Regulation Is What Is Needed After Bernie Madoff’s Scandal Essay

Introduction

Is there a need for more regulation in terms of more controls and audits in the persons and entities involved in the capital markets, after the Bernie Madoff’s scandal? This paper answers whether the US Securities and Exchange Commission (SEC) should be given more powers to impose more controls and audits among companies under its power or jurisdiction so as to prevent frauds on securities as those done in Madoff Scandal. This researcher takes the position that it is not more regulation that is needed in terms of more controls and audits but rather having the right people to do the job in regulation. The US SEC has already the needed power to have prevented what happened in the case of Mardoff and the same agency can still tap on that power to prevent similar kind of fraud in the future.

Main body

There are already controls and audits of different companies as required by the Sarbanes-Oxley Act of 2002. In fact many are already complaining of over regulation by the said law. More regulation would not help ensure more efficient capital market if companies are over burdened with requirements of the SEC.

In the case of Madoff there are reports that that the man was so connected with politicians and regulators particularly from the SEC regulatory officers, so that people who should be doing their regulatory functions under the law were blinded for one reason or the other. Madoff was known to have given political contributions to democrats.¹ Not surprisingly, Madoff was already in business during US SEC chairman Levitt term under the Clinton presidency.² This could mean that politics had reared again its ugly head why instead of being seriously watched just like other brokers, Madoff appeared to have played politics by causing people to refuse or refrain from doing what could have been done under the circumstances.

Berlau narrated the fact that when news first came out about Bernard Madoff’s alleged $50 billion worldwide Ponzi Scheme, media appeared to have first portrayed Madoff as indistinct hedge fund manager who was not subject to within the scope of regulation by the US SEC.³ But as the sheer magnitude of the fraud involving Madoff became obvious, Madoff’s place in the Wall Street-Washington world became clearer to.⁴

If an honest interpretation could allow in this kind observation, it would seem that Madoff has some degree of control by his influence on whether he could be indicted for any wrong doing. His influence of course appear to be knotted with his relationship with some politicians he might have helped and who are now in the government positions to possibly cushion any investigation that may be directed upon any wrongdoing involving securities.

The man’s wide businesses could not have avoided the eyes of regulators particularly by the SEC if the latter’s people had given the needed focus. Bernie Madoff was registered as an investment adviser in 2006 but even before 2006, his business falls under the SEC’ s extensive regulatory framework for securities broker dealers since he had established his companies in 5 decades ago.⁵ It is therefore surprising that Madoff had instead actually taken advantage his seeming connections with those in powers as part of his selling point to investors as when he told not too long ago about the virtual impossibility of violating the rules because of apparently strong regulatory environment.

His statements contain some degree of seeming familiarity of the regulatory frameworks which could be considered a come on statement by investors who would later become victims of the man. In fact, he was also known to have unregistered businesses ⁶(Sheer, 2008) which would strengthen his influence with politicians why he was not investigated early in the game that could have prevented the fraud of $50 billion.

Indeed, Madoff’s appointment as part of a large advisory commission which has something to do with exploring the rapidly changing structure of the financial markets⁷ during Chairman Arthur Levitt’s term at the SEC, may have given him the necessary knowledge of the weakness of the regulation which he may latter take advantage. Being part of a seeming regulatory commission and broker during those period may sound like bringing some conflict of interest that should have been looked into by regulators had they not lost focus of the real threat to the investors.

Or possibly, a political connection of Mardoff may have indeed blinded regulators and politicians alike to fair to notice the extent of fraud and damage of investors what he was then cooking or planning during the early stage. It is said that when a businessperson is too good to politicians, something fishy must be in the offing. Why would a businessperson give to contributions to politicians? It would not be hard to read the meaning of political contributions. A businessman is motivated by profit while a politician is motivated by power. Since one feeds the other, public interest could just be a concept that exists in books but different in reality.

The argument therefore for more regulation is misplaced as it could just be the quick-fix solution that may be suggested by law makers who are part of the politicians who may have benefited by political contributions made by Madoff in the campaign. In fact the Sarbanes-Oxley Act of 2002 was being considered an overreaction to have more regulation that is causing some problems due to high cost of doing business as more requirements require additional cost to implement by companies while not actually being responsive to promoting a more secure protection of investors. It can even be argued that the Sarbanes-Oxley Act of 2002 which was already enacted for the need to comply with accounting mandates allegedly to preserve market integrity, failed also to prevent the kind of fraud caused by Madoff.

If the said law is an added power to SEC, then the same can be considered as more regulation. If said more regulation failed to prevent Madoff’s way of committing fraud, will more regulation therefore be believable at this point in time for the capital market? Incidentally the Sarbanes-Oxley Act of 2002 was championed by then SEC Chairman Arthur Levitt, who appointed Madoff to an advisory commission as described by New York Times.⁸

There is miserable failure of regulation⁹ and the solution is to complicate the same by more regulation. To have rigorous oversight to prevent ‘creativity’ in Wall Street has lost its sense once again. It is not in making regulators more powerful. It is in having them do the job because they like it.¹⁰ It is therefore an issue of motivation that may possibly remedied by minimizing abuse of power or elimination of conflict of interest.¹¹

To make regulators do their work, the same must be done ethically. Improving life after Madoff is also an ethical issue where regulators must practice what is ethical not only because they fear the consequences of failing to do the same but that their values must motivate them to do it.¹²

To prove that more regulation is not needed after Madoff Scandal, it could be asserted that a CNBC reporter named Charles Gasparino wrote in 1999 and 2004 about a relationship of Madoff with regulators, which could have destroyed the objectivity of regulators to Madoff’s way of doing business.¹³ Gasparino was referring to the marriage in 2007 of SEC assistant inspections director Eric Swanson to one named Shana, Madoff’s niece and was the regulatory compliance attorney at a Madoff’s company.¹⁴ If put together, these matters could indeed support the ‘blinded’ exercise of regulation by those who are supposed to discharge the function properly. It may be noted that Swanson was one of the SEC team who found nothing wrong with Madoff’s firms and that the marriage took place after Swanson left SEC.

It can be concluded that that more regulation could not solve the problems as that caused by Madoff if it means giving more power to SEC. In fact, SEC could have prevented what happened if its people have not lost focus of the more important concerns of the SEC. It was found in this paper that SEC did not lack the power to prevent this is the kind of fraud caused by Madoff. Inefficiency and incompetence of the people that should enforce regulation could not be equated with giving more power to these people.

Regulators should rather pay attention to the warning signs about where the real fraud is. Blinders to regulators and possible conflicts interest should be avoided. Conflict of interest between the SEC officials and the subjects that should be investigated when circumstances justify them and this must be disclosed by the SEC officials to the public and that same should cause them to inhibit them selves for their regulatory functions and allow the independent ones.

Conclusion

The law therefore has all what it takes to do under the circumstance to prevent a Mardoff scenario and this could not be remedied by giving SEC more powers. The solution is rather on putting the right people at the SEC who are not only competent and efficient but also honest and incorruptible to the ever-changing political realities who would have public interest at heart and mind before personal interest.

Works Cited

Berlau, J., Madoff: Hiding in Plain Sight, Thanks to SEC, 2008. Web.

Massie, J., Essentials of Management, Prentice-Hall , Inc, 1987.

Richman, Sheldon (2008) Madoff Scandal Exposes Government Failure, 2008. Web.

Sankar, Y., Management of Technological Change, Wiley, 1991.

Scheer, D., Bernard Madoff’s Misconduct Said to Date to 1970s, 2008. Web.

Whittington & Pany, Principles of Auditing , IRWIN, Chicago, USA, 1995.

Footnotes

1. Berlau, J., Madoff: Hiding in Plain Sight, Thanks to SEC, 2008. Web.
2. Ibid.
3. Ibid.
4. Ibid.
5. Ibid.
6. Sheer.
7. Berlau, J., Madoff: Hiding in Plain Sight, Thanks to SEC, 2008, see above.
8. Ibid.
9. Richman.
10. Massie, J., Essentials of Management, Prentice-Hall , Inc, 1987.
11. Whittington & Pany, Principles of Auditing , IRWIN, Chicago, USA, 1995.
12. Sankar, Y., Management of Technological Change, Wiley, 1991.
13. Berlau, J., Madoff: Hiding in Plain Sight, Thanks to SEC, 2008.
14. Ibid.