[House Prints 111-B]
[From the U.S. Government Publishing Office]




   111th Congress }                                 { Committee
    1st Session   }        COMMITTEE PRINT          { 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




111th Congress }                                         { Committee
 1st Session   }            COMMITTEE PRINT              { 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


                                 ______

                  U.S. GOVERNMENT PRINTING OFFICE
  63-127                  WASHINGTON : 2011
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS McCOTTER, Michigan
CHARLES WILSON, Ohio                 KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIC PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
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

        Jeanne M. Roslanowick, Staff Director and Chief Counsel





                            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

 
                   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.
    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.
    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 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 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 one-firm 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 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 broker-dealers, 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.
    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.
    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 pro-market. 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 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 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 supposedly 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, 11\1/
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 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 
personnel, 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, 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.
    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.
    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 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 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 Risk-Assessment 
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 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 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.
    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. 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 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 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 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.
    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 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.
    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 
three-man 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.
    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 regulatory 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.
    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 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.
    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?
    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?
    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?
    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--
    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.
    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 
unfortunately, 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--
    Mr. Ackerman. I ask unanimous consent with the witness-to-
come'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--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.
    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 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?
    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 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.
    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 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.
    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?
    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, full-blown, 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 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 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 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.
    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 so-called 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.''
    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--
    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 public. 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.
    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 
neighborhood 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 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?
    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.
    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 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 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 one-bedroom 
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 mid-1990'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 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, 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. 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.
    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.
    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--
    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, 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--
    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--
    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.
    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.
    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. 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 securities. 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?
    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.
    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.
    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.
    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 benefits. 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 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.
    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 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 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 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.]


                            A P P E N D I X



                            January 5, 2009





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