The Public Duty Doctrine.13: Madoff & SEC

I love C-Span and the New York Times. Life without these two would be a big, black hole, filled with cable-fluff and mindnumbing commercials. They may not be "fair and balanced" all the time, but they sure are far reaching in their depth and scope. Both provide an excellent starting point if you feel the need to investigate further.

Yesterday, C-Span covered the U.S. Senate Committee on Banking, Housing, and Urban Affairs, chaired by Senator Dodd. The topic was "SEC Investigation into Madoff Ponzi Scheme." And the witness before the committee was Security and Exchange Commission Inspector General H. David Kotz, Esquire (Esquire means lawyer). He's the top cop in American finance. He inherited our current financial woes. And yesterday, he presented a summary of his agency's failure, over 16 years, to identify a problem -- and act upon it -- with Bernie Madoff and his $50 billion dollar ponzi scheme.

Kotz's report was disturbing: Two SEC offices, unbeknownst to each other, investigated Madoff at the same time; the investigators were novices, and had little or no support from supervisors; over 16 years, whistleblower reports never made it to the top dog of the SEC (most were ignored); investigators were outmanned, outgunned, grossly untrained, lazy, incompetent, and negligent.

Senator Menendez asked Kotz who should be held accountable. Kotz replied that the SEC should be held responsible, particularly the heads of the enforcement divisions. The Senator also asked whether any SEC employee involved in this case has been fired; Kotz replied that no one has been fired (from this or the prior administration).

When Kotz was asked about compensation for the Madoff's victims, he responded with, "We must do better."

One Senator said, "The Federal Government blew it!"

But, here's one clincher, relating to The Public Duty Doctrine: Senator Mike Johanns, R-Nebraska, made the statement, "The SEC's role is to protect the public." This fast and loose comment is pure doublespeak. The average citizen hears this and thinks one way, when, the truth of the matter is, the government is thinking the exact opposite.
What do you think would happen if an individual or group of individuals, harmed by the SEC's negligence in this case, sued the agency? The courts would say that given the Public Duty Doctrine, government has a duty to only protect society as a whole, not the individual. Given recent events, all across the span of governmental services, they can't even do that.

Just prior to turning himself in, many of Madoff's investors chose to stay with the program based on a "clean bill of health" issued by the SEC. Trying to reconcile the agency's credibility in the marketplace with consumer's decisionmaking, Kotz said (paraphrasing) that the public should not act favorably based on the fact that a company has been investigated and gotten a clean bill of health. He said that the SEC might have missed something and, therefore, should not be totally relied on.

In summary, what I came away with is this: No one was fired. A U.S. Senator, through omission, misstated government's duty to the public. And, with regard to government inspections, U.S. Grade A means nothing.