Washington » Monday brought some closure to Bernard Madoff's victims, who were swindled out of $65 billion in the largest recorded financial fraud -- a scheme that was exposed in part because the plummeting stock market led investors to demand repayment of money that was long gone.

With Madoff on his way to jail, attention is shifting to the next fraud -- and to the agency responsible for preventing it, the Securities and Exchange Commission, which lost credibility when it emerged that a tipster had been trying to blow the whistle on Madoff for years but had been brushed off repeatedly.

 

Could a Madoff-style fraud happen again?

Of course. Enforcement is by definition a backward-looking process, with officials exposing and punishing wrongdoing only after it's been committed. As far as the SEC knows, there are more Madoffs starting up right now.

But officials say fraud on Madoff's scale is unlikely because he was an uncommonly talented crook, quietly gaining the trust of investors, regulators and power brokers over decades in the financial world.

 

Does that mean they're not doing anything to stop the next Madoff?

Regulators are doing quite a bit to prevent similar Ponzi schemes from bilking more investors.

The examinations division, which is responsible for day-to-day oversight, will be improving

examiners' expertise in fraud detection and in complex financial products, looking more closely at firms deemed more likely to commit fraud and improving handling of tips and complaints.

SEC Chairman Mary Schapiro also has installed a new director of the Division of Enforcement: Robert Khuzami, a former federal prosecutor. The agency also will introduce a computer system intended to track and sift through the complaints that come in, which number 750,000 to 1.5 million a year.

 

That all sounds nice, but aren't there some concrete loopholes the SEC needs to close to prevent future scams?

Madoff exploited the opportunity to act as both investment adviser and custodian of his clients' assets. That meant there was no one to verify whether the assets existed, or whether he was making the trades he claimed.

The SEC proposed a rule that would require third-party verification of the assets, effectively closing that loophole, said Laura Unger, acting chairman of the SEC.

 

With so many attempts at reform going on all at once, how can we be sure the SEC even understands where the problems were?

In August, SEC Inspector General David Kotz is expected to release a long-awaited investigation of the breakdowns that allowed Madoff to go undetected. It will examine information sharing between the examination and enforcement divisions, and attempt to explain why a tipster was unable to attract the agency's attention for more than a decade.

 

Now that the SEC is stepping up its game, can investors rest easy?

Never.

Investors who want to feel safe misunderstand the agency's role, Unger said. Investments earn higher returns than savings accounts precisely because they carry risks -- and fraud is one of those risks. "We can't end fraud because we can't end greed and stupidity," she said.