Asleep at the Switch

Ever since the Bernard Madoff story first broke, we’ve been hearing people asking if the Securities and Exchange Commission (SEC) was asleep at the switch while all of his shenanigans were going on. The SEC is part of the Executive Branch of the Federal government, and thus suffers from having a great many political hacks and useless drones on its payroll at any given time, but generally the agency has managed to keep the very worse violations of our financial system from happening. Or, at least, it had until recently, when the current financial crisis began sweeping the nation and some guy named Bernie managed to steal the equivalent of $500 from every man, woman and child in America…

Now it turns out that our fears about the agency having been asleep at the switch may not come to close to just how messed up the situation really was. A story being reported by Reuters Online reveals that as long ago as 2004, an SEC attorney DID twig to potential improper operations in the Madoff organization, and did report her suspicions to her superiors in the agency. Unfortunately, at that time the SEC was engrossed in searching for fraud in the Mutual Fund industry, and the attorney in question was ordered to suspend her investigation of the Madoff Group and get busy with those priority inquiries. Personally, I should think it was quite bad enough that those Mutual Fund investigations completely failed detect the growing problems in the Financial and Insurance industries, despite the fact that a lot of mutual funds were heavily invested in those sectors. But now it turns out that one of the supervisors who told the attorney to abandon her investigation was married to Madoff’s niece…

It’s the kind of story that often gets featured on “Stranger than Fiction” blogs and web sites. If you pitched this idea in Hollywood you’d probably get shot down for being too trite, or at least too predictable. And, in fairness, it remains to be seen if this Madoff family collateral actually had anything to do with the investigation being dropped, or indeed if he did anything wrong. But even in the current age of fantastical blunders and improbable family connections, it’s hard to believe that this was an innocent event…

So what is the business lesson in all of this? How can we possibly learn from such an impossibly far-fetched sequence of events? Let me suggest that if this story turns out to be true as reported, and a bit of family influence kept the Madoff outrages from being detected for another four or five years, then this is a wake-up call to every one of us who might have viewed the original report with skepticism. Outlandish as it sounds, the truth is that people receive improper advantages due to family connections every day in America, and it’s entirely possible that even the most outrageous betrayals of the public trust might boil down to something as simple as the offender’s niece’s husband deciding to deflect an embarrassing investigation away from dear old Uncle Bernie…

And if we assume that just because something is outrageous, outlandish, asinine, and utterly shameful, it can’t possibly be true, then the people who were really asleep at the switch were us…