For anyone who has been watching the business media lately, the details surrounding Bernie Madoff’s huge $50 billion ponzi scheme is both amazing and heart breaking.  Amazing in that it went on for so long without being caught and heart breaking for all the investors, including many charities, that lost billions.  The only comfort I take in the news is that this pattern isn’t new.  Whenever the economy gets ugly, we always uncover corruption, or as Buffett says, “find out who has been swimming without their trunks on.”  When it comes to mankind’s shortcomings, another wise sage – King Solomon –  reminds me that there is nothing “new under the sun”. 

While I hate to pile on the SEC for not catching this ahead of time, I can’t help but do so.  Where were they????   I’ve been involved on the buyside of two different investment management firms for nearly twenty years.  Over this time, I’ve played a major role in coordinating activities surrounding three separate SEC exams and two audits from the State of Ohio.  The SEC audits occurred at my prior firm and typically lasted one week.  The State of Ohio exams have been here at Broadleaf Partners, which we started a little over three years ago.  Our first exam from the state was about two years ago and our second actually starts on Friday.  (Yeah, Merry Christmas!)  These exams are never much fun but at the same time are a necessity;  I’d compare the SEC visits to a week long visit to the dentist.  (My apologies to dad who was my dentist for all but the last two years!)     

In any event, while SEC audits are standard procedure, you never take them lightly.  They are extraordinarily extensive and anyone who is normal can’t help but be a tad stressed even when you know you’re clean.  In the audit process, examiners always find something that needs to be improved and go out of their way to ensure that they aren’t your friends.  Our auditors could accept neither coffee in the morning and on one visit would not use the firm’s restrooms but had to use those in the general office building all week.   Why that one, I’m not sure, but I didn’t argue.

I don’t know the details behind Bernie’s involvement in the industry, but my experience would be that he’d have been visited every few years by the SEC, that they would find a handful of deficiencies each time, and that they wouldn’t in the least bit ever be “cozy” with him as they apparently were in reality.  LIke the Princess and the Pea (I read it to Johnny last night), these guys are quite adept at finding the slightest irritants six feet deep.  What is even more amazing is that allegations are surfacing that the SEC had been sent several letters over the years expressing concerns about Madoff and yet the SEC never did anything.  I can assure you, it never took a complaint for us to get audited, it just happened.  I can only imagine the length of the visits had someone in public raised a suspicious eye.

Unfortunately, bad apples are fact of life and my guess is that this case was a whole basketful.  Some heads will and should roll.  I don’t know that we need new regulations, we just need to uniformly enforce those that we’ve already got.  SEC exams should happen and at least in my experience,  they have never been nor should they ever be cozy or comfortable affairs.