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Former SEC Lawyer Charged with Conflict of Interest in Madoff Case

On Tuesday, the inspector general of the Securities and Exchange Commission referred the actions of a former general counsel for the SEC, David Becker, to prosecutors because of a possible conflict of interest in the Bernie Madoff Ponzi scheme case.  At issue is a sizable investment with Madoff held by Becker's family.

The SEC is concerned that Becker, knowing his family had an investment with Madoff, should have excused himself from the case because of the possible conflict of interest.  Madoff, who stepped down from his post with the SEC in April, inherited a $2 million investment account with Madoff from his deceased mother along with his two brothers.

Subsequently, Becker played a key role in designing the SEC's procedures for determining how much money Madoff's victims would be paid from funds recovered by the trustee in charge of compensation.  SEC officials claim that Becker “worked on particular matters that could impact the likelihood, and even possibility, of a clawback suit against him, as well as the amount that could be recovered in such a clawback action.”

Irving Picard, the trustee charged with recovering funds for Madoff's bilked investors, has said that $1.5 million of the $2 million inherited by Becker and his brothers consisted of “fictitious profits” and could therefore be seized and used to compensate other Madoff investors.  The SEC's general inspector, meanwhile, alleged that Becker fought for methods that would limit the trustee's ability to recover funds from investors such as himself.

According to the report, Becker argued that Picard should use a “last account statement method” to determine compensation, meaning victims would be compensated the amount shown on the last statement received from Madoff, including fictitious profits.  Ultimately, the SEC chose a money in-money out method, wherein victims were only entitled to the amount of money they invested with Madoff.

Becker has testified that he discussed his family's account with Madoff with the SEC's ethics department, but the inspector general said that the ethics official he discussed the issue with reported directly to him.  The inspector general also noted that seven other top SEC officials, including Chairman Mary Schapiro, were aware of Becker's Madoff ties in 2009.  “And yet, none of these individuals recognized a conflict or took any action to suggest that Becker consider recusing himself from the Madoff Liquidation,” the report noted.

Bernard Madoff pleaded guilty to a variety of charges in 2009 and was sentenced to 150 years in prison for running the largest Ponzi scheme in US history.  Madoff's scheme persisted for several decades and bilked thousands of investors out of an estimated $18 billion.