What good is a blind watchdog?

Back in February, I told the tale of David Becker, former S.E.C. General Counsel, who had inherited money from his mother that was really the fruits of the Bernie Madoff investment scandal after he had served in the post while Madoff was merrily swindling people as the S.E.C. twiddled its thumbs. Becker apparently wasn’t in the information chain that should have led the S.E.C. to stop Madoff , and the scandal was uncovered after he left the agency. In 2009, after the Madoff mess had exploded, he rejoined the agency in his old job, but when it came to light that he and his brothers had inherited $2 million Madoff-manufactured profits from their mother, he quickly stepped down. My view was that Becker was a victim of circumstance: he had the appearance of impropriety, but hadn’t done anything wrong.

I should have known better: after all, this is the Securities and Exchange Commission, where they illegally shred files and the regulators look at porn all day. Now it is revealed that…

1. Becker’s conflict of interest with his Madoff money should have stopped him from returning as general counsel, according to the agency’s ethics rules;

2. The S.E.C.’s Chairwoman, Mary L. Schapiro, who was brought in as two years ago with a mandate to strengthen its enforcement unit, knew about Becker’s Madoff connection and hid it from Congress;

3. Becker disclosed his ties to Madoff money to the Commissioners and the S.E.C. ethics officer. A report issued this week stated that none of these individuals recognized a conflict or took any action to suggest that Becker consider recusing himself from the Madoff liquidation;

4. Becker, contrary to S.E.C. rules, was then allowed to participate personally in Madoff-related matters in which he had a financial interest and…

5. He argued for a change in S.E.C. policy that would have directly benefitted his family!

From the New York Times:

“Perhaps the most significant Madoff matter involving Mr. Becker is a proposed reversal of the agency’s recommendation on how to compensate victims of the scheme, according to two people briefed on the S.E.C.’s discussions who asked not to be identified because they were not authorized to discuss the matter. While the agency had agreed on a deal that would return to investors only the money they had put into their Madoff accounts, Mr. Becker argued that the commission should change its stance to allow victims to keep some of the gains their investments had generated, since the investment would have grown somewhat over time even in a low-interest account. The Becker family would benefit from this approach.”

The ethics conclusions:

• Becker should not have sought to rejoin the agency as General Counsel, because he had a clear conflict of interest as long as his family had proceeds from Madoff’s scheme.

• Schapiro should not have allowed him to hold the position.

• She had an obligation to fully disclose his situation to the leadership on to Congress, which would then have insisted that Becker leave immediately. That, it seems, is why she chose to keep silent.

• The fact that none of the Commissioners nor the S.E.C.’s ethics officer perceived that Becker had a damaging conflict of interest shows that the agency is either hopelessly corrupt, hopelessly inept, or both.

• Becker’s participation in Madoff related-matters was improper and a violation of S.E.C. rules. He should have known not to do it, and if he did not, he should have been prevented from doing it.

The matter is being referred to the Justice Department. Good-–although it is small consolation. Meanwhile, the financial investment sector which played such a devastating role in the nation’s financial meltdown and which appears to be so besotted with greed and self-interest that it will require constant oversight and scrutiny if we are to avoid as  many Meltdown sequels as “Halloween,” is apparently being monitored by a federal regulatory agency that is completely untrustworthy.

Sleep tight!