The SEC’s female Inspector Clouseau

The other day I linked the amazing Wall Street Journal report that the Securities Exchange Commission had conducted eight investigations of Bernard MADE-OFF over the last sixteen years and had failed to uncover perhaps the biggest act of private theft in the history of the world. Yesterday’s New York Post has an exclusive on Meaghan Cheung, branch chief of the SEC’s New York enforcement division during its 2006 probe of Madoff’s company. After whistleblower Henry Markopolos gave Cheung a long memo in fall 2005 stating that “Madoff Securities is the world’s largest Ponzi scheme,” she and two female colleagues authorized an investigation, found nothing amiss, and gave Madoff a clean bill of health. Speaking tearfully to the Post outside her apartment building on Tuesday, Cheung claimed complete innocence for her failure to see what was in front of her eyes. Well, yes, if innocence means lack of knowledge of good and evil. In an April 2008 memo to the SEC, Markopolos had said about Cheung: “I did not believe that she had the derivatives or mathematical background to understand the violation.” [Italics added.] I wonder what her salary was. A quarter mil? Also, she is white (see photo below).

January 7, 2009

The Securities and Exchange Commission’s New York watchdog, under fire for failing to uncover Bernard Madoff’s alleged $50 billion Ponzi scheme—despite a dead-on tip by a whistleblower—yesterday tearfully defended herself, arguing that she and the agency did the best job possible.

“Why are you taking a mid-level staff person and making me responsible for the failure of the American economy?” an upset Meaghan Cheung, with eyes tearing up, told The Post.

“I worked very hard for 10 years to make a career, and a reputation, and that has been destroyed in a month,” said Cheung, who was the SEC’s branch chief of the New York enforcement division during that unit’s earlier probe of Madoff’s brokerage business.


The 37-year-old has been singled out by whistleblower Harry Markopolos as the woman who failed to detect the scam despite his lengthy warnings. It was Cheung who signed off on a 2006 SEC investigation that effectively gave Madoff the all clear.

She said, “I was shocked” to learn last month that Madoff had been charged with—and confessed to—operating a massive Ponzi scheme at his Manhattan firm that swindled thousands of investors.

“I think it’s a tragedy,” said the married mother of two, who is a graduate of Yale University and Fordham University Law School.

But when asked if she would have done anything differently in her Madoff probe—which ended with “no evidence of fraud”—she demurred.

“I can’t answer that,” said Cheung, who left the SEC in September for personal reasons unrelated to Madoff. “If someone provides you with the wrong set of books, I don’t know how you find the real books.”

“Everyone in the New York office behaved ethically and responsibly and did as thorough an investigation as we could do,” said Cheung. “I supervised some lawyers and I was supervised by many levels above me. I’m just mid-level management.”

“I had no incentive to give anyone a pass. I had an incentive to bring cases that should be brought, especially big cases,” she said. “I was not influenced, and I don’t believe anyone in the New York office was influenced, by any other desire than to find out the truth… There is no other reason to work there for so long, except that I love what I do.” She added, “No one in my office had any incentive to miss something like this.”

Regarding Madoff specifically, Cheung said, “I never met the man. I had no personal connection, no financial connection, no social connection.”

Cheung spoke outside her Flatiron District co-op after media reports detailed how the SEC failed to catch Madoff even after investigating his Manhattan broker-dealer firm at least eight times over 16 years.

Some of those reports have noted an April 2008 e-mail that Markopolos wrote another SEC exec.

“Cheung, branch chief in New York, actually investigated [Markopolos’ claims] but with no result that I am aware of. In my conversations with her, I did not believe that she had the derivatives or mathematical background to understand the violation,” Markopolos wrote.

Cheung said that when she read a critical New York Times piece on Sunday mentioning that e-mail, she was on a plane with her children, and that she burst into tears.

As for Markopolos’ reference to her supposed lack of mathematical acumen, Cheung said, “Investigations are conducted by lawyers and examiners and investigators. We have experts available to help us.”

Cheung and other SEC staffers had met Markopolos in New York in November 2005, after years of him suggesting to the agency that Madoff was an arch-crook. Markopolos once had worked at a rival firm, but Cheung told The Post, “I didn’t have enough interactions with [Markopolos] to be able to judge his motivations.”

Markopolos gave the investigators a long memo that flatly said that “Madoff Securities is the world’s largest Ponzi scheme.”

Soon after, in January 2006, the New York branch of the SEC opened an enforcement case on Madoff based on Markopolos’ claims. The document authorizing that probe is signed by three SEC staffers: Cheung, attorney Simona Suh, and Assistant Director Doria Bachenheimer.

But after interviewing Madoff and a principal of Fairfield Greenwich Group -his biggest hedge-fund investor—as well as reviewing documents, the SEC probe “found no evidence of fraud,” according to a case closing recommendation signed off by those three staffers.

The probe did find that Madoff had violated regulations by acting as an investment adviser without registering, but said he should not be disciplined because he had remedied the situation.

Philip Michael, a lawyer for Markopolos, said the failure by Cheung and the other probers to find Madoff’s fraud suggests that “she just didn’t understand what was going on” even after Markopolos gave her a road map.

Brad Friedman, a lawyer for Madoff’s victims, called the SEC’s failure to find the fraud “stunning.”

“They had every red flag in the world,” Friedman said. “Even with a map and a flashlight, they couldn’t find it.”

As to why the SEC didn’t discover the fraud, Cheung said. “We still don’t know exactly what happened. We don’t know when it started.”

“It’s personally very upsetting, especially, since I am not able to respond in any substantive way… I’m not in a position to defend myself. I am forced to see one side of the story,” Cheung said, referring to Markopolos’ characterization of her.

“He has no basis to judge what we did or did not do in any investigation because we’re not able—as we told him at the time—we were not able to give him updates as to what we were or were not doing with his information. And that is a strong commission policy, that we do not disclose what is happening in a confidential, non-public investigation. And that is for the benefit of everyone.”

“There’s nothing I can say about what we did in this investigation other than to say we worked as hard as we could,” she said. “I was not influenced, and I don’t believe anyone in the New York office was influenced by any other desire than to find out the truth.”

“With the SEC, we’ll never have search warrant authority to knock down somebody’s door, and search his secret records, and nobody would want to live in a world where we could do that,” she said. “We conduct investigations professionally and without regard to the stature of the people. You should be able to see that from the kind of cases that we bring.”

Cheung adamantly denied looking the other way for future gain in the financial industry. “Any allegations that we were somehow swayed by the prospect of a high-paying job are ridiculous and unfair…. Allegations of impropriety and unethical behavior are so unfair and hurtful.”

She said, “I have never been pressured to walk away from a case by any of the career staff or division of enforcement. I don’t believe the New York office has ever walked away from a case based on influence or the reputation of individuals involved. We have investigated fraud and pursued it.”

As for her future, “I am staying home with two kids now,” she said. “I didn’t leave for a high-paying job. My reason for leaving was purely personal. I never interviewed for another job.”

[end of Post article]

LA writes:

Note Cheung’s use of two characteristic liberal phrases: “I was shocked,” and “It’s a tragedy.” For her to call the biggest act of theft in history a “tragedy” removes any moral judgment from what Made-off did; it becomes something unfortunate, rather than something wrong. Thus her inability, reported by Henry Marcopolos, to understand the nature of the wrong-doing he was charging against Made-off, is complemented by her nonjudgmental worldview which implicitly denies the very existence of wrongdoing. And her being “shocked” fits right into that. Marcopolos gave Cheung a memo in 2005 stating that Made-off was engaged in “the world’s largest Ponzi scheme.” And now, three years late, Cheung is “shocked” to find out that Made-off was engaged in the world’s largest Ponzi scheme. See my articles on “Shock”—liberals’ normal response to the non-liberal reality they refuse to acknowledge.

Cheung reminds me of the female Agriculture Department official who, when Muhammad Atta entered her office and made threatening statements against America, felt that she needed to reach out to him as he was new in our country and didn’t understand our culture. Imagine how shocked she was by the 9/11 attack, excuse me, tragedy.

- end of initial entry -

Gintas writes:

When I saw that picture of Cheung I thought it was a picture of a bag lady.

Flyboy writes from Canada:

I do not understand why one should require a degree in advanced mathematics to determine that a set of equity investments did or did not exist. Was it not the case that Madoff claimed to be investing clients’ money and that he in fact did nothing of the kind? How about simply checking for share certificates and/or reports from brokers and money managers? What does this derivative discussion have to do with the 2005 SEC investigation?

LA replies:

Of course. Where were the investments? Where were the certificates showing that Madoff had in fact purchased tens of billions in various securities? He had been accused of running a Ponzi scheme, meaning that the securities he had supposedly purchased and was managing for his clients didn’t exist. Determining whether he actually had purchased those securities couldn’t be simpler. This level of incompetence makes you feel our whole civilization is on the Inspector Clouseau level.

On “derivatives,” that puzzled me too. So I made a wild guess and thought he was using “derivatives” as a slang/synonym for “wherewithal,” as in capacity (financial or otherwise): “Does this person have the wherewithall to do such and such?” That was all I could figure in trying to make sense of what he said.

Andrew E. writes:

I recall reading, though I can’t remember where, that Markopolos had said Madoff claimed to achieve his returns through an investing strategy involving various combinations of options contracts. Markopolos attempted to back-test this supposed strategy and was unable to achieve the same returns that Madoff had reported, I believe this is what spurred him contact the SEC. To approach the problem from this angle, one would need some degree of knowledge in derivative securities to understand the payoff functions involved which can be quite complex, especially when they’re layered on top of one another. Madoff may have been counting on this. Regardless, I think this is where Markopolos is coming from when he said he didn’t think Mrs. Cheung was capable of understanding the problem. Of course, the people who go to the trouble to learn these complicated securities almost always end up at Wall Street banks or hedge funds where the real (funny) money is made, not the SEC.

LA replies:

No news article has yet explained: why couldn’t the SEC simply check to see if Madoff Securities actually had purchased and was holding the securities it said it was holding? How difficult could that be? It seems to me that the Marcopolos angle on this turns the equivalent of a simple arithmetic problem into a calculus problem.

Posted by Lawrence Auster at January 08, 2009 09:50 AM | Send

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