'Illiteracy' among junior SEC staff facilitated Madoff

FINANCIAL ILLITERACY among junior staff at the US Securities and Exchange Commission (SEC) made it easier for Bernard Madoff to operate his alleged $50 billion (€35.8 billion) fraud undetected, the head of the US's biggest options exchange has warned.

Bill Brodsky, chief executive of the Chicago Board Options Exchange, said the scandal showed that inspector-level staff had not received enough training to enable them sufficiently to check for fraud.

"The people doing the examinations have no clue what the right questions are to ask," he said in an interview with the Financial Times. "Going in and asking questions out of a manual doesn't help you understand how a business works."

The comments come as the financial industry continues to reel from the Madoff scandal. The world's second biggest investor in hedge funds is set to demand that some of the largest US hedge funds - including Cerberus and Citadel DE ShawSAC Capital - appoint independent administrators or face it pulling its money. Administrators value a funds' assets and communicate with investors.

Switzerland's Union Bancaire Privée, in an internal memo, instructed managers of the $56 billion it has allocated in hedge funds to put in immediate redemptions for any fund that does not have independent administrators and custodians. The move by UBP has the potential to reshape the US industry, where the oldest and largest funds typically do not use third-party administrators, a common practice in Europe.

Mr Madoff, according to several investors, insisted on acting as custodian of assets placed with him, and had no external administrator because he ran a brokerage rather than a hedge fund.

Investigators have issued a subpoena to David Friehling, the accountant who audited the financial statements of Mr Madoff's firm, seeking documents going back to January 1st, 2000. Andrew Lankler, his attorney, confirmed the existence of the subpoena but declined to comment further.

Christopher Cox, outgoing SEC chief, has launched an inquiry after admitting last week that his agency had failed to investigate Mr Madoff in spite of warnings from industry sources.

Mr Brodsky said part of the problem at the SEC was that many of the staff at the regulator did not have the fundamental investment experience. "They're young, they very often don't have any money and they're not allowed to use these instruments themselves. How do they equip themselves to do a good job?"

- (Financial Times service)