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Regulators defend actions amid Madoff scandal

Top US regulators defended their oversight of securities markets and said they had probed accused swindler Bernard Madoff's brokerage firm in the past but found no evidence of a massive fraud.

The Securities and Exchange Commission is being heavily criticized for not thoroughly following up on tips from one of Madoff's competitors and missing red flags such as Madoff's ability to generate steady returns in all types of market environments.

The industry-funded Financial Industry Regulatory Authority (FINRA) has also been tainted by the Madoff scandal, as its main mission is to supervise nearly 5,000 US brokerages.

At a congressional hearing, the SEC's head of enforcement, Linda Thomsen, said the agency started an investigation of Madoff's business in 2006 but closed it early in 2008 without recommending enforcement action.

Thomsen also said the SEC filed two enforcement actions in 1992 that involved Madoff's broker-dealer firm, but neither Madoff nor his firm was named as a defendant in either case.

Lori Richards, the SEC's director of compliance, inspections and examinations, said the SEC did examine Madoff's broker-dealer operation - most recently in 2004 and 2005 - but found no fraud.

The SEC did not examine Madoff's advisory operations despite the firm registering as an investment adviser in September 2006, Richards told the Senate Banking Committee in prepared testimony.

The banking committee hauled in top enforcement officials to press them over how and why they failed to uncover Madoff's alleged $50 billion fraud.

“The fact that the regulators were put on notice through direct tips, press articles and industry chatter raises serious questions about the state of our regulatory system,” said the panel's top Republican, Richard Shelby of Alabama.

FINRA's interim chief executive, Stephen Luparello, said the watchdog conducted regular examinations of Madoff's broker-dealer operations during the last 20 years.

FINRA received and investigated 19 complaints against Madoff's broker-dealer, but the complaints generally related to trade execution quality and did not relate to the investment advisory issues where fraud is alleged, the watchdog has said.

Luparello said the watchdog never received any complaints alleging a Ponzi scheme, nor did the SEC share tips or concerns with FINRA. (Reuters)