

you said earlier. Give me an alternative for what you think. You 

are there, you have been looking at what is going on. What do we 

need? If there is one thing you would like for Congress to do to empower someone, you or someone to do something differently that 

might eliminate the damage done to the suckees? 

Mr. KOTZ. I would rather be able to answer that question after 

conducting my investigation and review. I think once I do that, I 

will come up with more than one matter that could be done. I think 

we need to look very carefully at what happened. We need to look 

very carefully at the whole operation of the SEC and then make 

determinations. It is a little premature at this stage—the investigation just began 2 weeks ago—to make that determination. 

Mr. CLEAVER. How long do you think the investigation is going 

to last? Of course, I guess it is difficult to know how long it is going 

to last because what I am curious about is how do you do an asset 

search on in this issue? 

Mr. KOTZ. Yes. I understand the need for the investigation to be 

conducted very quickly, and so I do plan to do that. It is hard to 

give you a definitive timeline on how long our investigation will 

take place. Our investigation will yield recommendations about the 

SEC. Reviewing the assets would be what the enforcement division 

would do and for that I couldn’t speak to. 

Mr. CLEAVER. Mr. Harbeck, do you have any idea how you assess 

the assets? It seems to me like that is almost like unraveling these 

subprime loans. 

Mr. HARBECK. One of the first things the trustee for the liquidation did was get subpoena power for a wide variety of witnesses 

who will be testifying as to what happened to the assets. He has 

received these subpoenas and he has sent them out. 

Mr. CLEAVER. How do we find out who is owed what? 

Mr. HARBECK. On the who is owed what, the best source of information is the claimants themselves. 

Mr. CLEAVER. All right. Thank you, Mr. Chairman. 

Mr. KANJORSKI. Thank you very much Mr. Cleaver. The gentleman from Colorado, Mr. Perlmutter. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. Mr. Harbeck, the 

question was asked of Mr. Kotz whether he knew what a split 

strike strategy was. Do you know what a split strike strategy is? 

Mr. HARBECK. The only options trading I am familiar with is covered calls. So the answer is no. 

56 

Mr. PERLMUTTER. I guess kind of what we are talking about here 

and Mr. Paul sort of talked about personal responsibility. There is 

the personal responsibility piece, there is the government oversight 

piece. I am a bankruptcy lawyer as you are. And a lot of times people come up with terms. I have been hearing terms these last few 

weeks on this committee that I have never heard of before. So you 

have to say what is that, really, that is the personal responsibility 

side of this. Am I just getting a bunch of gobbledygook and they 

are quoting some kind of gambling strategy with some kind of terminology that nobody really understands which is what a Ponzi 

scheme is. 

I have a little black box, I am not going to tell you what is in 

the black box, but boy, it has great returns and the money comes 

out the other end. And that is what this Ponzi scheme was about. 

So there is a personal responsibility piece, but Mr. Ackerman, he 

has his retiree who is in trouble, I have firefighters and police officers who may have lost substantial amounts with respect to their 

pensions. I don’t know what the exact amount is. And my firefighters may be fighting with his retiree to take from this pool that 

your bankruptcy trustee is going to try to gather and then spread 

it out evenly among everybody. In your bankruptcy—and I know 

you didn’t have a specific amount, but I saw some numbers in 

there. Do we have any idea at this point what the liquid assets 

were that are in the bank that could be taken by the trustee and 

then any other kind of portfolio stocks that could be liquidated? 

Mr. KOTZ. The liquid assets, as far as we know, are in the neigh- borhood of $830 million to $850 million. Those have not yet all 

been secured, but the trustee is working on that. After that, it becomes a job of hunting them down to see source and application 

funds. 

Mr. PERLMUTTER. And just let us talk about the claw back and 

then I would like to move to Mr. Kotz really quickly. ‘‘Claw back’’ 

meaning if somebody—let us say they put $100,000 into Mr. 

Madoff’s investments and they received over time $50,000 back. Is 

the claw back going to take that $50,000 away from them even 

though they haven’t even gotten their investment back? 

Mr. HARBECK. The fraudulent transfer preference and the insider 

preference provisions of the Bankruptcy Code apply to that fund of 

customer property. So to take a more extreme example, someone 

who put in $1 million and took out $5 million over time may, within the statute of limitations, be called upon to pay back so that 

someone who put in $1 million and got back nothing would have 

something to share. It is a matter of equity. That has been the law 

since the case of Cunningham versus Brown which was the original 

Ponzi scheme case on fraudulent preferences and transfers. 

Mr. PERLMUTTER. So my firefighters who got nothing back—I 

don’t know what the status is. Let us say they got zero back. Mr. 

Ackerman’s constituent to—this retiree has received payments over 

time may end up being at odds? 

Mr. HARBECK. That is what the law is. The statute of limitations 

helps those retirees in one respect and the rule of reason also applies as well. 

Mr. PERLMUTTER. All right. Next question. Does your agency ever 

talk to the SEC about fears that you see from an underwriting kind 

57 

of a context about wait a second, what is a split strike strategy? 

We never heard of this stupid thing. 

Mr. HARBECK. In that particular instance, that didn’t come to our 

attention. I know that for example, in the Bayou Securities Ponzi 

Scheme, when you read the description of the investment strategy 

and you see the incredible returns that were theoretically made, 

those were red flags that a layman could see. The reason this 

scheme went on as long as it did, at least at first blush is that Mr. 

Madoff did not try to hit a home run. He tried to be a doubles hitter. He kept—he kept himself looking like a steady hand rather 

than a spectacular winner. 

Mr. PERLMUTTER. But here is where the SEC—we are all saying 

the same thing, is falling down on the job terribly. This return 

went on, this 8 to 19 to 12 percent went on forever, which is unlikely in good times and bad and the SEC didn’t pick up on it. And 

where I believe where Mr. Paul is just dead wrong is that my firefighter in Colorado or his retiree along the Gold Coast, they don’t 

know because they are sort of investing through other people or 

whatever. That is where the SEC comes in. And I am just curious 

why nobody brought this to anybody’s attention. That is what you 

are going to find out, Mr. Kotz? 

Mr. KOTZ. Yes. 

Mr. PERLMUTTER. Should the Bear Stearns incident have brought 

this Madoff kind of thing to anybody’s attention or are they just so 

different that the SEC problems are that different and then I 

would yield back, Mr. Chairman. 

Mr. KANJORSKI. Thank you very much, Mr. Perlmutter. 

Mr. KOTZ. Yes, I think they are different. Although we did find 

in the Bear Stearns case that there were red flags that were not 

followed up on, albeit different red flags. If we were to determine 

that there were red flags that weren’t followed up on, then I think 

that would represent some sort of pattern, although it would be different types of issues. 

Mr. PERLMUTTER. Okay. Thank you. 

Mr. KANJORSKI. Thank you. Next we will have the gentleman 

from Indiana, Mr. Donnelly. 

Mr. DONNELLY. Thank you, Mr. Chairman. Mr. Kotz, as the Inspector General for the SEC, you keep an eye on their operations, 

make sure they are doing things by the book. Do they, when they 

go into a firm, the enforcement arm, is there a checklist that they 

use where they say check, accounting situation makes sense, check, 

custodial relations makes sense. Is there any set form they use 

when they go in? Obviously, they are going to look at a number of 

things, but is there any list of, hey, here are the things we are at 

least going to make sure we check these 10 things? 

Mr. KOTZ. That would be that particular office. But as part of our 

investigation and audit, we would look at exactly that. I do believe 

there are policies in place, there are procedures. I don’t know if it 

is a check list per se, but certainly procedures as to what should 

be reviewed for different types of situations. What we plan to do 

is analyze what they were, determine whether they were triggered 

in this case; if they were triggered, why wasn’t the resulting action 

taken? And if there was nothing that was triggered, then why 

weren’t those triggered mechanisms put on the policies? 

58 

Mr. DONNELLY. I guess that is where I am leading to. We heard 

talk that the custodial relations didn’t make sense here, that the 

accounting relations did not make sense, that there was no registration. At what point if there—if these are being checked, do 

they look up and say five of these are completely out of whack. We 

have to go much deeper into this? 

Mr. KOTZ. In my view, it would be any one of those. 

Mr. PERLMUTTER. Right. And here we see one after another, after 

another and this goes on for year after year and is not found by 

the SEC, but by the fact that there is no money left. 

Mr. KOTZ. So if that is the case, either there are problems in 

terms of how the forms are being used or the forms are problematic. But there is a significant issue. 

Mr. DONNELLY. And as Inspector General, how would we find out 

as Congress, what forms there are, and we would love to get copies 

of those. 

Mr. KOTZ. We will certainly, as we produce our reports, incorporate the forms, cite them and analyze them to see what were the 

potential issues that one would look at and provide all of that information in our reports. 

Mr. DONNELLY. I guess part 2 of this question is what other organizations that the SEC audits, enforces also may not have had 

these different checkmarks ticked off? Who else has an accounting 

situation in and as the Inspector General, I hope that is—and I am 

sure it is, one of the things you are looking into now is where else 

are there red flags? So that no other person, in my home State of 

Indiana or any other State who works so hard to put a few bucks 

away that they are not going to put it in next week and get burned 

by another organization? 

Mr. KOTZ. No. We need to look at the forms that are problematic 

such that they need to be revised or whether the way the forms are 

reviewed is problematic such as we need to deal with that issue. 

So, yes, we are planning to look at way beyond just the Madoff situation because as you say, if the form was not appropriately used 

in that case, then it would be not appropriately used in many other 

cases, and in that way, we can actually see things that are coming 

in the future rather than what is often the case with an Inspector 

General office which your only ability is to see things after it was 

brought to your attention. 

Mr. DONNELLY. Right. It would seem that we almost have to go 

right back to ground zero with every organization that the SEC 

works with. 

Mr. KOTZ. I certainly think we need to look at how the SEC deals 

with those organizations, what is their process for examining or auditing or reviewing those organizations and figure out whether that 

process works. If this information is correct, it seems it didn’t work 

at all in this case. If it didn’t work in this case, then it likely 

doesn’t work in any case. So we need to look at that and suggest, 

recommend reforms to make sure that it does work. 

Mr. DONNELLY. I think—I know on my—personally for me, I 

would love to get a copy of what the SEC does for each of the inspections that they do, what steps are followed, what do they look 

into so that we can get an in-depth idea of that and Mr. Chairman, 

thank you for your time. 

59 

Mr. ACKERMAN. Mr. Chairman? 

Mr. KANJORSKI. Yes. 

Mr. ACKERMAN. Could I just share some information before this 

panel leaves? I know Mr. Foster is yet to have his turn. 

Mr. KANJORSKI. Yes. 

Mr. ACKERMAN. Something that I think that is of critical importance at this junction based on our colleagues’ questions, if I could 

have 1 minute, you are talking about red flags. Up until now, nobody has seen any of the monthly statements that Mr. Madoff sent 

out. And I think these will be made available by the law firm that 

is representing the witness that we will hear from. But for the sake 

of Mr. Kotz and the committee, people got these detailed statements at the end of the month. Mr. Madoff turned everything into 

treasuries, and we believe he did this with every account or almost 

every account. 

At the end of the reporting period with everything in treasuries, 

he did not have to report to the SEC. He escaped the scrutiny of 

your agency and perhaps nobody was watching him and the question that should be asked of all of the members of SIPC, all of the 

brokerages, how many of them at the end of the month show that 

they have turned every account into treasuries and aren’t reporting? There may be many other people who have come across this 

brilliant way of flying under the radar and basically reporting 

forms to no one owner we are holding treasuries and not securities. 

Thank you, Mr. Chairman. 

Mr. KANJORSKI. The gentleman from Illinois, Mr. Foster. 

Mr. FOSTER. Thank you. Inspector General Kotz, I was interested 

in a related question, but it has to do with whether the SEC has 

systematic written procedures for just dealing with complaints like 

Mr. Markopolos generated, that when one of these is received, are 

there written procedures for cataloging these, for assigning responsibility for follow up, for tracking them and eventually dispensing 

with these type of complaints? 

Mr. KOTZ. Yes. I believe the Enforcement Division does have procedures in place and what I am going to look at is whether those 

procedures are working, whether these procedures need to be revised or whether those procedures are simply not being utilized appropriately. 

Mr. FOSTER. And you will be getting us copies or references of 

just how you handle complaints so we can see where it got dropped 

in this? 

Mr. KOTZ. Absolutely. 

Mr. FOSTER. In Mr. Markopolos’s November 7, 2005, complaint or 

tip to you guys, they had the sentence here that says ‘‘due to the 

sensitive nature of the case I detail below, its dissemination within 

the SEC must be limited to those with a need to know,’’ which 

must be a very common situation because of the obvious effect on 

markets and so on. Do you have any idea of the order or magnitude 

of the number of people inside the SEC that were actually privy 

to the details of this? 

Mr. KOTZ. I don’t know that right now, although I would say it 

certainly seems as though there were sufficient people who knew 

about it, who were in a position to do something about it. So I don’t 

think it was a question about not enough people became aware of 

60 

it. It seems as though it was brought to the right place and that 

was the place that has the responsibility follow up. I don’t know 

exactly how many people. We will obviously talk to every person 

who became aware of it and find that out. But it certainly seems 

as though it was brought to enough people that action could have 

been taken. 

Mr. FOSTER. So this was more than 10 people and less than 100 

as a guess? 

Mr. KOTZ. Yes. I don’t know for sure. But I would think that 

would be the case. 

Mr. FOSTER. Okay. I guess—oh, one other question. What is the 

scope of your e-mails that you are looking into here? Are these limited to official SEC e-mails by current and former employees or do 

they include the private e-mails of current and former employees 

and so on? 

Mr. KOTZ. Initially, we requested all the public e-mails, the SEC 

computer e-mails. And you would be surprised how much information is on a government e-mail. Now, as we further gain information, we can try to take steps to get personal e-mails as well. And 

that may be something we need to do in a couple of cases here. 

Mr. FOSTER. All right. And you have the authority to do that? 

Mr. KOTZ. We can. We have in the past dealt with different 

Internet providers and gotten the information that we have needed, 

yes. 

Mr. FOSTER. Thank you. I yield back. 

Mr. KANJORSKI. Thank you very much, Mr. Foster, and now this 

panel is concluded finally. Thank you, gentlemen, very much. We 

are holding up a panel of three more and they have been kind 

enough to remain here and be available. May I ask the question, 

is there any travel difficulties with the next three panelists? The 

three witnesses, do you have any travel difficulties at all? 

Mr. METZGER. I have a 7:00 train. 

Ms. FRANKEL. I missed this plane, but the question is whether 

I could go to another one. 

Mr. KANJORSKI. Both to New York, the two trains? 

Mr. METZGER. Boston. 

Mr. KANJORSKI. Boston? Oh, my. Okay. We will try to get this 

completed as soon as we can. Let me get right on and welcome you 

to the committee. 

And let us get to the testimony first of Mr. Allan Goldstein, who 

is an investor with Bernard L. Madoff Investment Securities. Mr. 

Goldstein. 

STATEMENT OF ALLAN GOLDSTEIN, RETIREE AND INVESTOR, 

BERNARD L. MADOFF INVESTMENT SECURITIES 

Mr. GOLDSTEIN. Good afternoon, and thank you for the opportunity to testify today on my experiences with Bernard L. Madoff 

Securities, the impact that Mr. Madoff’s actions have had upon my 

family and myself. My name is Allan Goldstein and I am a human 

face of this tragedy. I speak not only for myself, but for the many 

people who have lost everything because of this Ponzi scheme. I 

held an IRA retirement account with Mr. Madoff’s firm for approximately 21 years. I am 76 years old and until my retirement, I 

worked in the textile trade buying and selling fabrics for use in 

61 

women’s apparel. My wife Ruth and I have been married for 52 

years. For the past 16 years, we lived quietly in the Taconic Mountain region of New York State. At this stage of our life, I could 

never have envisioned the financial devastation we are now suffering following the arrest of Mr. Madoff last month. In the blink 

of an eye, savings that I struggled my entire life to earn have vanished. Like many of Mr. Madoff’s victims, we are hardly super rich. 

I was born and raised in the Flatbush section of Brooklyn in a onebedroom apartment with my parents and sisters. 

I worked my way through New York University with two jobs to 

pay tuition. After school, I spent 2 years in the Army, including 16 

months in Korea. Ruth and I married in 1956. Our first home was 

a furnished basement apartment. My first job selling drapery fabrics paid $200 a month. With my scant savings accumulated over 

several years, I co-founded a textile company that became fairly 

successful through the 1970’s and 1980’s. Throughout that time, I 

always remained very conservative with my money, investing it 

prudently and keeping a good deal of it in money market funds. By 

the late 1980’s, I managed to accumulate approximately $1.8 million in my IRA. 

My accountant took note of the slow returns from the money 

market fund and recommended me to Madoff securities. He told me 

that Madoff generally achieved an 8 to 12 percent return per year 

and he employed a conservative proprietary hedging strategy that 

moderated market risk. In the late 1980’s, I transferred $1 million 

from my IRA to Madoff. I received account statements every 

month, showing gains of 8 to 12 percent annually. As this conservative strategy offered me peace of mind, I was willing to forego outside gains in boom years in favor of greater security. In the mid1990’s, I moved the rest of my IRA savings to Mr. Madoff, approximately another million and a half dollars. 

Since retiring in 2001 at the age of 69, we have used our savings 

at Madoff to pay our mortgage, taxes, and general living expense. 

By November 2008, our Madoff account had reached approximately $4.2 million in stated value. Ruth and I thought we were 

living the American dream. Our dream, as well as so many others, 

has turned into a nightmare. We had considered Madoff securities 

not a get rich scheme, but a buffer against risk. We entrusted Mr. 

Madoff with all we had and now everything I worked for over a 50- 

year career is gone. I have been forced to cash in my life insurance 

policies to pay my mortgage. We are forced to sell our home and 

with the real estate market the way it is, we probably will not find 

a buyer and be forced into foreclosure. I sit before you a broken 

man. 

Throughout my life, I always believed the American system of 

capitalism was the best regulator in the world and could safely be 

relied upon by investors like myself. But the Madoff scandal and 

the SEC’s inability to detect it despite repeated written and other 

warnings tells me that is not the case. I believe my government 

has failed us and we have suffered tragically as a result. As with 

many other Madoff investors, the past several weeks have been a 

difficult waiting period for my family and myself. The media has 

covered the scandal zealously but there are no real details on how 

62 

and when investors will see any recovery. For me, even 5 or 6 

months would be too late. 

We simply do not have years to wait. Our current reality has 

nothing to do with profligate spending or undue market risks. We 

conducted our affairs in good faith in the belief that the SEC would 

never allow this sort of scheme to be conducted. I pray that Congress will come to understand our plight and enact some emergency legislation to allow SIPC to loosen its standards and distribute funds as soon as possible, as well as establishing a restitution fund for the Madoff victims. 

We are not trust funds, hedge funds or banks. We are ordinary 

people who are victims of an incomprehensible crime who have had 

their lives turned upside down. We are turning to our government, 

our only help for relief and help that we desperately need. Thank 

you. 

[The prepared statement of Mr. Goldstein can be found on page 

96 of the appendix.] 

Mr. KANJORSKI. Thank you very much, Mr. Goldstein. It is certainly a horrible situation. 

Professor Frankel. 

STATEMENT OF TAMAR FRANKEL, PROFESSOR OF LAW, AND 

MICHAELS FACULTY RESEARCH SCHOLAR, BOSTON UNIVERSITY SCHOOL OF LAW 

Ms. FRANKEL. Thank you. Mr. Chairman, and committee members, thank you for the opportunity to speak about Ponzi schemes, 

trusting the securities market, and the need for regulatory reform. 

I want to emphasize that Ponzi schemes are common and they are 

common in the United States as well. In 2002, court cases, just 

court cases covered $9.6 billion of these schemes. So we have them. 

What is amazing in this case is the amount. 

Mr. BACHUS. I am sorry. Mr. Chairman— 

Mr. KANJORSKI. Yes. Could you pull your microphone just a little— 

Mr. BACHUS. Pull the microphone— 

Ms. FRANKEL. I am sorry. 

Mr. BACHUS. It’s not you. Just if you can pull the microphone towards you, it might be— 

Ms. FRANKEL. Okay. Can you hear me now? 

Mr. KANJORSKI. Yes. 

Ms. FRANKEL. It is the amount that was so enormous and this 

really raises concerns. How did Mr. Madoff gain the trust of sophisticated people who knew how to read and write or knew how to ask 

questions? I would say first it is his personality, second he paid relatively higher returns, just as was described here. Third, he targeted trusting groups, affinity groups and that is the way it done. 

That is the kind of fraud this is. Fourth, he conducted a business 

similar to legitimate businesses. It looked like a brokerage after all. 

He looked like that. 

And fifth, he drowned the truth in details. And that made the 

discovery tremendously costly and this is what happened, and I 

went through about 700 of these cases just in the United States— 

by the way, there are other places too—and found this kind of pattern. So the difficulty is verification. The difficulty is finding out, 

63 

out of all of these details, what is missing. And that is how he created undeserved trust. 

Let me say two words about trust. Trust is not gullibility. Trust 

must be reasonable. Trust is a reasonable belief that the other person is telling the truth, that the other person will abide by his 

promise and reasonable belief requires some verification. But this 

is what the investors in the Madoff situation failed to do and others are likely also not to succeed because of the costs of verification 

and therefore let me add one more thing. During the last 30 years, 

we have really dismantled the financial structure that we used to 

have. So we have regulation here about financial structure that 

doesn’t exist, that is very different. And he could combine a variety 

of structures together, which made the regulation also very, very 

difficult. 

So what kind of regulatory reform would help restore investors’ 

trust in the market which we must have. We must have this. We 

need deterrents and we need verification. I want to focus on 

verification. We heard a lot about deterrents. So first, we do not 

necessarily need more rules, especially not now. Rules deter, but 

they don’t really verify. And I was very happy to hear the questions 

here were about verification, not about rules, additional rules. And 

besides—and this is one of the problems, what would be the future, 

fraudulent activities, we don’t know. And preventive rules may prevent innovations, may prevent necessary flexibility. 

So I would not focus on rules now. The second one, do we need 

more prosecution? Sure. We need to prosecute. But prosecution 

doesn’t enhance trust, especially when it gives the impression that 

everybody in the financial business is a crook, which isn’t true. It 

isn’t true. So I would suggest that we need prosecution, but we 

should focus on verification. So first of all, we should verify. The 

investors cannot verify. The private sector gatekeepers do not 

verify. We have seen that time and again. The lawyers, the accountants, the rating agencies not now, they don’t verify. So we are 

left with the government. The government must verify. So let me 

ask who should be examined and how. And here I reach the point 

that I have said before. I believe that all financial actors that can 

affect the financial market regardless of what you call them and 

whether they are registered or not registered, all of them must be 

examined. The main test should be the amount that they hold, not 

necessarily whether they are broker-dealers or this or that or the 

other because we don’t have any more of the structure that we 

used to have. 

Annual examinations, I think, should be mandatory, but also 

flexible, subject to exemptions and changes. Examiners should be 

highly qualified, they should be well paid, they should be sheltered 

from influence by the regulated entities which will be large. And 

they should be interdisciplined or in collaborated groups of experts. 

They should find out how these large institutions work and how 

they profit. I would not necessarily suggest that they should become the FDIC and decide whether they profit rightly or wrongly, 

but just how. Government verification can be effective to support 

investors’ trust. 

If you look at the FDIC, it is effective. If you look at the Internet, 

the verification by banks, by e-trust, by good housekeeping works. 

64 

It is effective. So the very existence of examiners like the police on 

the beat may also enhance trust. The emblem that the person— 

that these institutions may have examined by the SEC might also 

be desirable by them and therefore given the resource, the SEC can 

contribute to bringing trust back into the markets. Not necessarily 

people into the prison, but also back into the markets. 

There are other benefits of examinations. They do not require restructuring the government. They are less expensive than 

verification through the courts. The problem is, I don’t think the 

SEC has today the amounts that are necessary to examine and 

maybe also the talent that is needed. We need people who really 

know the ins and outs of the market. And most importantly, we 

don’t have much time. I think mistrust, like trust, can become part 

of the culture and it is very hard to change. So congressional support of examinations can be introduced in a relatively short period 

of time and we need hands-on government policing fairly soon. And 

this is what we can achieve now. Thank you. 

[The prepared statement of Professor Frankel can be found on 

page 86 of the appendix.] 

Mr. KANJORSKI. Thank you very much, Professor. 

Mr. Metzger is an adjunct faculty member at Columbia University, Cornell University, New York University and Yale University. 

Mr. Metzger. 

STATEMENT OF LEON M. METZGER, ADJUNCT FACULTY MEMBER, COLUMBIA UNIVERSITY, CORNELL UNIVERSITY, NEW 

YORK UNIVERSITY, AND YALE UNIVERSITY 

Mr. METZGER. Mr. Chairman, Mr. Ranking Member, and distinguished members, thank you for inviting me to speak. I commend 

you for conducting a meeting on regulatory reform of the financial 

services industry. In these remarks, I wish to stress two things: 

first, the need for top-notch internal controls; and second, that 

operational risk is the great unspoken-about danger. With the 

chairman’s permission, I would like to submit my written statement for the record and summarize my principal observations and 

oral remarks. 

Mr. KANJORSKI. Without objection, it is so ordered. 

Mr. METZGER. My written statement includes the following 10 

specific recommendations for new legislation or regulation: 

One, there should be separate market-stability and market-integrity regulators. 

Two, certain financial institutions should provide complete and 

timely disclosure of positional information to a market-stability 

regulator. 

Three, the government should develop a model due-diligence 

questionnaire for investors. 

Four, advisers should be required to remind their clients that the 

volatility of returns or the absence thereof is not necessarily the 

sole or even appropriate measure of risk. 

Five, Members of Congress should mute the criticism of FAS 157. 

Six, all financial intermediaries should be required to disclose 

how they diversify both financial and operational risks. 

Seven, advisers should offer greater transparency to investors. 

65 

Eight, an independent third-party custodian should be used by 

all investment advisers. 

Nine, accounting firms that audit broker-dealers should be peer 

reviewed. 

And ten, the government should review whether investors benefit 

from soft-dollar arrangements. 

Studies of hedge fund failures have concluded that the majority 

of them folded because of a failure to manage operational risk, not 

because of a failed investment strategy. 

If investors could be given the tools for evaluating non-financial 

aspects of investments and could be convinced to use those tools, 

I am certain that vastly fewer of them would fall prey to investment fraud. 

Unfortunately, for many investors, due diligence begins and ends 

with reviewing the performance record. There is a tendency for investors to ‘‘chase returns’’ and to assume that past performance 

guarantees future results. 

The payoff for many hedge-fund strategies is a high probability 

of a small profit, and a low probability of a huge loss. Investment 

advisers use financial leverage to amplify returns. A manager with 

an impressive performance record may have achieved that success, 

not because of his investing skills, but because of his tolerance for 

risk taking. 

Increased transparency allows for better due diligence and monitoring. It can help the investor identify excessive contributions in 

her portfolio when she aggregates her investment, and any style 

drift by the investment adviser. 

One of the arguments made by the investment advisers who oppose transparency is that it could allow competitors to reverse engineer proprietary trading algorithms. I do not have much sympathy 

for those who assert this concern. Too many managers generate 

‘‘fake alpha’’ by delivering early above-average returns when the 

expected return over a longer period is much lower. 

Investors should be given enough information so that they can 

accurately asses the risk to their portfolio. 

Eliminating risk is impractical, because without risk there cannot be any reward. The aim should be to achieve an appropriate 

balance between risk and return. 

Diversification of assets and strategies, which reduces the risk of 

excessive concentration, is a necessary part of risk management, 

which must also address low-probability events. 

While we may not be able to undo the damage of the past, we 

should resolve: first, to contribute to the development of legislation 

and regulation that will protect investors from Ponzi schemes and 

other fraud. 

Second, to inform and educate investors regarding the dangers of 

making investment decisions solely on the basis of past performance, ignoring the importance, understanding the investment strategy, disregarding best internal control practices and piggy backing 

on smart money; 

And third, to inform and educate investors regarding the benefits 

deriving from diversifying both investment and operational risks 

and conducting proper due diligence. 

66 

Consider the extent of our contribution if, because of today’s 

meeting, investors will walk away from the next multi-billion-dollar 

fraud, avoiding the embarrassment and financial pain that inevitably follows. 

Regulatory reform of the financial services industry should be a 

high priority. Thank you for your leadership in this important matter and for inviting me to speak. I stand ready to assist you, and 

welcome any questions you may have. 

Mr. KANJORSKI. Thank you very much, Mr. Metzger. 

[The prepared statement of Mr. Metzger can be found on page 

114 of the appendix.] 

Ms. FRANKEL. I join my friend. I also would like to assist. 

Mr. KANJORSKI. Thank you, Professor. Professor Frankel, I didn’t 

get to introduce you. You are a faculty member of the Boston University School of Law and have been a witness before this committee on several past occasions. We welcome you back and sought 

your expertise on this particular issue. Maybe we could take Mr. 

Goldstein’s experience here and then look at your evaluation and 

opinion as it affects him. Why can we assume—first of all, let me 

say, in a capitalist system, there has to be risk. Do we all concede 

there is going to be risk? 

Ms. FRANKEL. That is right. 

Mr. KANJORSKI. Then the question of due diligence. Where does 

it lie, does it lie with the investor or does it lie with someone else? 

And I come to the conclusion it really is with the investor. Now, 

on the other hand, listening to Mr. Goldstein’s story, I am absolutely shocked in terms of an experienced businessman, successful, 

hesitant when you took some of your money from your IRA and 

gave to the Madoff investment but you retained half of it for a decade or so. What was the compelling reason? Was it the advice of 

your accountants that made you select the Madoff outfit or did you 

individually check them out in some way? How did you get to 

them? I am curious. 

Mr. GOLDSTEIN. It was on the advice of my accountant. 

Mr. KANJORSKI. The advice of your accountant? Is there any relationship? Was he a finder, your accountant, for Mr. Madoff? 

Mr. GOLDSTEIN. No. 

Mr. KANJORSKI. He just heard from other people who— 

Mr. GOLDSTEIN. I think he invested money with Mr. Madoff also. 

I was prepared for risk. I wasn’t prepared for fraud. 

Mr. KANJORSKI. Isn’t fraud a potential risk factor, though, to be 

considered? 

Mr. GOLDSTEIN. To my mind, no, because the securities industry 

is regulated by the Securities and Exchange Commission to prevent 

that kind of thing, in my mind. 

Mr. KANJORSKI. So you believe when someone—there is a Good 

Housekeeping seal of approval, if securities are issued and people 

say the Securities and Exchange Commission approved the 

issuance, you don’t have to go any further, you don’t have to look 

at the character, the personality of the people involved or their 

track record? 

Mr. GOLDSTEIN. These weren’t securities. These were—my statements showed only Dow Jones components every month. There 

weren’t any auditables— 

67 

Mr. KANJORSKI. And part of your testimony was a looking forward to some sort of relief, potentially from the government? 

Mr. GOLDSTEIN. Yes. 

Mr. KANJORSKI. If you had purchased General Motors stock 3 years ago and it fell from $80 to $2, do you believe that the United 

States Government should compensate you for that? 

Mr. GOLDSTEIN. Absolutely not. 

Mr. KANJORSKI. Why not? 

Mr. GOLDSTEIN. Because it is a risk that I took. 

Mr. KANJORSKI. What kind of risk did you take, stupidity over 

fraud, is it? 

Mr. GOLDSTEIN. I am really having difficulty answering that 

question. If I bought a stock, let us say General Motors with the 

expectation that it was going to burn money and continue to go up 

and it didn’t, then possibly I didn’t, do my due diligence, or possibly 

the market was adverse to me and I would understand that and 

accept that readily. But this was a fraud. These people took my 

money. 

Mr. KANJORSKI. Okay. How about you are walking down 5th Avenue and I sort of like the cut of your clothes, so I pull my little 

gun out and I say Mr. Goldstein, give me your wallet, do you want 

the government to recompensate you? 

Mr. GOLDSTEIN. No. 

Mr. KANJORSKI. Aren’t you entitled to believe that you should 

live in a safe place and it wouldn’t have happened except that a 

thief is allowed to carry on in the streets of New York? 

Mr. GOLDSTEIN. I also would expect that the police force or the 

law would protect me to the best of their ability. 

Mr. KANJORSKI. And they obviously didn’t because you were 

robbed. 

Mr. GOLDSTEIN. That is right. 

Mr. KANJORSKI. So should the State of New York or the government pay you for whatever you were robbed of? 

Mr. GOLDSTEIN. Possibly not, but possibly my insurance company 

would. 

Mr. KANJORSKI. You can insure against that I see. Couldn’t you 

have insured against dealing with fraudulent people? Isn’t there 

some insurance? I am not aware of what the insurance— 

Mr. GOLDSTEIN. I don’t have anything like that, but I always 

thought that SIPC would do that. 

Mr. KANJORSKI. What I am curious about, though, is that, having 

listened to some of the testimony today and having read the press 

reports of this, I am astounded not by you, Mr. Goldstein, I think 

you fall within the range of really less sophisticated than some of 

the people who were taken. We are talking about banks that got 

taken for billions of dollars and they have the responsibility of investing other people’s money and due diligence and they have regulators that come in and look at their accounts. That is the thing 

that shocks me. Do you see where my trend of examination, Professor, is going? Can we afford to represent that the United States 

Government or any government can stand behind people who are 

defrauded? 

Ms. FRANKEL. First, I want to say a word. Banks, there were 

eight banks that were caught in a Ponzi scheme, not very long ago, 

68 

a few years ago. So even banks can fall within such a scheme. But 

the question was whether we can afford to be protected. What exactly—I am sorry. Maybe I didn’t follow. What was the question? 

Mr. KANJORSKI. Is it reasonable to rely that the government will 

stand behind all fraud situations in a loss or is that concomitant 

with the risks of investment? 

Ms. FRANKEL. Not all. But fraud I agree. And the question is the 

cost. How costly is it to really find out the fraud. The government 

does have resources that investors don’t. It has the ability to force 

people to tell the— 

Mr. KANJORSKI. Let me stop you right there, Professor. Some of 

the people who had the fraud, some of these banks had billions of 

dollars and the SEC only has $900 billion to carry out all of its 

functions as a regulatory agency. So really some of these people 

who were defrauded have far more money than the government 

agency. 

Ms. FRANKEL. The banks, those people who were—had the money 

and also were regulated, they should not expect, I think, payment 

by the government. Taxpayers shouldn’t support them. But the person like this gentleman, who did his best, but—let me say one 

thing. We are a specialized community. We must depend on each 

other. If each of us has to become an expert in law, in medicine 

and so on, we won’t have the society we are having today. So we 

must rely on others. And if the cost of supervising and the cost of 

finding out frauds are too high, we won’t be able to have a financial 

system. That is what people are doing now. They are taking their 

money and running away. That is because they can’t supervise that 

much so it is a question of measure. 

Let me add one more thing: There are three building blocks to 

the financial system. One of them is morality and that is self-regulation, self-limitation of the people who hold other people’s money. 

The other one is forced morality and that is the law. The third one 

is protection. What we have done in the last 30 years is we have 

moved everything to self-protection and that is what we get. 

Mr. KANJORSKI. I would love to go on, but I am taking too much 

of my allotted time. The gentlelady from West Virginia. 

Mrs. CAPITO. I want to thank the witnesses. I want to particularly thank Mr. Goldstein for coming before the committee today. 

I know it is a particularly difficult time for you and you have put 

a human face on this. And I have just a couple of specific questions, and then just generally a couple of questions. Did you actually interact personally with Mr. Madoff at all during any of these 

transactions? 

Mr. GOLDSTEIN. Never met him. 

Mrs. CAPITO. Never met him. Were you in a circle of friends or 

anything who other folks were investing with him and so you were 

aware of other larger profits that were being made and that type 

of thing? 

Mr. GOLDSTEIN. I knew of no one in Madoff when I first put my 

money in except my accountant who had money there. But over the 

course of years, I have come across a lot of people who are friends 

of mine who had money there also. 

Mrs. CAPITO. And during the course of the 10 years, your money 

was in this— 

69 

Mr. GOLDSTEIN. 21 years. 

Mrs. CAPITO. Excuse me. 21 years. Did you draw out and receive 

dividends and benefits all those kinds things in a regular manner 

that you would have expected from another investment account? 

Mr. GOLDSTEIN. Yes. Since I have retired, I took out living expenses. I didn’t take out any huge sums of money. 

Mrs. CAPITO. Okay. Thank you. I would like to ask—I am kind 

of getting a conflicting message from the other two panelists, because Ms. Frankel says no more rules and Mr. Metzger is saying 

more regulation. Are you agreeing or disagreeing or is a regulation 

different than a rule? And how is that, in your minds, divergent 

or together? 

Ms. FRANKEL. May I say something? I don’t suggest that we don’t 

need regulation or rules. They are the same as law. I think they 

should be the second or third in line, which would be done now 

should be examinations rather than rules. I am concerned about 

rules that would limit the ability to develop. So now the rules that 

Mr. Metzger suggested are different. 

Mr. METZGER. Yes, I am talking about rules of disclosure. I don’t 

think those are heavy-handed rules. I think also the way our society has developed, the lines of separation between certain types of 

financial products at one point were quite clear but now they are 

blurred. The approach toward regulation should change. I am not 

saying we have to have additional regulation, but I think that 

there ought to be a market-integrity regulator and there ought to 

be a market-stability regulator. Right now, information that the 

market stability regulator ought to have, that regulator doesn’t receive. So, I don’t think that this is a major change in regulations. 

These are just slight modifications that I think will improve things. 

Mrs. CAPITO. And I will agree with that in I think the sophistication of the financial instruments that are at work here are well beyond somebody who is reading their monthly statement can begin 

to imagine, much less how to regulate or keep track of what is actually going on. So I think that we need something that can move 

quickly and can adjust from time to time probably more quickly 

than we have been able to adjust at this point. Would that be an 

accurate statement— 

Mr. METZGER. Yes, it is. And I would also say that some of my 

legislative suggestions relate to education of investors as opposed 

to regulation of investors. 

Mrs. CAPITO. I think that is an excellent suggestion as well. 

Going back to Mr. Goldstein as an individual investor, he was basing his very intelligent decisions on the fact that things that were 

before him were true, that the standards that Mr. Madoff had and 

the certifications that he had and the bond—or the ratings that he 

had, that all of these things in fact represented a true and honest 

portrayal of an honest professional. And I am sure the law is going 

to figure out how dishonest or whatever, but it is so difficult I 

think from an advised’s point of view when the SEC and other regulators have come in and said, okay, okay, okay, you trust in that 

and then when you find out that is all a fraud, you really, I think— 

I think you just have to throw your hands up and be so frustrated 

by that because as an individual, it would be very difficult to unwind that on your own. And so— 

70 

Mr. METZGER. May I respond? 

Mrs. CAPITO. Yes. 

Mr. METZGER. In my written testimony, I referred to a due diligence questionnaire that the Alternative Investment Management 

Association has produced. I think if investors were to look at this 

DDQ and then question prospective investment advisers and have 

them respond to the survey, they would learn so much more, and 

it is likely that there would be far fewer frauds of this type. 

Mrs. CAPITO. But the fact of the matter is a crook is a crook, and 

if somebody is going to lie, they are going to lie. 

Mr. METZGER. No. There is a question of who is your custodian 

and the adviser says, ‘‘I am the custodian,’’ there you go. 

Ms. FRANKEL. And if the adviser says the custodian is in the 

Cayman Islands and in the Virgin Islands, what would you do 

then, go— 

Mr. METZGER. That is a red flag. 

Ms. FRANKEL. That is a red flag and what do you do next? 

Mrs. CAPITO. There were a lot of red flags in this case unfortunately, and I yield back. 

Mr. KANJORSKI. The gentleman from North Carolina, Mr. Watt. 

Mr. WATT. Mr. Chairman, I think I am going to yield my time 

to Mr. Ackerman since he has a constituent who has been directly 

impacted by this. 

Mr. KANJORSKI. Mr. Ackerman, go to it. 

Mr. ACKERMAN. Thank you very much. Mr. Watt. Thank you 

very much, Mr. Chairman. Actually let me state for the record that 

Mr. Goldstein is not a constituent, he is not one of those very 

wealthy people to whom I refer. He does not live in my district. But 

of the many, many cases that I heard of, many of whom are constituents, a number of whom have lost over half a billion dollars 

and some of whom can keep their life together and move on after 

that kind of thing, even though the public has no great sympathy 

for somebody who has lost at least a million dollars, I want to tell 

you that Mr. Goldstein is the typical American dream to whom everybody aspires to be. And that is where the problem lies and that 

is why I suggested him as a witness, Mr. Chairman. 

Mr. Goldstein’s statement—and people have asked and a colleague of ours mentioned if it seems to good to be true, it is probably not true. And other people have said people should do due diligence and they should look into these things and they should be 

smart and these people have so much money, why aren’t they that 

smart and we should have no sympathy for them. If one looks at 

Mr. Goldstein’s statement—and I am sure now a lot of people will 

now that it is part of the record—you will see a conservative prudent person. 

The first generation Americans grew up in one bedroom with sisters and parents all in one bedroom and scrimped and saved in 

what we used to call the into the day he could help his children 

and help his grandchildren and now find that he might lose his 

house because he is going to be underwater pretty soon if he 

doesn’t find a buyer and then can put the house on the market. If 

no help comes—because he has already taken—Mr. Goldstein, how 

much do you have left in cash value in your life insurance? 

Mr. GOLDSTEIN. None. I have taken it all out. 

71 

Mr. ACKERMAN. You took it all out for what purpose? 

Mr. GOLDSTEIN. To pay my mortgage, to pay my living expenses. 

Mr. ACKERMAN. Closer with the microphone. 

Mr. GOLDSTEIN. I have none left. I took it all— 

Mr. ACKERMAN. A little closer, please. Turn it on. 

Mr. GOLDSTEIN. I took out all the money from my life insurance 

policy since it was only my only liquid asset. I use it to pay my 

mortgage, to buy food— 

Mr. ACKERMAN. What month are you paid up to on your mortgage? 

Mr. GOLDSTEIN. My mortgage is paid through January. 

Mr. ACKERMAN. What is your mortgage payment a month? 

Mr. GOLDSTEIN. About $5,900 a month. 

Mr. ACKERMAN. Can you pay it next month, can you pay it the 

following month, can you pay it for the next 3 months? 

Mr. GOLDSTEIN. I think that I can pay my mortgage for the next 

2 months, February and March. 

Mr. ACKERMAN. Then what happens to your April payment? 

Mr. GOLDSTEIN. I just can’t make it. I don’t have any money. 

Mr. ACKERMAN. And if you sell your house, where does that 

money go? 

Mr. GOLDSTEIN. If I sell my house, it will pay the mortgage. But 

I don’t know I will be able to sell. There is no market right now 

for homes where I live. I live in upstate New York. 

Mr. ACKERMAN. And then you pay the mortgage company if it 

covers the mortgage. And then where do you live? You just sold 

your house. 

Mr. GOLDSTEIN. My daughter in California has told me that she 

would put my wife and myself up in her house. 

Mr. ACKERMAN. How does that make you feel? 

Mr. GOLDSTEIN. At this stage of my life, the thought of living in 

my children’s home is not humiliating but it is very sad. It is terrible. Terrible. So I have to end up my life living off the benefits 

of my children. 

Mr. ACKERMAN. When your statement from Mr. Madoff that you 

have scrutinized every month—and I have only spoken—I have just 

met you today, spoke to you for a few minutes before the hearing. 

But looking at your statement, thank you for allowing us to make 

this public. And I appreciate your wife’s willingness, although she 

could not be strong enough to be with us today, that she has allowed— 

Mr. GOLDSTEIN. My wife is going through severe emotional problems because of this. 

Mr. ACKERMAN. I am sure. And we appreciate her and the fact 

that you are willing to do this so that we can bring public light to 

this. But your statement shows a prudent investor. This is the face 

of somebody who has invested everything over 50 years starting 

from zero in things like Fidelity Spartan, Wal-Mart, Exxon, Intel, 

Johnson & Johnson. This is this month. JPMorgan, Coca-Cola, 

McDonald’s, Merck, Microsoft, Oracle, PepsiCo, Apple, Pfizer, Abbott Laboratories, Procter & Gamble, AmGen, Philip Morris, Bank 

of America, Qualcomm, Citigroup, Slumberjay, Comcourse, AT&T, 

Conoco Phillips, United Parcel, Cisco Systems, on and on and on, 

for ages. 

72 

Mr. KANJORSKI. May I ask a question? Is that Mr. Madoff’s statement? 

Mr. ACKERMAN. No. 

Mr. GOLDSTEIN. This is Mr. Madoff’s statement, my monthly 

statement from Madoff. 

Mr. KANJORSKI. Telling you what you are investing in? 

Mr. ACKERMAN. This is Madoff’s statement to Goldstein, to Mr. 

Goldstein. This is his IRA, this is his nest egg, this is his grandchildren’s tuition to college that he is going to get closer to than 

he ever thought he would be, fortunate or unfortunate and tragic 

although that may be. But this shows a prudent investment. Mr. 

Madoff, the thief that he is, was brilliant at what he did, people 

should understand. He showed you what he gambled on and what 

you won after the fact because he sent you a statement after the 

trading day was over. If he bought Exxon and you were flying high 

on the 14th, he knew the price that you bought it at, put it down 

and sold it at the 15th, knew the profit you made. If Mr. Goldstein 

checked out or anybody else checked out their statements, to the 

penny this checked out. At the end of the month, swept all of this 

money all—whatever it adds up to, $4 million or somewhat less, 

swept it into treasuries. How does a man—I will ask the other witnesses. They are the sophisticated professionals. Is there any way 

that the Mr. Goldsteins of this world, and there are numbers of 

them. They are more than the high profile—and I won’t name the 

people. You can read them in the paper who they are—that any of 

these people, sophisticated or average people, could have checked. 

The Inspector General is at a loss. He is just starting an investigation and he is scratching his head in front of us. He is talking 

about the Enforcement Division investigating this of the SEC. The 

SEC is supposed to—who was watching? If none of them could find 

this, how could Mr. Goldstein? 

Mr. GOLDSTEIN. I must add to this that on more than one occasion, I took my statement, and I sat down with the stocks index 

of The New York Times, and it checked out. 

Mr. ACKERMAN. Of course it did. He told you you were betting 

on a horse race after the race was over. 

Mr. KANJORSKI. Let me ask the next question. He converted to 

treasuries every month? 

Mr. ACKERMAN. He did nothing. He took Mr. Goldstein’s money, the $4 million that Mr. Goldstein thought he had saved with all his 

dividends, interest, etc., and he then paid everybody their 8 percent 

or 10 percent a year, and then he went to Mr. Jones and said, have 

I got a deal for you. Look, I got this guy and that guy and all these 

names of all these show business people and everybody— 

Mr. KANJORSKI. But you said to avoid some sort of inspection 

that would have been triggered by the SEC? 

Mr. ACKERMAN. Yes. What he did, at the end of the month— 

Mr. KANJORSKI. At the end of the month he converts everything— 

Mr. ACKERMAN. He took all these stocks that he never bought. 

Mr. KANJORSKI. Right. 

Mr. ACKERMAN. These stocks don’t exist. You can’t check it out. 

They are in nobody’s name. They are not in the street name, in 

Madoff’s name. Maybe Madoff had some stocks in his street name. 

73 

We don’t know that. But for the most part we think what is going 

on here, he just paid you off in new money that he took in. That 

is the Ponzi scheme. He got 10 million investors. He wouldn’t touch 

you. And every once in a while, he took one of these wealthy people 

who are all in the same country clubs in Palm Beach and the Gold 

Coast of Long Island. This guy is making 10 percent for 20 years. 

You would be stupid not to invest. That is the track record that you 

checked out with everybody who is brilliant, with everybody who 

is making money. 

And I have spoken to constituents of mine who had millions, who 

aren’t blinking an eye. They lost it and so what. This one guy says, 

I called up to check it out one day and I said Bernie, I need 

$500,000. He said, I will wire it in your account. He said the next 

morning, there was $500,000. He says, the next morning, I ran to 

the bank so quick to put it back in. Why should I lose 10 percent? 

I checked it out. The money is there. This guy was brilliant. And 

at the end of the month all of this stock that you thought you had, 

he then shows you at the end is in treasuries. Sold everything, put 

it in treasuries. You can’t check out treasuries. How many people 

say they should have checked? I said, where is your money? They 

said, I am in treasuries. I said, how do you know it is in treasuries? 

Because I told them to buy treasuries. I said, what if you sent it 

to X, Y, Z, name the 10 biggest brokerage houses you know and 

they are all crooks. They are not, but let’s say they are. And you 

sent them $10 million and said, put in treasuries. Did you ever see 

a treasury bill? You get a statement that says he has a treasury 

bill. All of the Mr. Goldsteins of the world got statements. They got 

all of this paper that said they have treasury bills. At the end of 

the month, he figures I can take out $4 million. I have it in treasuries, or whatever it is. 

Mr. KANJORSKI. So let me just interrupt you for a second. This 

is like reporting the race after it is run. If you ran through all this 

stock and took the day he claims that it was sold when in fact it 

really wasn’t, it would add up to the amount he purchased through 

treasuries and it would show the profit. 

Mr. ACKERMAN. To the penny. But thousands of people. We don’t 

know the number. Maybe 3,000 or so people. That Mr. Madoff 

could do this scheme himself, he had to be a lot smarter than the 

genius that some people think he was. The mad genius, the evil genius. That is part of what the Inspector General and the other law 

enforcers are going to find out. But it is not Mr. Goldstein’s fault. 

This is not a case where you can blame the victim for not doing 

due diligence. There is nothing anybody could have done. 

Mr. METZGER. This was a sophisticated fraud. Most sophisticated 

investors would not have been able to detect that. 

Mr. ACKERMAN. The SEC couldn’t detect it, the watchdog, the 

watchdog of watchdogs, couldn’t figure out what the crime was. 

Mr. METZGER. This was not a garden-variety case of alleged 

fraud. 

Mr. ACKERMAN. No. But we don’t know how many mini-Madoffs 

there are out there. We don’t know how many people sweep all of 

their money into treasuries. And hopefully Mr. Kotz is going to ask 

that question because they don’t have to report to his agency. They 

say, I am holding those securities or I am holding very few securiVerDate Nov 24 2008 13:25 Jan 24, 2011 Jkt 063127 PO 00000 Frm 00079 Fmt 6633 Sfmt 6633 K:\DOCS\63127.TXT TERRIE
74 

ties. I don’t have to report it to you because it is all in treasuries. 

This is the dilemma of Mr. Goldstein. Mr. Goldstein, who is not a 

cop, he is not an investigator, he is not a very sophisticated investor but he is a smart man who saved and did the prudent thing. 

And this is the face of the investors that we are talking about. 

But he did think that he had one thing. He had the confidence, 

as he has told us, in his government, that his government made 

sure that this has a seal of approval to at least $500,000. At my 

college, you know what we did and we insisted that Mr. Paulson 

do when people we wanted them to have confidence and not have 

runs on the bank because they had more than that? We raised it 

to $250,000. So we insured those accounts for $250,000 so people 

with that kind of money thought that they at least had that kind 

of protection and they should move the money into different accounts. Right? With brokerage accounts, some people said why am 

I in a bank with $250,000 if I have $300,000? I will put it in a brokerage account instead of my banker’s account and I am insured 

for $500,000. Mr. Goldstein is one of the thousands of people who 

were told that seal of approval, as it was called, that is given by 

our government, that is backed up presumably by people who are 

watching, the real cops, the real enforcers, or so we thought—and 

I did mean Inspector Clouseau instead of Jacques Cousteau. Forgive me, Jacques. So I thought it was guaranteed that if Mr. Goldstein can get his $500,000 worth of insurance and so many other 

people, at least they would have a temporary lifeline plus the rest 

of the assets that might be there. 

Mr. KANJORSKI. Thank you very much, Mr. Ackerman. I will now 

recognize the gentleman from Alabama for 5 minutes. 

Mr. BACHUS. Thank you, Mr. Chairman. Mr. Goldstein, your wife 

is obviously emotionally torn up by this. I am sure it has affected 

your health and hers. When you watch TV and you realize that Mr. 

Madoff is still going home every night to his luxury apartment, 

how does that make you feel? 

Mr. GOLDSTEIN. I have to answer that. The first 2 or 3 days after 

the disclosure, I was very, very angry, very angry. And I decided 

to myself that the only way that I could survive this as best I could 

was to get rid of the anger. So I don’t care if Mr. Madoff goes to 

jail. I don’t care if he sits in his apartment. It doesn’t—it won’t affect my life one way or the other. 

Mr. BACHUS. That is a good—I get a good lesson in forgiveness, 

although I am not sure that he should be spending the night in his 

luxury apartment. I am not sure what message that sends to other 

folks who would do this type of thing. 

Mr. Ackerman called him an evil genius. Basically what he did, 

he made this stuff up every month. 

Mr. GOLDSTEIN. I don’t think one man made all this up, however. 

Mr. BACHUS. Oh, I agree. I agree. I think if he were in jail, he 

may be more likely to cooperate. But maybe that is not true. 

Mr. Metzger, you said it is not a garden variety type of fraud. 

A lot of people who have committed much less of a crime than this 

are in jail today, and went straight to jail. Does it bother you that 

Mr. Madoff is free on bond? 

75 

Mr. METZGER. I don’t know why the government reached that decision. I cannot defend the government’s—the way the government 

negotiated with him. 

Mr. BACHUS. How about you, Ms. Frankel? Or Professor. 

Ms. FRANKEL. I don’t think it makes that much of a difference. 

I would like to see him in jail. On the other hand, I don’t want to 

pay for his food and keep. What I would like is to make him live 

the way the other people—I would like his money rather than his 

discomfort. And then the discomfort will come. 

Mr. BACHUS. You know we don’t seem to apply that standard to 

other people who steal much less than that. We don’t just ask for 

the money back. 

Ms. FRANKEL. Then maybe we should start. We should start if 

we take other people’s money—the point is this, he took other people’s money and then they are—he should be trustworthy. 

Mr. BACHUS. They are suffering worse tonight than he is. I guess 

that is my point. I am not— 

Ms. FRANKEL. He is ruining or he has helped continuously to 

ruin a very important part of this country. 

Mr. BACHUS. Including charities and schools. 

Ms. FRANKEL. The whole financial system. 

Mr. BACHUS. I for one am outraged that this man continues to 

walk the street and go home at night, and I consider myself a pretty forgiving person. But I think that the message it sends about 

law enforcement and the even-handedness and equal protection of 

laws is a dangerous message. 

Ms. FRANKEL. I agree. 

Mr. BACHUS. Thank you. You know we are talking about what— 

Mr. Goldstein what you did and whether you should have done 

something different. I wrote down some of the things that I would 

have done. One of them, I would have found a good investment adviser with a good track record, and that was Mr. Madoff. In fact 

he appeared to be about as good of—had a great track record, 

was—and then you know I, like you, I would have looked at my 

statements to see if he was investing it wisely and if I was getting 

a good return. And every month it would be—I would—I would 

have the opinion that I had done the right thing, and that would 

be reinforced by these made up statements. And you did that, too. 

You looked at them. And obviously he was investing in what I have 

heard other people say, and you, a lot of index funds which is diversification. 

Ms. FRANKEL. That is right. 

Mr. BACHUS. And treasuries, which is, what is safer than treasuries? So yes, I can’t really—it is hard to understand that you 

could have this massive of a fraud for this period of time and have 

complaints come before the regulators and yet them not discover it. 

It just blows my mind. 

Mr. GOLDSTEIN. I would just like to say one thing. I never 

thought of fraud in this. It was an investment. It looked perfectly 

fine. I was getting a return. But somewhere inside of me was the 

thought that this was a regulated industry, and the government 

was behind the regulation. And it wasn’t. It wasn’t. The red flags, 

the warnings, the letters were just pushed aside. So the end result 

was people like myself are suffering because of that. 

76 

Mr. BACHUS. I agree. Thank you very much. 

Mr. GOLDSTEIN. Thank you very much. 

Mr. KANJORSKI. Thank you very much now. Do you have that 

train to catch at 6:30? Is that correct? 

Mr. METZGER. Mine is at 7:10. 

Mr. BACHUS. I think you have already missed it. 

Mr. KANJORSKI. The question is— 

Mr. METZGER. I am willing to stay. 

Mr. KANJORSKI. Professor? 

Ms. FRANKEL. I am willing to stay. 

Mr. KANJORSKI. And Mr. Goldstein? 

Mr. GOLDSTEIN. Yes. 

Mr. KANJORSKI. It would be very helpful because this does put 

a human face on a problem. And it is shocking. So I am very 

pleased we will be able to get—I will even start with Mr. Scott, 

give him the first 5 minutes. 

Mr. SCOTT. Thank you, sir. I appreciate that. First of all, let me 

thank you for your patience and waiting. You have been here since 

2:00 and it is good to see that you have stayed because, in fact, 

yours is probably the more important of the panels from my perspective. 

Mr. Goldstein, let me just talk with you for a second. How much 

money are we talking about that you have invested with— 

Mr. GOLDSTEIN. I invested with Madoff two different times. The 

total—this was 20-some odd years ago. But the total was approximately $2.5 million. 

Mr. SCOTT. That is the total leading up after 20 years of investment of your money. So you had a 20-year relationship with 

Madoff? 

Mr. GOLDSTEIN. Yes, sir. 

Mr. SCOTT. And if I may ask, how did you get into this relationship? Were you referred? Did you know him? 

Mr. GOLDSTEIN. I was referred by my accountant, who also had 

an account with Madoff. 

Mr. SCOTT. Okay. Your accountant wasn’t by any chance their 

auditor? 

Mr. GOLDSTEIN. No, no, no, no. 

Mr. SCOTT. So this $2.5 million that you had invested and lost 

with him over a 20-year period, now what did you see from this 

over this 20-year period? Did you engage in any selling and buying 

with him? Were you able to see—of the $2.5 million that you invested, what was a gain to you? What did you see for that? 

Mr. GOLDSTEIN. I had a yearly return, which was give or take 

10 percent. 

Mr. SCOTT. Okay. 

Mr. GOLDSTEIN. It was so steady. Over the years there was never 

any hint of impropriety. What I did was, I mortgaged my house, 

lived on that money, and let the Madoff money just increase in 

value and the account got bigger. From my $2.5 million, I have 

$4.2 million on my November statement. 

Mr. SCOTT. 4.2 million in your November statement. 

Mr. GOLDSTEIN. Yes. That is what he told me I had. Obviously 

I didn’t have it. 

77 

Mr. SCOTT. You didn’t have that because of the scheme. Let me 

ask you, Ms. Frankel, if I may, moving forward, you made a recommendation and I would like for you to just expound on it for a 

moment. When you said that rules, the regulations, I think the 

heart of your testimony was that we should verify. Can you explain 

what you are talking about when you say verify and how we would 

do that? Are you Ms. Frankel? 

Ms. FRANKEL. Yes. 

Mr. SCOTT. Yes, Ms. Frankel. 

Ms. FRANKEL. The government has a right to demand proof. And 

in this case, that is the way mutual funds, for example, are regulated. They are—there is a whole slew of rules. And it is not merely 

that you have the money in a certain—with a certain bank. But 

you have all sorts—you have requirements for the—you have a requirement for the insurance of the employees. You have a lot of requirements. As a matter of fact, the Investment Company Act of 

1940 and the Investment, even the Investment Advisers Act of 

1940 have rules. But these—Mr. Madoff was a broker. Brokers are 

not subject to many of these rules. And they were not—that is— 

that is number one. Number two, I think we should have more examination. In other words, not merely they are saying, yes, we did 

put the money in the bank. But somebody should come there and 

examine and say, show me. Yes. I was at the SEC for just a year 

and a half. I was on loan. And I went to these examinations. They 

were for other things, yes, they were for soft dollars. We went in. 

We said hello, hello. And then we said, show us, yes. And we asked 

questions and the people there said for about 2 years. 

Mr. SCOTT. Let me ask you this— 

Ms. FRANKEL. Sorry. 

Mr. SCOTT. What do you think a step in that direction would be 

if we in one part of the process, if we brought broker-dealers, regardless of their size, make sure that they are audited by auditors 

that come under the jurisdiction of the Public Accounting Board? 

Ms. FRANKEL. Broker-dealers now even assert that they are not 

fiduciaries even though they hold other people’s money. Yes? And 

I think the regulation of broker-dealers ought to change. And it is 

more complicated but it ought to change. 

Mr. KANJORSKI. Thank you, Mr. Scott. Mr. Sherman, for 5 minutes. 

Mr. SHERMAN. Thank you, Mr. Chairman. Mr. Goldstein, your investment was directly in Madoff. And so as I understand the position of SIPC, you stand to—you have a good claim for $500,000. 

Mr. GOLDSTEIN. God willing. 

Mr. SHERMAN. Yes. On the other hand, filings have been made 

on behalf of those who invested indirectly, where you know a fund 

manager would take the money of 20 people and put it into one 

Madoff account, and the old-fashioned position on that was those 

20 people are all going to have to share $500,000. People in that 

situation have gone before the courts to say, no, we are 20 people. 

Treat us as 20 people and not as one account. If that happens, 

SIPC is way bankrupt. 

Are you and the direct investors taking any position with regard 

to the claims of the indirect investors? 

Mr. GOLDSTEIN. Not that I know of. 

78 

Mr. SHERMAN. Okay. Ms. Frankel, I will go a little bit outside the 

Madoff situation because sophisticated investors at least go with a 

guy who looks like he is a broker or an investment adviser. A lot 

of people in my district may invest in a variety of other flim-flams 

where—most people in my district don’t know what a private placement memorandum is supposed to look like. 

Ms. FRANKEL. Right. 

Mr. SHERMAN. The SEC takes the position that they will surf the 

Web looking for problems. But they will never send an e-mail to 

someone who is offering an investment unless they say, hi, we are 

the SEC. We are investigating you. But they won’t pose as a potential investor. So would it make sense for the SEC to pose either in 

person or online or both as a prospective investor and hear the 

pitch not from the people who are registered investment advisers, 

registered companies with the SEC but with the folks who are 

stealing from the less sophisticated? 

Ms. FRANKEL. This is a criminal law question of entrapment. The 

question is, to what extent are these people entrapped? 

Mr. SHERMAN. It is hardly entrapment to say—the problem we 

have is the SEC says, we don’t want to be a law enforcement agency, which begs the question, who? It certainly is not entrapment if 

you see something online, ‘‘double your money in 6 months, e-mail 

me now and find out how’’ to say, hi, my name is Jack Smith. I 

would sure like to double my money in 6 months. But these hearings are going to create—I think it was Mr. Paul, whom I usually 

don’t agree with, who said that one of the functions of the SEC— 

one of its effects is to create an image in the society that things 

are safe. Go try to find the right investment. And of course things 

are particularly unsafe for those who are not investment purveyors. 

Ms. Frankel, what is your comment on that? Or, excuse me, Mr. 

Metzger. 

Mr. METZGER. I wasn’t following the question. Do you want me 

to tell you what I think about impersonation? 

Mr. SHERMAN. Certainly, when it comes to enforcing our laws 

against prostitution, police have a certain approach of impersonation. The SEC will not impersonate an investor even though local 

cops in my district will impersonate either side of the oldest professional transaction. 

Mr. BACHUS. Is that a concern for you, Brad? 

Mr. SHERMAN. I am more likely to lose in an investment scam. 

But go on. 

Mr. METZGER. That is a public policy decision. I am troubled by 

the idea of impersonation. I understand what the benefits are. It 

is a moral question. It is an ethical question. 

Mr. SHERMAN. Moral, so it is moral— 

Mr. METZGER. On the one hand, you have potential fraudsters, 

and you want to protect less sophisticated investors from these people who are committing fraud. 

Mr. SHERMAN. I believe my time has expired. 

Mr. KANJORSKI. Take the response, though. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

Mr. METZGER. So, on the one hand, there is this idea of just— 

I just feel uncomfortable sanctioning impersonation. It just doesn’t 

seem right. So you have to weigh the benefits. It is costs and beneVerDate Nov 24 2008 13:25 Jan 24, 2011 Jkt 063127 PO 00000 Frm 00084 Fmt 6633 Sfmt 6633 K:\DOCS\63127.TXT TERRIE
79 

fits. Standing on one leg, I can’t give you an answer right now 

about how I feel about it. 

Mr. SHERMAN. Every law enforcement agency does it. The SEC 

refuses to be a law enforcement agency. And I yield back once 

again. 

Mr. KANJORSKI. Thank you, Mr. Sherman. We now have Mr. 

Green of Texas. 

Mr. GREEN. Thank you, Mr. Chairman. Mr. Goldstein, my heart 

goes out to you. And I wish you and your wife the very best. My 

suspicion is that you are not here today because you lost money as 

a result of the stock market going down. You are here because you 

lost your money by way of a fraud. If you had invested the same 

amount of money and the stock market just didn’t serve you well, 

my suspicion is you would not be here today. Is that a fair statement? 

Mr. GOLDSTEIN. 100 percent correct. 

Mr. GREEN. So I beg that you tell those who would say you could 

have been a better watchdog, it is your responsibility to protect 

yourself. We here on the committee have our opinions about it, and 

we have expressed them. I think my colleague Mr. Ackerman expressed himself quite well. And he made a great case. But I think 

it is important for you to have a message for those who say that 

you could have protected yourself and that we leave it to you to investigate and to ascertain whether or not you are being defrauded. 

Mr. GOLDSTEIN. Is that a question? 

Mr. GREEN. Yes, sir. Would you give—what would you say to 

them? 

Mr. GOLDSTEIN. I will say exactly what I said before. I invested 

my money. The market goes up, the market goes down. I understand that. But I also invested my money, knowing somehow that 

the government, the SEC, whatever laws were involved, were protecting me from fraud, not from market volatility. Market volatility 

is my own problem. Fraud, on the scale that it was perpetrated, I 

think the government has some complicity. There were warning 

signs. There were letters. There were audits that weren’t made. 

There was an accountant who didn’t fit into the picture. There 

were so many things that happened and nobody did a thing about 

it. So we were all victims. 

Mr. GREEN. And as a victim, you made the statement that you 

think that your government has failed you. 

Mr. GOLDSTEIN. Yes, sir. 

Mr. GREEN. And I truly understand the import of the statement 

that your government has failed you. What by way of restitution 

do you seek today as a result of this experience? 

Mr. GOLDSTEIN. I don’t expect to get $4.2 million back. I don’t. 

If I get the SIPC money, that would help me to survive until I 

could sell my house. If there was some kind of restitution from the 

assets of Madoff or even a little more than that, that would be a 

miracle for me. That is what I am looking for. I just want to continue my life. I am not going to be driving a Mercedes-Benz. I am 

not going to Europe on vacation. I just want to have a normal life 

being in my own home, spending—I am not going to be around forever. I am 76 years old. Giving my wife some peace of mind every 

80 

night so she can go to sleep without a pill. That is all I want out 

of life. 

Mr. GREEN. Let me thank you for having the courage to be here 

today. And let me add this, that you were—as you were perusing 

these monthly or quarterly statements— 

Mr. GOLDSTEIN. Monthly. 

Mr. GREEN. Monthly statements. I can easily see that you were 

a person assuming that you were investing not only in those corporations but in the country because all of the businesses that were 

called to our attention, they do business in this country. They make 

products that benefit the consumers. They are engaged in discovery-type efforts such that we have a better quality of life in this 

country. You were doing what clearly can be considered American. 

It was an American thing to do to invest in your country, though 

it was indirectly done through Mr. Madoff, who made off with a lot 

of money. But you were doing what was clearly an American thing 

to do. And I just hope that people who are reviewing this will understand that you are not some guy with deep pockets who just had 

millions of dollars to throw away, that you inherited money and 

you have had a silver spoon in your mouth all of your life. You 

earned every penny of what you invested. And you invested it in 

quality companies as perceived by you based upon what was presented to you for your perusal. And I want to let you know that 

I have great sympathy. And I want to make sure that we can do 

whatever we can to help you. 

Thank you. 

Mr. GOLDSTEIN. Thank you very, very much, for myself and all 

the other people who are in the same position I am, thank you. 

Mr. GREEN. You are welcome. Thank you, sir. 

Mr. KANJORSKI. The gentleman from Missouri, Mr. Cleaver. 

Mr. CLEAVER. Thank you, Mr. Chairman. I have no questions. I 

appreciate you being here, Mr. Goldstein. There are no answers 

you could give me that would cause my stomach to churn less. 

Thank you. 

Mr. GOLDSTEIN. Thank you. 

Mr. KANJORSKI. Thank you, Mr. Cleaver. The gentleman from Illinois, Mr. Foster. 

Mr. FOSTER. Thank you, Mr. Chairman. 

Professor Metzger, my first question is relating to your Recommendation VII, which has to do with transparency. For instance, 

do you have a more detailed set of recommendations for exactly 

what sort of disclosures you would recommend? 

Mr. METZGER. Yes. It is in the written testimony. 

Mr. FOSTER. Okay. All right. That is I think a very interesting 

thing, interesting set of things to think about. You also mentioned 

the possible danger of reverse engineering of the trading strategies 

of the houses would be able to reverse engineer that if you had too 

much disclosure of positions and so on. And I was wondering, do 

you really think that would result in a less effective, less efficient 

market if that were, in fact, possible over time to do that? My question is, what is wrong with that if over time— 

Mr. METZGER. What is wrong with people reverse engineering? 

Mr. FOSTER. Yes. And being able to understand what their competitors were doing over a period of time. 

81 

Mr. METZGER. If someone has some sort of edge, some investing 

edge that the adviser thinks that he or she can exploit, the adviser 

doesn’t want other people to copy what he or she is doing. 

Mr. FOSTER. I understand it might interfere with the profitability 

of trading houses. 

Mr. METZGER. Yes, in terms of society— 

Mr. FOSTER. Would result in a less efficient capital allocation for 

our country? 

Mr. METZGER. Right. So society will benefit from that type of disclosure. 

Mr. FOSTER. Okay. Now the other thing has to do with the compliance and regulatory costs for the different proposals. It strikes 

me there is a big spread in how cost effective these are in terms 

of the compliance costs and how effective they would be at stopping 

this sort of scheme. For example, the independent custodian thing 

strikes me as something that would be fairly cheap and would be 

quite effective at eliminating the possibility of this sort of Ponzi 

scheme. There are other things like randomly assigning an independent auditor to all financial entities that might be very effective 

but very expensive to do. It might still be a good idea. I was wondering, has anyone or do you intend to actually develop estimates 

for the compliance costs for these different options? 

Mr. METZGER. That I have suggested? 

Mr. FOSTER. Yes. 

Mr. METZGER. No, I haven’t done that. 

Mr. FOSTER. Do you think it might be feasible to do that? 

Mr. METZGER. I don’t think I have the data available to me, but 

I don’t think that it should necessarily be that costly. 

Mr. FOSTER. Okay. Just when you go down the whole smorgasbord of possibilities, having some estimate for what they cost 

not only directly to the government but for everyone that has to do 

with the regulations. You also had this mention that confused me 

of managers generating an early fake alpha, and how exactly does 

that work? Is there a quick way to explain that? 

Mr. METZGER. I will try to use an example. Take an XYZ stock trading at $100. Assume that someone wants to sell an uncovered 

call option where the call would be exercised at $200, which means 

that the person who sells the call won’t have to pay up, if you will, 

until the stock exceeds $200. Let’s say the seller of the call receives 

$1 because it is very remote that the stock will rise in 1 year from 

$100 to $200. So, let’s say this adviser does this trade 20 consecutive years; you make a dollar a year. So, the investor will say, 

‘‘Wow, this person is terrific, consistent results, $1 a year, no volatility whatsoever.’’ Then in year 21, the stock more than doubles. 

There is a takeover, or for whatever reason the stock more than 

doubles. You have lost your $20 and then some. So, that is what 

I mean by a fake alpha. In other words, it looks good. 

Mr. FOSTER. Just because you are not sampling the whole distribution and getting the right average? 

Mr. METZGER. Correct. 

Mr. FOSTER. Okay. Got it. 

And Professor Frankel, this is more a general question. What do 

you think sets the scale for the amount of effort that we should put 

into enforcement on this thing? If you look at what we spend to 

82 

prevent bank robberies compared to what our society loses for bank 

robberies, shouldn’t that roughly be in the similar proportion to 

what we spend for security frauds compared to what we lose for security frauds? Because if that is the case, I think there is a big mismatch. 

Ms. FRANKEL. Right now, our system is threatened. If it were— 

I wanted to say just—but if it were just the individual investors 

who were losing, that is one thing. But our whole system is threatened and it is dragging our economy with it. So what I am focusing 

on is the system. And as far as that is concerned, I would pay— 

I think we should pay more. Then when everything kind of balances again, then we can reduce. We don’t have to commit forever. 

But right now, I think there is a real danger, and that—I don’t 

know what it is. 

Mr. FOSTER. It is in our straight-up self-interest to spend more 

on enforcement is what your basic point is? 

Ms. FRANKEL. That is correct. To spend more on not enforcement, 

examination. I want verification. Transparency doesn’t mean 

verified transparency. So Madoff sent him a transparency but it 

wasn’t. I want to make sure that it is true. 

Mr. FOSTER. Last question. Do you think the Madoff affair was 

really due in large extent to the increased complexity of modern finance? Or would this whole thing be recognizable to someone 100 

years ago? 

Ms. FRANKEL. No. I think we are inventive. Some of the inventions are not lending themselves to transparency at all. You have 

some instruments that can be understood only by those who have 

the algorithms and so on, yes. 

Mr. FOSTER. So you think Bernard Madoff’s trading strategy 

could not have been implemented 100 years ago? 

Ms. FRANKEL. Oh, the Ponzi schemes? 

Mr. FOSTER. Not the Ponzi schemes. Just his trading strategy, 

the split strike thing. 

Ms. FRANKEL. I think it couldn’t. It couldn’t. I know the history 

of the 1920’s and it was simple. It was straightforward. Yes, there 

were pyramids. But that was the most complicated thing. 

Mr. FOSTER. Thank you. I yield back. 

Mr. GOLDSTEIN. Could I add something, if I may? I am a layman 

and you are talking in terms I probably don’t understand. But any 

industry where people make $50 million to $100 million salaries 

and give out hundreds of millions of dollars in bonuses can afford 

to pay for their own compliance. 

Mr. FOSTER. Understood. I yield back. 

Mr. KANJORSKI. Thank you, Mr. Foster. I am just going to take 

one or two things. Are you suggesting that we should be looking 

at an insurance or government guarantee? I am not quite sure that 

I understand from the panel what— 

Ms. FRANKEL. No, no, no, no, no. Not an insurance and not a government guarantee. But examinations that will—as a matter of 

fact, our regulators have to find out what is really going on in the 

financial system. It is complicated. And I don’t think they really 

know. There are people in the industry who do. And now they are 

laid off so maybe this is a good time to hire them to the government. And they will really find out what is going on, how are 

83 

things being done. That is what I suggested. And then, then you 

know the examinations that are being done within the SEC may 

not be enough and may not be the right ones. We have to know 

what is happening in the market. 

Mr. KANJORSKI. I understand the problem. Earlier, when I was 

examining the three of you, it sounded like I was harsh because I 

have this struggle between caveat emptor and an individual’s duty 

to do their own due diligence. 

Ms. FRANKEL. Goodness, no. 

Mr. KANJORSKI. To do their own due diligence. But quite frankly, 

I don’t want you to leave thinking that I am harsh that way because quite frankly how you were taken in I can see almost everybody in the world could be taken in that way. 21 years of successful 

dealing and a recommendation by an accountant, potentially a lawyer. Just amazing. I don’t know where we come up with this. But 

I will say one thing, he is an evil—who called him an evil genius? 

Did you call him that? 

Mr. BACHUS. He did, and I quoted him. I quoted Mr. Ackerman. 

Mr. KANJORSKI. Mr. Ackerman is right. Where this comes from. 

I am just going to throw out this one thing though and this is the 

problem I have. The other night I watched a druggist. They displayed the story of the druggist in Kansas City who gave chemotherapy to thousands of his patients who had cancer, and he watered down the prescription and hundreds of them died. Now no 

one knows for certain that any of them wouldn’t have died if they 

had gotten the correct chemotherapy. But obviously, they did die. 

I was thinking that as bad as Mr. Madoff is, if all the allegations 

are correct, it doesn’t quite rise to the level of that pharmacist. And 

yet the FDA is not being asked to guarantee that pharmacists give 

out proper prescriptions. Whether it is we can’t afford it, don’t 

know how to do it, I am not certain. But I guess what I am getting 

at is there is a limit on just what we can guarantee or what we 

can protect against. And when you get up to a fraud of this size, 

with the number of people involved, I would be far more understanding, quite frankly, if there were ill-informed people. But man, 

what a clientele to take to the cleaners, absolutely unbelievable. 

That is what astounds me. Bankers, insurance companies, sophisticated investors, other hedge funds. Unbelievable. 

Mr. METZGER. Mr. Chairman? 

Mr. KANJORSKI. Yes. 

Mr. METZGER. I didn’t get an opportunity yet. I want to express 

my sympathy for Mr. Goldstein. I really feel very badly for you, 

and I just wish it had never happened to you. I wish you happiness 

and good health. 

Mr. GOLDSTEIN. Thank you. 

Mr. KANJORSKI. Yes. Thank you, Mr. Metzger. That is very good. 

Mr. Goldstein, I am sure I speak for everybody who has heard your 

story, and thousands of people or hundreds of thousands who have 

seen it on television or will, you certainly did put a human face on 

this and made it far more understanding. Take care of your wife 

and make sure she doesn’t get extreme on the situation. Enough 

people have already lost their lives or lost their futures. So we 

don’t want anything worse to happen. And as Mr. Cleaver indicated, I hope that ultimately we come up with a solution to help 

84 

serve—and certainly, I am going to hold Mr. Ackerman responsible 

to guarantee that $500,000 is at least there. Is that correct, Mr. 

Ackerman? 

Mr. ACKERMAN. We can work on that together, Mr. Chairman. 

Mr. GOLDSTEIN. Thank you very much. 

Mr. KANJORSKI. Now, I will excuse the panel, and thank you all 

for being as kind as you have been to remain as long as you have. 

The Chair notes that some members may have additional questions for this panel which they may wish to submit in writing. 

Without objection, the record will remain open for 30 days for 

members to submit written questions to today’s participants and to 

place their responses in the record. 

Before we adjourn, the following written statements will be made 

a part of the record of this meeting: a communication from the Institute of International Banking Law and Practice and a communication from the Investment Advisers Association. Without objection, it is so ordered. 

The panel is dismissed and this meeting is adjourned. 

[Whereupon, at 6:57 p.m., the meeting was adjourned.] 

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A P P E N D I X 

January 5, 2009 

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