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SEC Paid Bonus to Employee Faulted in Madoff Case, Watchdog Says

The U.S. Securities and Exchange Commission paid a performance-based bonus to an employee for work on a 2009 investigation related to Bernard L. Madoff’s Ponzi scheme, even though the person had played a key role in earlier botched probes of the fraud, the agency’s watchdog said.

Both the employee who received the $1,200 award and his supervisor who approved it had been cited “for numerous performance issues and were subject to potential disciplinary action at the time the award recommendation was made,” Inspector General H. David Kotz said in a report published yesterday on the SEC’s website.

The payment was made in part to reward the employee’s 2009 efforts in a follow-on investigation related to Madoff, who had been arrested in December 2008 for running a $50 billion fraud, Kotz said. The award was proposed in September 2009, just two weeks after Kotz had admonished the employee for his critical role in a 2005 examination and 2006 investigation that failed to uncover the scheme, according to the report.

Following the recommendation, the agency withheld payment until April 2010, when an independent review by the firm Fortney & Scott, LLC, determined that disciplinary action against the employee wasn’t warranted, according to the report. Kotz said that Fortney & Scott didn’t dispute the “serious performance issues” that he had raised in his 2009 review of the agency’s failure to catch Madoff, and recommended formal disciplinary action against the assistant regional director who had approved the award nomination.

New Controls

Kotz’s report didn’t identify the employee or the supervisor.

Even though the award wasn’t related to the earlier failed efforts to catch Madoff, Kotz said the agency should implement controls to prevent awards to staff who are under review for disciplinary action. The agency agreed with the recommendation.

Madoff, who was arrested in December 2008, is serving a 150-year sentence in federal prison. In his 2009 critique of how the agency handled Madoff’s fraud, Kotz detailed missed opportunities dating back to 1992 in which the SEC assigned inexperienced lawyers to inquiries, supervisors denied requests to expand probes and staff failed to follow up on leads.

In the report released yesterday, which also reviewed the SEC’s recruitment, relocation and retention incentives, Kotz said the SEC’s overall awards budget and average award per person are “nominal,” and that the agency needs to develop alternatives so that it is competitive with other federal agencies’ awards programs.

“While we agree it’s useful to incentivize employees through cash awards, we often find ourselves needing to direct our limited resources to monitoring the markets and pursuing enforcement actions,” SEC spokesman John Nester said, declining to comment on the award related to the Madoff investigation or on any possible disciplinary actions that have been taken related to the Madoff probes.

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