Fallout over Madoff ripples through Washington

[December 18, 2008]  NEW YORK (AP) -- As Bernard Madoff returned home to his Manhattan apartment, it was impossible to overlook the disorder he has brought on with his alleged $50 billion investment fraud.

Cameras awaited him as he walked out of the courthouse toward his black SUV. Minutes later, a smirking Madoff was swarmed by more cameras as he entered his apartment building, with the scrum at one point turning into a shoving match between Madoff and a journalist.

He was then fitted with an electronic-monitoring bracelet and placed under house detention in his $7 million apartment.

Madoff's chaotic commute came on a day when the fallout over the scandal spread through the nation's capital, with the Securities and Exchange Commission taking more heat and Congress jumping into the fray.

The chairman of the House capital markets subcommittee, Rep. Paul Kanjorski, D-Pa., announced an inquiry that will begin early next month into what may be the biggest Ponzi scheme of all time and how the government failed to detect it. The SEC is also looking into the relationship between Madoff's niece and a former SEC attorney who reviewed Madoff's business.

Madoff made his appearance in the courthouse to shore up conditions of his bail package. The judge had required him to find two additional co-signers to vouch for Madoff, but he was apparently unable to find anyone as the cloud of scandal swirls around him.

Judge Gabriel W. Gorenstein responded by approving a modification to the bail package. As a result, Madoff had to show up to sign over his Upper East Side apartment and his homes in Palm Beach and the Hamptons.

Madoff, who has already surrendered his passport, now will be required to be at his apartment from 7 p.m to 9 a.m. His wife was required to surrender her passport as well. His lawyer, Ira Lee Sorkin, said the electronic monitoring was in place by Wednesday evening.

In Washington, SEC Chairman Christopher Cox again found himself on the defensive after days of withering criticism that his agency did not do enough to root out the fraud.

"We have thus far no evidence of any wrongdoing by any SEC personnel," Cox told reporters at SEC headquarters. "We need to go about this in a thorough, professional way."

SEC Inspector General David Kotz is looking into the agency's failure to uncover the alleged fraud in Madoff's operation. One area Kotz said he will examine is the relationship between a former SEC attorney, Eric Swanson, and Madoff's niece, Shana, who are now married.

As an SEC attorney, Swanson was part of a team that examined Madoff's securities brokerage operation in 1999 and 2004. Neither review resulted in any action against Madoff. In a statement about Swanson's role, the SEC compliance office cited its strict rules prohibiting employees from participating in cases involving firms where they have a personal interest.

A spokesman for Swanson said that he and Shana Madoff met at a breakfast in October 2003, started dating in April 2006 and married last year.

Another potential conflict also emerged in Washington on Wednesday.

U.S. Attorney General Michael Mukasey recused himself from the Madoff probe because his son, Marc Mukasey, is representing Frank DiPascali, a top financial officer at Madoff's investment firm. The Justice Department refused to say when Mukasey became aware of the conflict but confirmed he was removing himself from all aspects of the case.

DiPascali was the Madoff employee who had the most day-to-day contact with the firm's investors. Several described him as the man they reached by phone when they had questions about the firm's investment strategy, or wanted to add or subtract money from their accounts.

The events unfolded the day after Cox delivered a stunning rebuke to his own career staff, blaming them for a decade-long failure to investigate Madoff.

Credible and specific allegations regarding Madoff's financial wrongdoing going back to at least 1999 were repeatedly brought to the attention of SEC staff, Cox said. He said he was gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate the allegations or at any point to seek formal authority from the politically appointed commission to pursue them.

Cox's critics said that targeting the staff was Cox's attempt to salvage his own reputation.

"He put in place the people he is now shifting the blame to," said Ross Albert, a former SEC senior special counsel and federal prosecutor and now a private attorney in Atlanta.

Senate Majority Leader Harry Reid, D-Nev., suggested Cox bears some of the responsibility for what went wrong.

"I served in Congress with Christopher Cox, but I don't think he's going to make the All-Star team," said Reid.

Kotz said his office would move as quickly as possible to complete the inquiry into why regulators didn't pursue Madoff more aggressively.

Kanjorski, the lawmaker, said his subcommittee's inquiry will examine the alleged Madoff fraud and try to determine why the SEC and other regulators "failed to detect these substantial evasions."

[Associated Press; By LARRY NEUMIESTER]

Associated Press writers Pete Yost, Lara Jakes Jordan and Marcy Gordon in Washington and David B. Caruso in New York contributed to this report.

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