Financial Market Investigations into Madoff Holdings

Jan 5, 2009

House Committee Financial Services

Subcommittee Chairman Paul Kanjorski chaired a House Financial Services Committee hearing on the $50 billion investment scam allegedly engineered by Bernard L. Madoff that was the subject of multiple investigations. The hearing titled "Assessing the Madoff Ponzi Scheme and the Need for Regulatory Reform" focused on the need to rewrite the laws .. Read More
Subcommittee Chairman Paul Kanjorski chaired a House Financial Services Committee hearing on the $50 billion investment scam allegedly engineered by Bernard L. Madoff that was the subject of multiple investigations. The hearing titled "Assessing the Madoff Ponzi Scheme and the Need for Regulatory Reform" focused on the need to rewrite the laws governing the U.S. financial markets. Representative Bachus noted for the record that the hearing was not official as the 110th Congress had adjourned and the 111th Congress would not convene until the next day. Representative Frank noted that the committee would not be official until later in the month. Representative Kanjorski made known his intention that the meeting would be made an official hearing retroactively.

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TRANSCRIPT

TIME SPEAKER TEXT
00:00:17 Kanjorski, Paul E.U.S. Representative

(Gavel sounds.) The committee will come to

order. Without objection, the rules of the House...

00:00:38 Bachus, SpencerU.S. Representative

Mr. Chairman?

00:00:38 Kanjorski, Paul E.U.S. Representative

The gentleman?

00:00:40 Bachus, SpencerU.S. Representative

Reserving the right to object, I do not intend to

object. And I'm glad you raised the issue...

00:02:21 Frank, BarneyU.S. Representative

Mr. Chairman, I would reserve the

right to object, although if -- I'm not sure of the procedure,...

00:02:21 Bachus, SpencerU.S. Representative

-- (inaudible) --

00:02:21 Frank, BarneyU.S. Representative

-- wait, here's the real point I wanted to make --

in January of 2007 we were not officially...

00:04:21 Watt, MelvinU.S. Representative

Would the gentleman yield on his --

00:04:21 Frank, BarneyU.S. Representative

Yes.

00:04:21 Watt, MelvinU.S. Representative

I would just observe that everybody else here is

overdressed for this occasion. (Laughter.)...

00:04:36 Frank, BarneyU.S. Representative

Oh, I appreciate it.

00:04:36 Watt, MelvinU.S. Representative

-- I yield back to the gentleman.

00:04:36 Frank, BarneyU.S. Representative

Taking back my time, could I get a testimony from

the gentleman in writing that I showed up...

00:04:44 Watt, MelvinU.S. Representative

I think I would ask unanimous consent that we

recognize that. (Laughter.)

00:04:48 Frank, BarneyU.S. Representative

I thank the -- I thank the gentleman, and I withdraw

my (reservation ?).

00:04:51 Bachus, SpencerU.S. Representative

Yes, Mr. Chairman, I'd like unanimous consent to

introduce my letter of December 17th calling...

00:05:03 Kanjorski, Paul E.U.S. Representative

Without objection, it will be entered into the

record. All right, but a little note on the gentleman...

00:05:58 Bachus, SpencerU.S. Representative

And, thank you. Mr. Chairman, all I was pointing

out is that -- is the hearing, technically,...

00:06:06 Kanjorski, Paul E.U.S. Representative

It will be in the future.

00:06:06 Bachus, SpencerU.S. Representative

And I commend the -- I commend the chairman for

calling this meeting.

00:06:13 Kanjorski, Paul E.U.S. Representative

Thank you.

We meet today to begin to understand how Bernard Madoff allegedly

swindled...

00:13:44 Bachus, SpencerU.S. Representative

I thank the chairman for convening this meeting to

begin the Committee's examination of the...

00:22:03 Kanjorski, Paul E.U.S. Representative

Thank you very much. Now we'll hear from the

chairman of the full committee, Mr. Frank of Massachusetts.

00:22:11 Frank, BarneyU.S. Representative

Thank you, Mr. Chairman-to-be. I

would note, according to procedural regularities here, that...

00:28:08 Kanjorski, Paul E.U.S. Representative

I know recognize the gentleman from Texas for

two minutes. Mr. Paul.

00:28:14 Paul, RonU.S. Representative

Thank you, Mr. Chairman. The ranking

member made some important points early on about the timing...

00:32:18 Kanjorski, Paul E.U.S. Representative

Thank you. The gentleman from New York, Mr.

Ackerman, is recognized for two minutes.

00:32:32 Ackerman, GaryU.S. Representative

(Off mike, laughter.) Thank you, Mr.

Chairman, or whatever you are. (Laughter.) Bernard Madoff...

00:35:06 Kanjorski, Paul E.U.S. Representative

The chair thanks the gentleman from New York and

now we'll hear from the gentleman from Illinois,...

00:35:13 Manzullo, DonaldU.S. Representative

Thank you, Mr. Chairman. The -- as I

go over and review exactly what happened here -- at least...

00:37:14 Kanjorski, Paul E.U.S. Representative

The gentleman from California, Mr. Sherman, is

recognized for two minutes.

00:37:17 Sherman, BradU.S. Representative

Thank you, Mr. Chairman. The Madoff

scheme would still be in operation today and perhaps for...

00:40:38 Kanjorski, Paul E.U.S. Representative

The gentleman from New Jersey, Mr. Garrett, is

recognized for three minutes.

00:40:42 Garrett, ScottU.S. Representative

And I thank the chairman for holding

this important hearing this afternoon. I also want to thank...

00:44:06 Kanjorski, Paul E.U.S. Representative

Thank you.

The gentlelady from New York, Ms. Maloney, is recognized for one

minute.

00:44:14 Maloney, CarolynU.S. Representative

Thank you very much.

In contrast to the seeming ease with which Bernard Madoff vastly

overstated...

00:45:34 Kanjorski, Paul E.U.S. Representative

Thank you, Ms. Maloney.

The gentleman from New York -- or, I'm sorry, the gentleman from

Nevada,...

00:45:42 Heller, DeanU.S. Representative

Thank you very much, Mr. Chairman, and

to the ranking member, for holding today's meeting and...

00:47:29 Kanjorski, Paul E.U.S. Representative

Thank you very much, Mr. Heller.

The gentleman from New York, Mr. Meeks, is recognized for two

minutes.

00:47:34 Meeks, GregoryU.S. Representative

Thank you, Mr. Chairman. I thank you

and the ranking member for conducting this hearing today....

00:50:07 Kanjorski, Paul E.U.S. Representative

(Off mike.)

00:50:07 Scott, DavidU.S. Representative

Thank you very much, Mr. Chairman. I'm

delighted you're having this meeting.

I think that...

00:51:49 Kanjorski, Paul E.U.S. Representative

Thank you very much, Mr. Scott.

The gentleman from Florida, Mr. Klein, is recognized for two

minutes.

00:51:54 Klein, RonU.S. Representative

Thank you, Mr. Chairman, and I thank the

ranking member for holding this committee meeting today...

00:54:11 Kanjorski, Paul E.U.S. Representative

Thank you, Mr. Klein. Now the gentleman from

Texas, Mr. Green, is recognized for one minute.

00:54:17 Green, AlU.S. Representative

Thank you, Mr. Chairman, for hosting this

hearing. I, Mr. Chairman, don't know what should happen...

00:55:30 Kanjorski, Paul E.U.S. Representative

Thank you very much. And now finally, for one

minute, Mr. Perlmutter of New Hampshire (sic).

00:55:30 Perlmutter, EdU.S. Representative

Thanks, Mr. Chairman.

Colorado, we had a -- our fire and police pension fund was one of

the...

00:56:52 Frank, BarneyU.S. Representative

Thank you, Mr. Perlmutter. I just want to assure

you I know you're from Colorado, but I got...

00:57:18 Hodes, PaulU.S. Representative

Thank you, Mr. Chairman, and I thank you

and the ranking member for holding this hearing.

Ponzi...

00:58:51 Kanjorski, Paul E.U.S. Representative

I thank the gentleman from Colorado. I think

that's fair. (Laughter.)

00:58:57 Hodes, PaulU.S. Representative

New Hampshire, New Mexico, Colorado; they all have

snow, Mr. Chairman.

00:59:04 Kanjorski, Paul E.U.S. Representative

Right. The chair makes the point Mr. Obama

carried them all, so that's -- (laughter).

I...

00:59:34 Kotz, H. DavidInspector General

Good afternoon. Thank you for the opportunity to

testify today before this committee on the...

01:10:47 Kanjorski, Paul E.U.S. Representative

Thank you very much, Mr. Kotz. And next, we

will hear from Mr. Stephen P. Harbeck, president...

01:10:56 Harbeck, Stephen P.President and CEO

Thank you, Mr. Chairman. Chairman Kanjorski,

Chairman Frank and ranking member Bachus and members...

01:16:58 Kanjorski, Paul E.U.S. Representative

Thank you very much, Mr. Harbeck. I certainly

will start the questions and have a few.

Look,...

01:20:16 Kotz, H. DavidInspector General

Sure. Certainly with respect to my area, which is

looking at the SEC, looking at the potential...

01:21:02 Kanjorski, Paul E.U.S. Representative

What do you think it will take, Mr. Kotz?

01:21:02 Kotz, H. DavidInspector General

Well, I hesitant to give you an exact amount of time

because we just started the investigation....

01:21:36 Kanjorski, Paul E.U.S. Representative

Well as you get these issues resolved, very

quickly, I assume, will you provide that information...

01:22:13 Kotz, H. DavidInspector General

I agree with you, absolutely. That's not the case in

my office. That hasn't been the case in...

01:22:59 Kanjorski, Paul E.U.S. Representative

Okay, just -- I know my time has expired, but do

both of you gentlemen -- are you appointeds...

01:23:10 Kotz, H. DavidInspector General

No, I'm not. I'm not. The change in administration

won't affect my position.

01:23:14 Kanjorski, Paul E.U.S. Representative

Okay, Mr. Harbeck?

01:23:14 Harbeck, Stephen P.President and CEO

SIPC is not a government organization, and I will

be here as long as the board of directors...

01:23:21 Kanjorski, Paul E.U.S. Representative

Very good. So I'm going to turn it over to our

hound dog from Alabama, ranking member --

01:23:30 Bachus, SpencerU.S. Representative

Inspector general, let me ask you about four areas

for investigation. The first one that --...

01:23:52 Kotz, H. DavidInspector General

Absolutely. I mean, that is one of the most central

issues here that we have to look at, which...

01:24:25 Bachus, SpencerU.S. Representative

I appreciate that, because you couldn't have a

fraud of this magnitude without involvement of...

01:24:46 Kotz, H. DavidInspector General

Well, we're initially asking for SEC documents, so I

-- SEC employees and contractors -- but...

01:24:57 Bachus, SpencerU.S. Representative

Yeah, I'd be interested to see -- I'd urge you as

soon as possible to expand that to contractors,...

01:25:20 Kotz, H. DavidInspector General

Yeah, I mean, that's something that we have to look at

as well. I mean, there were forms that...

01:25:46 Bachus, SpencerU.S. Representative

You know, it appears that's a red flag, and then

when you couple that with the fact that, although...

01:26:29 Kotz, H. DavidInspector General

I mean, I think the issue of aggressive oversight --

was there aggressive oversight in place...

01:27:04 Bachus, SpencerU.S. Representative

In fact, I guess that would be my last red flag, in

that Madoff claimed to do something that...

01:27:55 Kotz, H. DavidInspector General

In my personal view, there should be folks at the SEC

who have that expertise, and you know,...

01:28:38 Bachus, SpencerU.S. Representative

I appreciate that. Do you have the authority to

contact former employees as well as former commissioners...

01:28:53 Kotz, H. DavidInspector General

Well, we could certainly contact, and have on many

occasions contacted, former employees. We...

01:29:13 Bachus, SpencerU.S. Representative

I hope you will, because, you know, some of this

would extend back at least 10 years. Mr. Harbeck,...

01:29:29 Harbeck, Stephen P.President and CEO

Well, one of the first things that we did with

respect to this was to modify our standard claim...

01:29:57 Bachus, SpencerU.S. Representative

Has Madoff supplied you with any -- or his

associates or the firm -- supplied you with what...

01:30:04 Harbeck, Stephen P.President and CEO

The trustee has taken over the books and records of

the brokerage firm and by the way, the investment...

01:30:28 Bachus, SpencerU.S. Representative

When they're one entity, does that create some,

maybe, opportunities for mischief?

01:30:35 Harbeck, Stephen P.President and CEO

I'm not an examiner, I'm a bankruptcy attorney. I

think you may be right, however.

01:30:40 Bachus, SpencerU.S. Representative

Okay, thank you. You've got a $1 billion line of

credit with the Treasury.

01:30:46 Harbeck, Stephen P.President and CEO

Yes, we do.

01:30:46 Bachus, SpencerU.S. Representative

You've had that since 1970. Obviously, is that --

01:30:52 Harbeck, Stephen P.President and CEO

Adjusted for inflation -- the number has never

changed since 1970 -- adjusted for inflation...

01:31:20 Bachus, SpencerU.S. Representative

Let me just close by asking you this -- no, that's

fine, I can --

01:31:29 Kanjorski, Paul E.U.S. Representative

Thank you very much. Something the ranking

member brought up, the broker/dealer being required...

01:32:09 Kotz, H. DavidInspector General

Yes, I mean, I know that there's been an issue that

has been raised of the limited authority...

01:32:19 Kanjorski, Paul E.U.S. Representative

Well isn't this the very point, though, that the

three-man auditing group that Mr. Ackerman...

01:32:33 Kotz, H. DavidInspector General

Yeah, I mean, it would certainly seem that if the

PCAOB had this information, that they would...

01:32:39 Kanjorski, Paul E.U.S. Representative

But the SEC gave an exemption since 19 -- or

since 2003 -- three or four times.

01:32:46 Kotz, H. DavidInspector General

Right, no, absolutely, there's an issue there about,

number one, what was the reason for that...

01:32:59 Kanjorski, Paul E.U.S. Representative

I understand, but what I'm not gathering is if

you or your predecessor knew of this -- isn't...

01:33:34 Kotz, H. DavidInspector General

I can only speak for the time I was as the inspector

general, but I agree that certainly if,...

01:33:53 Kanjorski, Paul E.U.S. Representative

But these gaping holes existed for five years

and an exemption has been given three times and...

01:34:10 Kotz, H. DavidInspector General

Yeah, I mean I -- we have not looked carefully at that

specific exemption issue, so it's difficult...

01:34:32 Kanjorski, Paul E.U.S. Representative

The junior lady from New York, Ms. Maloney.

01:34:32 Maloney, CarolynU.S. Representative

Thank you very much. My district

is home to many of Madoff's victims and as a representative...

01:35:46 Kotz, H. DavidInspector General

Yeah, I think that that's something that we would look

at very carefully as part of our review....

01:35:59 Maloney, CarolynU.S. Representative

Also it has been suggested that Madoff's tiny and

little-known auditor was a red flag. What...

01:36:18 Kotz, H. DavidInspector General

Yeah, I understand the point and as I indicated, we're

going to look not only at the specific...

01:36:36 Maloney, CarolynU.S. Representative

Now additionally, many people threw up red flags

and one of them was that Madoff's returns typically...

01:37:46 Kotz, H. DavidInspector General

Yeah, I mean that's exactly what I intend to find out.

Certainly, the articles that you mentioned...

01:38:29 Maloney, CarolynU.S. Representative

And when the key regulator is totally asleep even

when whistleblowers are calling and trying...

01:38:57 Kotz, H. DavidInspector General

Yeah, absolutely. I mean, we need to look at what was

the information that the individuals within...

01:39:11 Maloney, CarolynU.S. Representative

Well, many of us have lost confidence in the SEC.

It's pretty pathetic when a major newspaper,...

01:40:20 Kotz, H. DavidInspector General

Well, I can certainly understand the concerns and my

efforts will be to find out exactly what...

01:40:54 Maloney, CarolynU.S. Representative

I look forward to your report -- my time is

expired -- on why no one read the report on the...

01:41:06 Kanjorski, Paul E.U.S. Representative

Thank you, Ms. Maloney. And now we'll recognize

the gentleman from Texas, Mr. Paul.

01:41:12 Paul, RonU.S. Representative

Thank you, Mr. Chairman. I'd like to follow up on my

opening comments to Mr. Kotz. The contention...

01:45:23 Kotz, H. DavidInspector General

Sure.

I don't go into this with any preconceived notions that increased

regulation or...

01:45:55 Paul, RonU.S. Representative

The budget for the SEC nearly -- probably doubled in

the last seven or eight years. I think...

01:46:18 Kotz, H. DavidInspector General

Yeah. I'm not that familiar with the overall budget of

the SEC. I could talk more about our...

01:46:31 Paul, RonU.S. Representative

Do we do contracting out? Could that have been

hiring individuals where they were not called...

01:46:40 Kotz, H. DavidInspector General

There is some contracting out in the SEC, yes.

01:46:45 Kanjorski, Paul E.U.S. Representative

Thank you very much.

01:46:45 Paul, RonU.S. Representative

I yield back. Thank you.

01:46:45 Kanjorski, Paul E.U.S. Representative

Thank you very much, Mr. Paul.

Okay. The gentleman from North Carolina: Mr. Watt.

01:46:45 Watt, MelvinU.S. Representative

Thank you, Mr. CH airman.

Mr. Kotz, were you in the Inspector General's Office, prior to

becoming...

01:47:00 Kotz, H. DavidInspector General

No.

01:47:00 Watt, MelvinU.S. Representative

Okay. Is there anything that you, during your tenure

or your predecessor, could have done that...

01:47:15 Kotz, H. DavidInspector General

I mean, I'm not aware specifically. Obviously, I

think it's the job of the inspector general...

01:47:28 Watt, MelvinU.S. Representative

Yeah, but on this issue, is there anything that you

or your predecessor could have done? For...

01:47:54 Kotz, H. DavidInspector General

Yeah, I don't believe that --

01:47:54 Watt, MelvinU.S. Representative

Would that have been an appropriate role for the

inspector general?

01:48:00 Kotz, H. DavidInspector General

I don't believe that there is something specifically we

could have done. Now, we could have...

01:48:12 Watt, MelvinU.S. Representative

Okay. I'm not trying to blame you for any of this,

but it just seems to me that everything that...

01:48:50 Harbeck, Stephen P.President and CEO

There are analogies and there also differences.

01:48:50 Watt, MelvinU.S. Representative

Okay. I understand that, but you get appointed by

the members that you supervise, right?

01:49:03 Harbeck, Stephen P.President and CEO

No. First of all, we do not supervise anyone.

01:49:03 Watt, MelvinU.S. Representative

Who's on your board?

01:49:03 Harbeck, Stephen P.President and CEO

Our board of directors is composed of five

individuals. Pardon me, seven individuals, five of...

01:49:14 Watt, MelvinU.S. Representative

Okay, all right.

01:49:14 Harbeck, Stephen P.President and CEO

Three must be in the securities industry; two are

not permitted to be in the securities industry....

01:49:21 Watt, MelvinU.S. Representative

Okay. Is there anything that came to your attention

over the last five to 10 years about Mr....

01:49:39 Harbeck, Stephen P.President and CEO

No, sir. We do not. That rule is --

01:49:39 Watt, MelvinU.S. Representative

You're not required to do any audits or --

01:49:44 Harbeck, Stephen P.President and CEO

We're not permitted to.

01:49:44 Watt, MelvinU.S. Representative

-- you're not expected to do any audits?

01:49:44 Harbeck, Stephen P.President and CEO

We're not expected to or permitted to under the

statute we administer. That role falls to the...

01:49:53 Watt, MelvinU.S. Representative

Okay.

What happens if you exceed the $1 billion in -- I think you

testified that you have...

01:50:18 Harbeck, Stephen P.President and CEO

I believe this committee would be among the first

to know that. But we have $1.6 billion in...

01:50:37 Watt, MelvinU.S. Representative

I'm not asking you how much the claims will be. I

know you don't know that. But if you exceed...

01:50:50 Harbeck, Stephen P.President and CEO

Well, speaking to your point about who is on our

board of directors, we also have a director...

01:50:57 Watt, MelvinU.S. Representative

That's not the question I asked you, Mr. Harbeck.

That was the prior question. I'm asking you...

01:51:15 Harbeck, Stephen P.President and CEO

We will come to Congress.

01:51:15 Watt, MelvinU.S. Representative

And so the taxpayers will end up being responsible

for whatever that overage is on the claims,...

01:51:28 Harbeck, Stephen P.President and CEO

That would be the case if we did come to Congress.

We've not done so for 38 years and have never...

01:51:33 Watt, MelvinU.S. Representative

Okay. But under the statute is there either an

explicit or an implicit guarantee by the federal...

01:51:46 Harbeck, Stephen P.President and CEO

There is nothing explicit beyond the $1 billion

line of credit with the Treasury that's currently...

01:51:46 Watt, MelvinU.S. Representative

Is there anything implicit or has anything been

written about that over the years?

01:51:56 Harbeck, Stephen P.President and CEO

There really has not. And the reason is that this

event is such a remarkable outlier in terms...

01:52:11 Watt, MelvinU.S. Representative

I appreciate you volunteering all that information,

but I'm trying to -- if we -- would it be...

01:52:49 Harbeck, Stephen P.President and CEO

Yes. And they are a regulator.

01:52:49 Watt, MelvinU.S. Representative

All right. So is there a downside that you see to

doing that?

01:52:56 Harbeck, Stephen P.President and CEO

The question you've asked was asked in 1970 --

01:52:56 Watt, MelvinU.S. Representative

I didn't ask you that, now, Mr. -- I'm already out of

my time. I'm saying, can you articulate...

01:53:12 Harbeck, Stephen P.President and CEO

I don't think we could do any better job than the

people who are currently assigned to do it....

01:53:18 Watt, MelvinU.S. Representative

Which is the SEC?

01:53:18 Harbeck, Stephen P.President and CEO

The SEC and FINRA.

01:53:18 Watt, MelvinU.S. Representative

You're saying you couldn't have done a better job.

Even though your money and taxpayer money...

01:53:32 Harbeck, Stephen P.President and CEO

I would have hoped anybody could have done it, but

I'm not confident, since it's outside our...

01:53:40 Watt, MelvinU.S. Representative

Okay.

Thank you, Mr. Chairman. I yield back.

01:53:44 Kanjorski, Paul E.U.S. Representative

Thank you, Mr. Watt.

Mrs. Biggert.

01:53:44 Biggert, JudyU.S. Representative

Thank you, Mr. Chairman.

Mr. Kotz, looking over the number of the years that something

came...

01:55:00 Kotz, H. DavidInspector General

Well, I think we'd need to look at both those issues.

First of all, how...

01:55:31 Biggert, JudyU.S. Representative

Well, in your testimony you say that where

allegations of criminal conduct are involved, we...

01:56:01 Kotz, H. DavidInspector General

Well, when I mentioned that, I was talking about my

office, the Office of Inspector General....

01:56:36 Biggert, JudyU.S. Representative

Well, do you think that they should be more

involved in this investigation, then? Wouldn't it...

01:56:53 Kotz, H. DavidInspector General

Well, the investigation that the SEC Division of

Enforcement is undertaking, with regard to...

01:57:28 Biggert, JudyU.S. Representative

Thank you.

Well, Mr. Chairman, if -- may I suggest that we invite the FBI

and the Department...

01:57:59 Kanjorski, Paul E.U.S. Representative

I think that's an excellent suggestion. I will

certainly take it under consideration.

01:57:59 Biggert, JudyU.S. Representative

Then just one other question -- the focus about

the relationship between the SEC staff and Mr....

01:58:20 Kotz, H. DavidInspector General

Yes, I believe they do. And we have to look very

carefully at those rules to see if any rules...

01:58:46 Biggert, JudyU.S. Representative

Thank you. I yield back.

01:58:46 Kanjorski, Paul E.U.S. Representative

Thank you very much.

And our next, Mr. Ackerman of New York.

01:58:57 Ackerman, GaryU.S. Representative

Thank you, Mr. Chairman.

I'm trying to figure out what we got here. We got the president

of...

02:00:32 Harbeck, Stephen P.President and CEO

Congressman, the Securities Investor Protection

Corporation becomes involved only after it has...

02:00:42 Ackerman, GaryU.S. Representative

So you're not protecting the consumer. So you're

not protecting the security investor, is what...

02:00:52 Harbeck, Stephen P.President and CEO

With respect, I disagree.

02:00:52 Ackerman, GaryU.S. Representative

And it's not until Mr. Madoff turned himself in,

or had his children turn himself in, that you...

02:01:05 Harbeck, Stephen P.President and CEO

With respect, I disagree with your characterization

that we're not protecting investors.

02:01:05 Ackerman, GaryU.S. Representative

I got 50 billion dollars' worth of investors that

would disagree with you, but go ahead.

02:01:14 Harbeck, Stephen P.President and CEO

And we are going to use the maximum extent of the

law to return funds to them. But we have no...

02:01:20 Ackerman, GaryU.S. Representative

What funds? What funds?

02:01:20 Harbeck, Stephen P.President and CEO

From SIPIC's funds.

02:01:20 Ackerman, GaryU.S. Representative

How much money is there in SIPIC?

02:01:26 Harbeck, Stephen P.President and CEO

We have $1.6 billion.

02:01:26 Ackerman, GaryU.S. Representative

I got $50 billion to cover. How're you going to

do it? You got a Ponzi scheme?

02:01:31 Harbeck, Stephen P.President and CEO

Most -- a great deal of those funds are false

profits that never existed.

02:01:31 Ackerman, GaryU.S. Representative

False profits?

02:01:31 Harbeck, Stephen P.President and CEO

Yes, sir.

02:01:37 Ackerman, GaryU.S. Representative

So the government has been taxing people on false

profits?

02:01:42 Harbeck, Stephen P.President and CEO

I think -- I think your point on that is very well

taken, and I believe there are tax remedies...

02:01:54 Ackerman, GaryU.S. Representative

Mr. Inspector General?

02:01:54 Kotz, H. DavidInspector General

Yes, well, I can certainly understand what your

concern is, and I'm going to ask those very...

02:02:06 Ackerman, GaryU.S. Representative

What do you do before the Bernie Madoffs and the

mini-Madoffs turn themselves in?

02:02:13 Kotz, H. DavidInspector General

Right. Well, we need to make sure that the SEC has

enforcement and examination divisions in...

02:02:20 Ackerman, GaryU.S. Representative

Do they?

02:02:20 Kotz, H. DavidInspector General

Well, that's what my investigation and audits will

determine.

02:02:20 Ackerman, GaryU.S. Representative

You don't know that they have it or not?

02:02:20 Kotz, H. DavidInspector General

Well, I don't know that they had it --

02:02:25 Ackerman, GaryU.S. Representative

You had a -- you've been doing this for over a

year. Someone else has been doing it for a year...

02:02:35 Kotz, H. DavidInspector General

Well, I could certainly say that if the allegations

are as they say, then there's great concern...

02:02:43 Ackerman, GaryU.S. Representative

So after the fact, we're going to know if you

were able to do your job all these years and the...

02:03:51 Kotz, H. DavidInspector General

Yeah, I didn't have anything to do with instructions

about assets. That was the enforcement...

02:03:57 Ackerman, GaryU.S. Representative

Good. Will you make them -- would you turn that

-- will you turn that over to this Committee?

02:04:02 Kotz, H. DavidInspector General

I don't have that information, but certainly

everything that will be in my report I will seek...

02:04:02 Ackerman, GaryU.S. Representative

Mr. Harbeck, do you have it?

02:04:09 Harbeck, Stephen P.President and CEO

I know that the Securities and Exchange Commission

has it. SIPIC itself does not have the --

02:04:14 Ackerman, GaryU.S. Representative

Duuhhhhhh.

02:04:14 Harbeck, Stephen P.President and CEO

What I can tell you, sir, is that the trustee will

work with the SEC, get those assets, and...

02:04:23 Ackerman, GaryU.S. Representative

Will you turn it over to this Committee? The

public has a right to know. There's a bankruptcy,...

02:04:37 Harbeck, Stephen P.President and CEO

I can promise to you that if it is the Committee's

pleasure to have that report, I will get...

02:04:43 Ackerman, GaryU.S. Representative

I'm making that request. Will you get it to me

and the Committee as soon as you can?

02:04:43 Harbeck, Stephen P.President and CEO

Yes, sir.

02:04:43 Ackerman, GaryU.S. Representative

Can you do that within a week, because you turned

it over to the court already?

02:04:50 Harbeck, Stephen P.President and CEO

If the SEC has not given it to me, they will.

02:04:50 Ackerman, GaryU.S. Representative

And you will give it to us within a week?

02:04:50 Harbeck, Stephen P.President and CEO

Yes, sir.

02:04:55 Ackerman, GaryU.S. Representative

Now, what happens to this clawback thing that are

making a lot of people petrified? Why is there...

02:05:52 Harbeck, Stephen P.President and CEO

Your question with respect to clawbacks is that,

under the law, all customers participate in...

02:06:18 Ackerman, GaryU.S. Representative

Well, my constituent put in $10 million the day

before Mr. Madoff turned himself in, and people...

02:06:26 Harbeck, Stephen P.President and CEO

He is part of that common pool and, unfortunately,

he will not get his $10 million back any...

02:06:32 Ackerman, GaryU.S. Representative

Is there a government clawback for his $10

million?

02:06:32 Harbeck, Stephen P.President and CEO

No. Those funds are already in the Madoff

enterprise.

02:06:40 Ackerman, GaryU.S. Representative

The insurance that people have with SIPC -- the

$500,000 insurance that they think that they...

02:07:00 Harbeck, Stephen P.President and CEO

I've heard many such stories, and the answer to

your question is --

02:07:00 Ackerman, GaryU.S. Representative

Two-and-a-half years?

02:07:06 Harbeck, Stephen P.President and CEO

No, sir. We'll do it faster than that.

02:07:06 Ackerman, GaryU.S. Representative

Can he make his mortgage payment before he loses

his house and have to go live with his children...

02:07:11 Harbeck, Stephen P.President and CEO

If he can demonstrate that he put money in, and did

not take money out, we will get money back...

02:07:18 Ackerman, GaryU.S. Representative

Ask unanimous consent, with the witnesses, to

(count ?) permission, which I have, to put his...

02:07:27 Kanjorski, Paul E.U.S. Representative

Without objection, so ordered.

02:07:27 Ackerman, GaryU.S. Representative

Yield back whatever time I might have.

02:07:27 Kanjorski, Paul E.U.S. Representative

The gentleman from Nevada, Mr. Heller, for five

minutes.

02:07:35 Heller, DeanU.S. Representative

Thank you very much, Mr. Chairman.

And I want to thank the witnesses for attending. I know this

isn't...

02:07:48 Kotz, H. DavidInspector General

That's, unfortunately, not in my area of expertise.

02:07:48 Heller, DeanU.S. Representative

Do you anticipate someone in your agency would know

what a split-strike?

02:07:56 Kotz, H. DavidInspector General

Absolutely. I mean, that's certainly the areas within

the agency, not the watchdog office, that...

02:08:04 Heller, DeanU.S. Representative

Because I believe this is the basis of it. Okay, I

can't ask you the question, then, if you...

02:08:24 Kotz, H. DavidInspector General

I'm not at the moment. But, again, that's something

that we need to look at in the investigation,...

02:08:33 Heller, DeanU.S. Representative

Are you aware if there's a cool-down period for SEC

employees working in the industry?

02:08:41 Kotz, H. DavidInspector General

I believe that the standard rules -- standards of

conduct apply to SEC employees like every...

02:09:39 Heller, DeanU.S. Representative

Right.

02:09:39 Kotz, H. DavidInspector General

-- their decisions.

02:09:39 Heller, DeanU.S. Representative

And I appreciate that comment, and I would hope

that you would take a good close look at that.

I...

02:10:01 Kotz, H. DavidInspector General

We don't do -- our office is the watchdog office of

inspector general, so we don't do audits...

02:10:47 Heller, DeanU.S. Representative

So, you're anticipating that you would propose some

level of audit standards, or frequency of...

02:10:55 Kotz, H. DavidInspector General

Yeah, well, we would make recommendations regarding

the office's policies, potentially, about...

02:10:55 Heller, DeanU.S. Representative

Sure.

02:10:55 Kotz, H. DavidInspector General

First, I think we need to determine that the

examinations would find what they're supposed to...

02:11:17 Heller, DeanU.S. Representative

Thank you.

I will yield back.

02:11:17 Kanjorski, Paul E.U.S. Representative

The gentleman from California, Mr. Sherman.

02:11:17 Sherman, BradU.S. Representative

Thank you.

Mr. Harbeck, I want to thank you for pointing out that we're

dealing with one...

02:12:27 Harbeck, Stephen P.President and CEO

That is correct, sir.

02:12:27 Sherman, BradU.S. Representative

And in contrast, it's FINRA and the SEC that's

supposed to be doing the enforcing. They're the...

02:13:42 Harbeck, Stephen P.President and CEO

It all depends on the claims, which we haven't yet

received, Congressman. And I --

02:13:42 Sherman, BradU.S. Representative

Okay, but everybody who has one of these

statements -- where they directly invested in Madoff,...

02:14:02 Harbeck, Stephen P.President and CEO

They are protected. We don't use the word

"insurance" because of the fact that we don't protect...

02:14:09 Sherman, BradU.S. Representative

Okay. (Well, but ?) you do form an insurance

company function --

02:14:09 Harbeck, Stephen P.President and CEO

Yes.

02:14:09 Sherman, BradU.S. Representative

-- and any insurance regulator in this country who

looked at the fact that you're standing behind...

02:15:23 Harbeck, Stephen P.President and CEO

We look at the issue of our solvency every board

meeting. And what I can tell you is --

02:15:23 Sherman, BradU.S. Representative

I'm not asking for solvency, I'm asking for your

net worth -- your assets, minus your liabilities,...

02:15:56 Harbeck, Stephen P.President and CEO

The answer to your question is that historically

these frauds have been found before it costs...

02:16:04 Sherman, BradU.S. Representative

That's ancient history. Now we're in the new

history, the history of 1,000-point drops in the...

02:16:44 Harbeck, Stephen P.President and CEO

The first thing that happens when our fund falls

below $1 billion is we automatically institute...

02:16:54 Sherman, BradU.S. Representative

But you haven't done that yet even though you're

clearly going to lost at least $500 million...

02:17:05 Harbeck, Stephen P.President and CEO

I would expect our board will move on that in

January, sir.

02:17:05 Sherman, BradU.S. Representative

In January. Okay, let me shift to Mr. Kotz.

There are some -- you're going to write this great...

02:17:48 Kotz, H. DavidInspector General

Well, that's right. And what we are planning to do is

not just look at the tips that were provided...

02:17:54 Sherman, BradU.S. Representative

But, as of now, we don't know whether half of them

are handled correctly or maybe zero percent...

02:18:03 Kotz, H. DavidInspector General

Right. And so we need to look at all of the tips and

look at the process to ensure that --

02:18:03 Sherman, BradU.S. Representative

Okay. Likewise, do you know whether the SEC even

today is giving even an extra half-hour of...

02:18:22 Kotz, H. DavidInspector General

I don't know, but will get back --

02:18:22 Sherman, BradU.S. Representative

I'd sure like to find out. I yield back to the

chairman.

02:18:22 Kanjorski, Paul E.U.S. Representative

The gentleman from Alabama.

02:18:29 Bachus, SpencerU.S. Representative

Thank you. Mr. Harbeck, I want to compliment

you on a good work over a very difficult year,...

02:18:46 Harbeck, Stephen P.President and CEO

That is correct.

02:18:46 Bachus, SpencerU.S. Representative

And a lot of what has been lost as far as assets by

investors will be due to market loss, will...

02:18:56 Harbeck, Stephen P.President and CEO

Well, we're looking at this as a missing asset case

because assets were put in; there's no --...

02:19:15 Bachus, SpencerU.S. Representative

Right. He has acknowledged that he actually stole

money from investors.

02:19:15 Harbeck, Stephen P.President and CEO

Yes, he did. Yes, he has.

02:19:15 Bachus, SpencerU.S. Representative

So -- but I think it's going to be very difficult

and complex because you have no records or...

02:19:33 Harbeck, Stephen P.President and CEO

Well, certainly the records are -- don't match one

hand with the other in terms of the actual...

02:19:43 Bachus, SpencerU.S. Representative

Do you have auditors and forensic experts on staff?

Are you able to hire --

02:19:43 Harbeck, Stephen P.President and CEO

The trustee has hired forensic accountant, computer

experts and attorneys who specialize in...

02:20:01 Bachus, SpencerU.S. Representative

Right. I guess it's going to be very hard, in just

a matter of weeks, to start processing claims,...

02:20:10 Harbeck, Stephen P.President and CEO

It is going to be hard and we're going to do it.

02:20:10 Bachus, SpencerU.S. Representative

What?

02:20:10 Harbeck, Stephen P.President and CEO

It is going to be hard and we're going to do it.

That's why I certainly have urged customers...

02:20:24 Bachus, SpencerU.S. Representative

Okay, so there is some expectation on your part

that some could start getting reimbursed within...

02:20:32 Harbeck, Stephen P.President and CEO

We have a meeting with the Securities and Exchange

Commission division of trading and markets...

02:20:44 Bachus, SpencerU.S. Representative

All right. And I guess small investors may

actually have more promise of getting at least all...

02:20:53 Harbeck, Stephen P.President and CEO

Well, the investors who are going to have the

easiest trail are the people who have been in...

02:20:53 Bachus, SpencerU.S. Representative

Okay. And let me close by asking you this: Mr.

Ackerman asked you to share records with us but...

02:21:09 Harbeck, Stephen P.President and CEO

It is a bankruptcy and certainly, you know, if the

records are filed under seal, I cannot produce...

02:21:09 Bachus, SpencerU.S. Representative

Yeah, not only that, but I think you also couldn't

produce it to us before you produce it to...

02:21:21 Harbeck, Stephen P.President and CEO

I don't know under what terms the Securities and

Exchange Commission was given the authority...

02:21:31 Bachus, SpencerU.S. Representative

Yeah. I think that the fact that -- the judicial

proceeding is going to limit you somewhat,...

02:21:31 Harbeck, Stephen P.President and CEO

Yeah. I will get it to the committee as soon as I

legally may.

02:21:40 Bachus, SpencerU.S. Representative

Thank you.

02:21:40 Kanjorski, Paul E.U.S. Representative

Mr. Meeks, gentleman from New York.

02:21:40 Meeks, GregoryU.S. Representative

Thank you, Mr. Chair. Let me find out from Mr. Kotz

-- I was recently looking and we saw that...

02:23:05 Kotz, H. DavidInspector General

Yeah, I can certainly look into what the SEC does vis-

-vis these offshore operations and that's...

02:23:30 Meeks, GregoryU.S. Representative

But you can't -- you -- have you done any internal

investigations thus far of the SEC with how...

02:24:00 Kotz, H. DavidInspector General

I have not looked at that specific issue, no, but I

certainly can.

02:24:00 Meeks, GregoryU.S. Representative

So you're saying that's something that you will do

in the future, but it hasn't happened in...

02:24:07 Kotz, H. DavidInspector General

Right.

02:24:07 Meeks, GregoryU.S. Representative

You know, also, in addition there, too, if you look

at the SEC's annual report, the SEC cites...

02:25:03 Kotz, H. DavidInspector General

Well, I can't today as we're sitting here, but part of

the process of the investigation and...

02:25:31 Meeks, GregoryU.S. Representative

So all of this is going to be what you're looking at

now and you're going to come back with...

02:26:37 Kotz, H. DavidInspector General

Well, I mean, that is an issue that's come up in other

specific investigations and that is an...

02:27:07 Meeks, GregoryU.S. Representative

Mr. Harbeck, let me just ask you one last question.

And I know that in...

02:27:54 Harbeck, Stephen P.President and CEO

The bankruptcy proceedings of LBIE, which is the

European subsidiary of Lehman Brothers, are...

02:28:43 Kanjorski, Paul E.U.S. Representative

The gentleman from Texas, Mr. Hinojosa.

02:28:43 Hinojosa, RubenU.S. Representative

Thank you, Mr. Chairman.

Chairman Kanjorski, I want to thank you for having done this

congressional...

02:29:51 Kanjorski, Paul E.U.S. Representative

Without objection, so ordered.

02:29:51 Hinojosa, RubenU.S. Representative

I would also like to insert into the record a

copy of today's Bloomberg, Wall Street Journal...

02:30:03 Kanjorski, Paul E.U.S. Representative

Without objection, so ordered.

02:30:03 Hinojosa, RubenU.S. Representative

Thank you.

I have a question for Mr. David Kotz. Does your Office of

Inspector General...

02:30:24 Kotz, H. DavidInspector General

Well, our office is the one that looks at what

happened with respect to whether these things...

02:31:19 Hinojosa, RubenU.S. Representative

Mr. Kotz, I'm sure that you're going to do a good

job. But like my colleagues have pointed out,...

02:31:47 Kotz, H. DavidInspector General

Sure. Well, and I think if you look at the track

record of my office, Office of Inspector General,...

02:33:10 Hinojosa, RubenU.S. Representative

At this point, Mr. Kotz -- Kotz -- (corrects

pronunciation) -- since you have already seen some...

02:33:28 Kotz, H. DavidInspector General

We haven't gotten into the stage of the investigation

where I can say definitively either way....

02:34:12 Hinojosa, RubenU.S. Representative

My time has run out. And Mr. Chairman, I yield

back.

02:34:12 Kanjorski, Paul E.U.S. Representative

Thank you very much, Mr. Hinojosa.

Mrs. McCarthy of New York.

02:34:24 McCarthy, CarolynU.S. Representative

Thank you, Mr. Chairman.

Mr. Kotz, the question I want to ask you is -- an awful lot of

the...

02:34:42 Kotz, H. DavidInspector General

Yeah, I wouldn't know the answer to that question.

That would be a matter that --

02:34:42 McCarthy, CarolynU.S. Representative

Ten employees? Fifteen employees? Twenty?

02:34:42 Kotz, H. DavidInspector General

No, I wasn't involved in any of the issues relating to

-- any actions taken against Mr. Madoff....

02:34:55 McCarthy, CarolynU.S. Representative

All right, with that being said, say it was a

fairly large corporation, being that it seems...

02:35:14 Kotz, H. DavidInspector General

Yeah --

02:35:14 McCarthy, CarolynU.S. Representative

From what I understand, they only had a small

firm with one or two people.

02:35:14 Kotz, H. DavidInspector General

Yeah. I mean, I think that there are some serious

questions about whether that information about...

02:36:00 McCarthy, CarolynU.S. Representative

One other thing. Number one, I want to say thank

you both for your patience in front of this...

02:36:31 Kotz, H. DavidInspector General

That's correct. The Office of Inspector General looks

at matters after they've occurred to try...

02:36:41 McCarthy, CarolynU.S. Representative

I think what's going to be interesting as we go

forward -- my husband worked for a brokerage...

02:37:40 Kotz, H. DavidInspector General

Right. No, I mean, absolutely, that's a very

significant issue. And, you know, one could look...

02:38:37 McCarthy, CarolynU.S. Representative

My concern is, being that this went on for so

many years, how many other organizations, firms...

02:38:48 Kotz, H. DavidInspector General

Yeah, and as was indicated, you know, the market

collapse obviously had a lot to do with the...

02:39:35 McCarthy, CarolynU.S. Representative

I think that also, as we go forward on the full

committee and the subcommittees, obviously the...

02:40:01 Kotz, H. DavidInspector General

Yeah.

02:40:01 McCarthy, CarolynU.S. Representative

With that, I yield back.

02:40:01 Kanjorski, Paul E.U.S. Representative

Thank you very much, Ms. McCarthy. Now the

gentleman from Massachusetts, Mr. Lynch.

02:40:01 Lynch, Stephen F.U.S. Representative

Thank you. Now, with the greatest

respect to my colleague, let me just pick up on that point...

02:43:25 Kotz, H. DavidInspector General

Yeah, I would say absolutely that is something we need

to look at, and that is a major issue...

02:44:07 Lynch, Stephen F.U.S. Representative

Let me ask you one other thing, Mr. Kotz. In your

investigations -- you know, a couple of weeks...

02:45:21 Frank, BarneyU.S. Representative

Thank you very much, Mr. Lynch. Mr. Scott of

Georgia.

02:45:28 Scott, DavidU.S. Representative

Thank you, Mr. Chairman.

You know, Mr. Kotz, I've been sitting here trying to grab my

hands...

02:46:54 Kotz, H. DavidInspector General

Yeah. No, I'm not sure -- absolutely not -- and

that's something we will look at. I can tell...

02:47:35 Scott, DavidU.S. Representative

And also, in each of the reports, even when the SEC

looked at some of this stuff, none of that...

02:47:45 Kotz, H. DavidInspector General

Right.

02:47:45 Scott, DavidU.S. Representative

So I think that there is something with this. I

think that -- and I would hope -- I think one...

02:49:14 Harbeck, Stephen P.President and CEO

It's far too early to say, but we believe that the

$50 billion figure includes the inflated...

02:50:20 Scott, DavidU.S. Representative

Okay, so we're talking about ill-gotten gains, we're

talking about loss and gains that, to some...

02:50:52 Harbeck, Stephen P.President and CEO

That's correct, and the way this was perpetuated

for so long is people did not withdraw their...

02:51:09 Scott, DavidU.S. Representative

Now, there are what we call -- there's a management

firm for these -- what's left of these assets...

02:51:31 Harbeck, Stephen P.President and CEO

No, that's -- the trustee has received $29 million

back from a bank account. Some of that will...

02:51:44 Scott, DavidU.S. Representative

Okay, does this cover liquidation costs?

02:51:44 Harbeck, Stephen P.President and CEO

Yes, and that is not all costs that have, thus far,

been incurred -- that's more than what has,...

02:51:44 Scott, DavidU.S. Representative

All right, so that's a false figure that's out there

-- this $29 million?

02:51:54 Harbeck, Stephen P.President and CEO

It's somewhat correct in that that is an amount of

money that has been returned to the trustee...

02:51:54 Scott, DavidU.S. Representative

Okay, my --

02:52:02 Kanjorski, Paul E.U.S. Representative

Mr. Scott, your time has expired.

02:52:02 Scott, DavidU.S. Representative

All right. Thank you, sir.

02:52:02 Kanjorski, Paul E.U.S. Representative

The gentleman from Texas, Mr. Green.

02:52:09 Green, AlU.S. Representative

Thank you, Mr. Chairman, and again, I thank you for

hosting this event. Mr. Kotz, permit me...

02:53:07 Kotz, H. DavidInspector General

Yes, well, we were asked to do an audit of Bear

Stearns to determine whether the SEC misread...

02:53:15 Green, AlU.S. Representative

Exactly, which means that you can receive

intelligence from sources about inappropriate conduct...

02:53:45 Kotz, H. DavidInspector General

Right.

02:53:45 Green, AlU.S. Representative

Is it true or not true that your office received

some degree of intelligence prior to the arrest...

02:54:01 Kotz, H. DavidInspector General

No, no, to my knowledge, it's not true. There was

never a complaint; we actually searched back...

02:54:25 Green, AlU.S. Representative

The investigation that was begun with reference to

Mr. Madoff was never brought to the attention...

02:54:25 Kotz, H. DavidInspector General

Well, there was an enforcement investigation, not an

investigation that our office does.

02:54:35 Green, AlU.S. Representative

I understand, but you said that the investigation

that was begun with reference to -- and I'm...

02:54:49 Kotz, H. DavidInspector General

Right, what the chairman stated in his request for me

to conduct an investigation was the concern...

02:55:08 Green, AlU.S. Representative

And the enforcement division of which you speak is

one other than the enforcement division that...

02:55:15 Kotz, H. DavidInspector General

Yes, I head the Office of Inspector General that is

separate from the enforcement division.

02:55:21 Green, AlU.S. Representative

And so the enforcement division of the SEC received

its complaint, made its investigation, but...

02:55:32 Kotz, H. DavidInspector General

That's the allegation that the chairman asked me to

look into and what we will confirm, if it...

02:55:40 Green, AlU.S. Representative

So the allegation is made by whom?

02:55:40 Kotz, H. DavidInspector General

Well, the chairman of the SEC, when he asked me to

conduct the investigation, he stated that...

02:55:54 Green, AlU.S. Representative

Uh, there's a difference between why and whether.

02:55:54 Kotz, H. DavidInspector General

You're correct, sir.

02:55:54 Green, AlU.S. Representative

Okay, so which was it?

02:56:00 Kotz, H. DavidInspector General

It was why -- he asked why was, in his view, he did

not believe that the information regarding...

02:56:29 Green, AlU.S. Representative

To your knowledge, has there been any report, or

complaint, I should say, against the SEC with...

02:56:48 Kotz, H. DavidInspector General

Yes, I mean, certainly, there have been reports that

Mr. Marcopolis met with folks from the...

02:56:58 Green, AlU.S. Representative

And did Mr. Marcopolis give his report -- his report

was forwarded to your agency?

02:57:04 Kotz, H. DavidInspector General

To the agency in which I work, correct -- not my

office, but yes, my agency.

02:57:04 Green, AlU.S. Representative

But not -- yeah, this is not about you, personally,

okay. It came to the attention of your office.

02:57:12 Kotz, H. DavidInspector General

My -- the agency.

02:57:12 Green, AlU.S. Representative

Or your agency, all right. I'm sorry, your agency

-- I'll get my diction correct. Sometimes,...

02:57:49 Kotz, H. DavidInspector General

Right, because we were never made aware of them. In

other words, the SEC can undertake actions...

02:57:57 Green, AlU.S. Representative

But you said you received the same report that we

are contending the SEC should have acted upon,...

02:58:08 Kotz, H. DavidInspector General

My office never did, though.

02:58:08 Green, AlU.S. Representative

Not your office, your agency.

02:58:08 Kotz, H. DavidInspector General

Right, but it's a large agency, so because a

particular division of the agency received a report...

02:58:29 Green, AlU.S. Representative

Okay, so your office never received the report from

Mr. --

02:58:29 Kotz, H. DavidInspector General

No, we didn't receive it until now, as we're doing the

investigation.

02:58:35 Ackerman, GaryU.S. Representative

Mr. Chairman?

02:58:35 Kanjorski, Paul E.U.S. Representative

Yes.

02:58:35 Ackerman, GaryU.S. Representative

Could I ask unanimous consent that the gentleman

have one more minute so that the witness can...

02:59:01 Kotz, H. DavidInspector General

Correct.

02:59:01 Green, AlU.S. Representative

I will yield that one minute that you have asked

that I receive to you.

02:59:01 Ackerman, GaryU.S. Representative

I was just following up on your excellent,

excellent question -- so when you say your office,...

02:59:18 Kotz, H. DavidInspector General

Right. Right, no, we are not the --

02:59:18 Ackerman, GaryU.S. Representative

So they go to the enforcement, which is something

completely different, which is basically an...

02:59:39 Kotz, H. DavidInspector General

Right.

I mean, we would never see a document that suggests that there

was...

02:59:52 Ackerman, GaryU.S. Representative

Mr. Chairman, I would suggest, if there is

confusion here on the committee that we would hope...

03:00:26 Kanjorski, Paul E.U.S. Representative

I think it's a very good point taken, Mr.

Ackerman.

03:00:26 Ackerman, GaryU.S. Representative

And I yield the gentleman back his time.

03:00:26 Green, AlU.S. Representative

Thank you. And I would adopt the comments of the

gentleman and I have one final question, Mr....

03:00:50 Kotz, H. DavidInspector General

Right, not that I -- no, that's correct. We have now

because we've initiated the investigation,...

03:00:50 Green, AlU.S. Representative

But prior to this investigation, Mr. Harry

Makopoulos or no other person concerning the Ponzi...

03:01:12 Kotz, H. DavidInspector General

That's my understanding, right.

03:01:12 Green, AlU.S. Representative

Thank you.

03:01:12 Kanjorski, Paul E.U.S. Representative

The gentleman from Missouri, Mr. Cleaver.

03:01:17 Cleaver, EmanuelU.S. Representative

Thank you, Mr. Chairman. Most of

the questions that I was going to raise have already been raised.

Actually,...

03:03:22 Kotz, H. DavidInspector General

Kotz.

03:03:22 Cleaver, EmanuelU.S. Representative

That we need a holistic and comprehensive

approach. You said that earlier. Give me an alternative...

03:03:57 Kotz, H. DavidInspector General

Yeah, I mean, I would rather be able to answer that

question after I've -- after I've conducted...

03:04:21 Cleaver, EmanuelU.S. Representative

How long do you think the investigation is going

to last? Of course, I guess it's difficult...

03:04:38 Kotz, H. DavidInspector General

Yeah, I mean, I understand the need for the

investigation to be conducted very quickly. And...

03:05:00 Cleaver, EmanuelU.S. Representative

Mr. Harbeck, do you have any idea, how do you

assess that, the assets? I mean, it seems to me...

03:05:14 Harbeck, Stephen P.President and CEO

The first thing that the trustee, one of the first

things that the trustee for the liquidation...

03:05:32 Cleaver, EmanuelU.S. Representative

How do we know -- I mean, how will we find out who

is owed what?

03:05:38 Harbeck, Stephen P.President and CEO

Well, on the who is owed what, the best source of

information is the claimants themselves.

03:05:45 Cleaver, EmanuelU.S. Representative

All right. Thank you, Mr. Chairman.

03:05:45 Kanjorski, Paul E.U.S. Representative

Thank you very much, Mr. Cleaver. Gentleman

from Colorado, Mr. Perlmutter.

03:05:51 Perlmutter, EdU.S. Representative

Thanks, Mr. Chairman. Mr. Harbeck, a question

was asked of Mr. Kotz whether he knew what a split-strike...

03:06:03 Harbeck, Stephen P.President and CEO

The only options trading I'm familiar with is

covered calls. So the answer is no.

03:06:03 Perlmutter, EdU.S. Representative

I guess kind of what we're talking about here

-- and Mr. Paul sort of talked about personal...

03:07:45 Harbeck, Stephen P.President and CEO

The liquid assets, as far as we know, are in the

neighborhood of 830 (million dollars) to $850...

03:08:06 Perlmutter, EdU.S. Representative

Okay. And just -- let's talk about the claw-

back and then I'd like to move to Mr. Kotz, real...

03:08:27 Harbeck, Stephen P.President and CEO

The fraudulent transfer-preference and insider-

preference provisions of the bankruptcy code...

03:09:09 Perlmutter, EdU.S. Representative

So my firefighters who, say, got nothing back

-- I mean, I don't know what the status is, but...

03:09:24 Harbeck, Stephen P.President and CEO

That's what the law is. The statute of limitations

helps those retirees in one respect. And...

03:09:34 Perlmutter, EdU.S. Representative

All right. Next question: Does your agency

every talk to the SEC about fears that you see from...

03:09:50 Harbeck, Stephen P.President and CEO

In that particular instance, that didn't come to

our attention. I know that for example in the...

03:10:31 Perlmutter, EdU.S. Representative

But here's where the SEC, I think -- and we're

all saying the same thing -- has fallen down...

03:10:31 Kotz, H. DavidInspector General

Yes.

03:10:31 Perlmutter, EdU.S. Representative

Should the Bear Stearns incident have brought

this Madoff kind of thing to anybody's attention?...

03:11:24 Kanjorski, Paul E.U.S. Representative

Thank you very much, Mr. Perlmutter.

03:11:24 Kotz, H. DavidInspector General

Yeah, I think that they are different, although we did

find in the Bear Stearns case that there...

03:11:43 Perlmutter, EdU.S. Representative

Thank you.

03:11:43 Kanjorski, Paul E.U.S. Representative

Thank you, Mr. Perlmutter.

Next we'll have the gentleman from Indiana, Mr. Donnelly.

03:11:43 Donnelly, Joseph "Joe"U.S. Representative

Thank you, Mr. Chairman.

Mr. Kotz, as the inspector general for the SEC, you keep an eye

on...

03:12:30 Kotz, H. DavidInspector General

Yeah, I mean, that would be that particular office.

But as part of our investigation and audit,...

03:13:00 Donnelly, Joseph "Joe"U.S. Representative

And I guess that's where I'm leading to is we've

heard talk that the custodial relations didn't...

03:13:24 Kotz, H. DavidInspector General

Yeah, I mean, in my view it would be one of them.

03:13:24 Donnelly, Joseph "Joe"U.S. Representative

Right.

03:13:24 Kotz, H. DavidInspector General

It would be one of them.

03:13:24 Donnelly, Joseph "Joe"U.S. Representative

And here we see one after another after another,

and this goes on for year after year and is...

03:13:40 Kotz, H. DavidInspector General

So if that's the case, either there are problems in

terms of how the forms are being used or...

03:13:49 Donnelly, Joseph "Joe"U.S. Representative

And as inspector general, how would we find out,

as Congress, what forms there are? And we'd...

03:13:59 Kotz, H. DavidInspector General

Well, we will certainly, as we produce our reports,

incorporate the forms, cite them and analyze...

03:14:15 Donnelly, Joseph "Joe"U.S. Representative

And I guess part two of this question is, what

other organizations that the SEC audits, enforces...

03:14:58 Kotz, H. DavidInspector General

Right. No, we need to look at whether it's the forms

that are problematic such that they need...

03:15:32 Donnelly, Joseph "Joe"U.S. Representative

Right. It would seem that we almost have to go

right back to ground zero with every organization...

03:15:42 Kotz, H. DavidInspector General

Right. Well, I certainly think we need to look at how

the SEC deals with those organizations,...

03:16:10 Donnelly, Joseph "Joe"U.S. Representative

Well, I think -- I know, personally for me, I'd

love to get a copy of what the SEC does for...

03:16:27 Ackerman, GaryU.S. Representative

Mr. Chairman?

03:16:27 Kanjorski, Paul E.U.S. Representative

Yes?

03:16:27 Ackerman, GaryU.S. Representative

Could I just make some information before this

panel leaves. And I know Mr. Foster is yet to...

03:16:37 Kanjorski, Paul E.U.S. Representative

Yes.

03:16:37 Ackerman, GaryU.S. Representative

Something that I think is of critical importance

at this junction, based on our colleague's...

03:16:46 Kanjorski, Paul E.U.S. Representative

You're recognized.

03:16:46 Ackerman, GaryU.S. Representative

You're talking about red flags. Up until now,

nobody has seen any of the monthly statements...

03:18:15 Kanjorski, Paul E.U.S. Representative

Thank you.

The gentleman from Illinois, Mr. Foster.

03:18:15 Foster, BillU.S. Representative

Thank you.

Inspector General Kotz, I was interested in a related question,

but it has...

03:18:41 Kotz, H. DavidInspector General

Yes. I mean, I believe that the Enforcement Division

does have procedures in place. And what...

03:18:53 Foster, BillU.S. Representative

Okay. And you'll be getting us copies or

references of just how you handle complaints so we...

03:19:00 Kotz, H. DavidInspector General

Absolutely.

03:19:00 Foster, BillU.S. Representative

Okay. And in Mr. Markopoulos' November 7, 2005

complaint or tip to you guys, they had the sentence...

03:19:31 Kotz, H. DavidInspector General

Yeah. I don't know that right now, although I would

say that it certainly seems as though there...

03:20:05 Foster, BillU.S. Representative

Okay. So this was more than 10 people and less

than 100, as a guess?

03:20:05 Kotz, H. DavidInspector General

Yeah, I don't know for sure, but I would think that

that would be the case.

03:20:15 Foster, BillU.S. Representative

Okay. Oh, one other question. What is the scope

of your e-mail that you'll be looking into here?...

03:20:34 Kotz, H. DavidInspector General

Initially, we've requested all the public e-mails, the

SEC computer e-mails. And you'd be surprised...

03:20:52 Foster, BillU.S. Representative

All right, and you have the authority to do that?

03:20:52 Kotz, H. DavidInspector General

We can -- we have in the past dealt with different

internet providers and gotten the information...

03:21:03 Foster, BillU.S. Representative

All right, thank you. (Inaudible.)

03:21:03 Kanjorski, Paul E.U.S. Representative

Thank you very much, Mr. Foster. And now this

panel is concluded, finally. Thank you, gentlemen,...

03:21:11 Kotz, H. DavidInspector General

Thank you.

03:21:11 Kanjorski, Paul E.U.S. Representative

We're holding up a panel of three more and

they've been kind enough to remain here and be available....

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