was so badly planned that madoff himself had to alert the new york examiner that there counterpart in the washington office of the sec had been looking at similar issues. there was a determination that the culture and organizational structure is preventing reaching out to one another to share market information, obtain expert advice, or compare notes. . .

in the aftermath of the investigation, the sec claimed that more funding would address these issues. will it? it clearly describes an agency that does not know how to use the information and resources it already has. fixing the sec will not merely involve more resources. it is when to take much more. the commissioners were to have to make a broadbased change if it hopes to -- the commission is going to have to make a broadbased change. i am hopeful that the sec will learn from its failings and

seize this opportunity to reform itself from within. if it refuses to do so, congress will do it for them. thank you, mr. chairman. >> thank you, senator. we're glad to introduce our panelists. i think it is important to know that these are very talented people who have come on board. knowing a little bit about their backgrounds and a public setting will hopefully be encouraging a note to people of the steps had been taking place at the sec occurred i want to welcome -- at the sec. i want to welcome david kotz. he previously performed as the inspector general for the peace corps. i welcome your previous experience.

private -- prior to that, he worked with the agency of private development. he prepare the extensive report we are looking you have already heard me talk about mark -- about harry markopolos. he has raised questions over whether bernie madoff had violated securities laws, such as operating a ponzi scheme from 2000-2008. there was an eight-year period. he is the past president of the boston society perr. he worked with rahm part investment manager and became the chief investment officer don walsh was appointed the acting director of the office -- chief

investment officer. john walsh was appointed the acting director of the office. he has served at the sec for 12 years, including in the office of general counsel, the division of enforcement, and the special counsel to 0 1/3 leavitt. -- to arthur levitt. robert khuzami, i hope i pronounced that correctly, was appointed as the director of the sec division of enforcement in figure reap 2009 and came from deutsche bank, where he served as general counsel for the americans. he useprior to this, he served a federal prosecutor for 11 years with the u.s. attorney's office.

obviously, he has an extensive background. we thank all of our witnesses today for being with us. mr. kotz, we will start with you. i will have the letter to watch your time. we don't do to be too short, but you'll have to move along so we can get to all of the questions. >> thank you for the opportunity to testify today before this committee. in my testimony, immediately after bernie madoff in mid to operating a ponzi scheme, i open investigation as to what the sec failed to discover the scheme. over the course of the investigation, which sought e- mail from former employees from various time periods relative to

the investigation, ranging from 1999 to 2009. we obtained and searched minimill. during the investigation, which looked at work papers and examination files. they were from 1990 to december 11, 2008. we saw documentation from third parties, such as federinra. we retained two sets of outside consultants. in during 2009, we obtained fbi consultant ink -- fdi consultants thiinc. we also conducted 140 testimonies under oath or interviews of 120 two individuals with knowledge of facts and circumstances.

i would like to make dollars extraordinary efforts of the team -- i would like to acknowledge the extraordinary efforts of the team. with all their incredible devotion, we would not have been able to complete the investigation and present a thorough and comprehensive report. on august 31, 2009, we issued a comprehensive report of investigation in the mayor of matter -- in the madoff matter. the sec received six substantive complaints that raised significant red flags. they should have led to questions after it -- as to whether he was engaged in fraudulent activity.

our report concluded that, notwithstanding these six complaints, the sec never contest -- never conducted a thorough examination or investigation of madoff. in that had they been conducted, the sec would have been able to uncover the fraud. the first complaint, received in 1992, alleged that an unregistered investment company was offering 100% safe investment with a consistent high rates of return over a significant time to customers. the second complex was very specific. different versions of it were prepared -- were part -- were provided to the sec. the complex in 2005 -- the complaint in 2005 indicated that he was operating a ponzi scheme.

in may 2003, the sec received a third cousin played from your respective heads fund manager. -- a third complaint from a respected hedge fund manager. according to an sec manager, the complaint laid out issues that were indicative of a ponzi scheme. e-mails describe red flags that employees identified. these red flags included his incredible highly and unusual fill for equity trade, his reputation for [unintelligible] one of the internal e-mails provided a clear, step by step analysis of why madoff must be misrepresenting his trading.

there were viewed as indicating some suspicion as to whether he was trading at all. the sec received the fifth complaint in october 2005 from an anonymous informant. instead, under the madoff company is secretive and refuse to disclose anything. if my suspicions are true, they are running a highly sophisticated scheme and there -- and they have been doing it for a long time. the last one reference a potential scandal of major proportions which was executed by the investment firm bernard l. madoff. there was additional information that madoff kept two sets of records. these complaints all contained specific information and could not have been fully and adequately resolved without a thorough examination and investigation of madoff for

operating a ponzi scheme. the most critical step in examining court investigates a ponzi scheme is to verify the trading through an independent third party. the sec conducted two investigations and three examinations. based on the details and credible complaints, at no time did the sec verified is treading through an independent third party. they never actually connected a ponzi scheme examination or investigation of madoff. in 1992, suspicions that an associate had been operating a ponzi scheme, the sec investigated the associate. the sec had not consider the possibility that madoff took the money to pay the assisted

customers back from other brokerage claims. in 2004-2005, ocie conducted two parallel calls examinations. there were similarly flawed. there was inevitable delays, not withstanding the urgency of the complaints. the teams assembled word relatively inexperienced. with no -- there were no significant attempts. during both these examinations, the exam teams discovered a suspicious information and evidence and caught him in contradictions and inconsistencies. however, that either disregarded the concerns or past madoff about them and exited his seemingly implausible answers at face value. astoundingly, both positions were open at the same time at different offices without even knowing. in fact, it was madoff himself who informed one team that the other team had already received information being sought from him.

both examinations failed to follow up . a letter was [unintelligible] had this letter been sent, the data collected would have provided the information necessary. they failed to conduct any follow-up or even share information with the the exam team. the investigation that arose explicitly stated that it was highly likely that madoff was operating a ponzi scheme and that was never investigated. they directed most of their investigation as to whether he should register as an investment fire. -- as an investment by buyer.

the staff simply except his explanations as possible. although this sought to seize seek information from third parties, they did not follow through. had any of these efforts been fully executed, they would have led to madoff's ponzi scheme having been uncovered. my office plans to issue three additional reports relating to the failures regarding madoff. because of the systematic breakdowns found, we plan to issue two separate audit reports with concrete

recommendations to improve the operations. these recommendations are detailed in my written testimony. we are also finalizing a report from the enforcement investigations of madoff. the enforcement related recommendations we are considering are also detailed in my written testimony. both reports containing recommendations will be finalized and issued within the next few weeks. we also plan to issue an additional report in november to the other nine analyzing the reason why did rising unit did not conduct an investigation of madoff after he was forced to register as an investment adviser. we are confident that the sec will take the appropriate steps

to implement our recommendations, insure the fundamental changes are made so that the errors we found our promptly remedied and not repeated. thank you. >> thank you very much. that was very comprehensive works that you and your staff have done. we appreciate. i'm going to ask the clerk to keep on about seven minutes or eight minutes for the first round. we have a second panel of the tube. i know several colleagues have several oversight hearings -- we have a second panel to go to. i know several colleagues have several oversight hearings to attend. they want to make sure that their questions will be answered. to the extent that you have a lot of work, i would request that you can answer those questions as soon as possible. the report describes a number of critical instances in which the sec staff felt to seek -- the

sec staff failed to get information. there were steps as simple as sending a letter that was already drafted. it just needed to be sent. it probably would have brought an end to this years ago. a single phone call to the depository trust corp. or the national association of securities dealers, just a single phone call -- is that what you're saying? a single letter being sent, a single focal having been made could have brought this to a screeching halt. >> that is right. the concern was that there would get tremendous amounts of information that would take a long time to peruse. in fact, since madoff was not engaged in trading, they would have received very little information.

there are no records. >> he made no trades? >> that is right. we actually, during the course of our investigation, we went right to them and got specific dates, for example, the date the date testified and we compared the documents and the customer statements with the documents of the ftc and we immediately saw that there was no question that madoff was not making anywhere near the volume that he said he was. they are entities that cleared trades appeare. madoff could not have given them documents. those documents are independent. >> this is a broad question, but

try to be brief in your answer. the lack of follow-up, is that agency culture or lack of staff commitment? the office of compliance, investigation and enforcement, do they employ trusting people? i presume they do. what should the sec do, in your view, due to address this issue? >> they were too trusting of madoff. there were some people who did not believe that he could be operating a ponzi scheme. the scope of their investigations were too narrow. i think that there's too much of an emphasis on numbers, how many

exams were going to get it done that year. there was a certain time when the examiners had madoff's are conducting an examination it wanted to continue and the supervisor said that they had to give up. they did not make sure that they did a full and thorough job on that one. skepticism is very important, no matter who it is. madoff used the fact that he was the sole contacts for many of the examinations, particularly involving gender examiners. they sat with him for hours a day -- involving junior examiners. the sec within four hours a day. he give them information. he dropped a lot of names. and there was not sufficient support from the senior level people. you cannot allow a junior level person to be put in a position. madoff was very aggressive when they would ask for information that he did not want to provide. if they did not get enough support and back up from their senior level people.

madoff tried to focus them toward front-running and head toward these limited areas so there would not get to the real issues and he was successful in doing it. >> there are 41 recommendations that you making yorkin your report. -- that you make in your report. which are the ones that you believe are deserving of an immediate attention? >> i think there are specific things that need to be done, particularly in the examination program, in terms of ensuring that, when the complete content, all aspects of the complex are reviewed. they have to ensure that the planning memorandum are done on a partly pared back to make sure that the conduct of the exam is done sufficiently. and have to do -- they have to go to independent parties. i think those are important areas.

he mentioned coordination among staff. that is -- that is something that has to be addressed right away. you cannot have a situation where one side of the sec does not know what the other side is doing. when they confronted madoff, he pushed back on them and said ira provided this to your colleague. they were embarrassed. there were taken aback. it is difficult to continue that momentum in examination when it seems as though the individual you are examining knows more than you do. that is something that needs to be remedied right away. the sec, as a whole, got numerous complaints over the years, but nobody counted it up to see, when it minute, we get this complaint in this complex and this complaint. there must be more to it than simply frontrunning 3. that is something that meets -- ostensibly front-running. that is something that needs to

be met. >> there is a culture at the sec that minimizes the following on of tips. there is a rejection of the tips coming in as not really worthy of follow-up. you agree with that? >> certainly in the case of harry markopolos's complaint. he was not an insider and they immediately discounted his complaint appeared what else could he have provided -- discounted his complaint. what else could have provided? if he had said that he thought he was operating a ponzi scheme, they would not have needed to the sec. they had concerns about harry markopolos because he made a reference to a bounty, that he was only out for money. in fact, if you look carefully at this complex, he had to

scenarios. one was a ponzi scheme, which he viewed as highly likely, and the other was frontrunning, which he views as not very likely. there was a family a sense -- there was definitely a sense of them not taking seriously enough complaints like that of harry markopolos because that person was he an insider. because the information was not given to them wrapped up in a bow. clearly, the sec got sufficient information to move the ball park that was one of our concerns about the entire process. is it to move the ball. -- that was one of our concerns. contacting third parties with immediately moved people. >> they lost the new york

office. or their jealousies within offices to initiate these investigations, who gets it, who gets credit? did you encounter that? >> the boston office was very impressed with harry markopolos. they wanted to investigate. at that time, there was a concern in the agency that offices were courting cases. rightly so, the boston office felt that they should not where this case. they should send it to new york where madoff was. but when the heads of the boston office said it to new york, they made a special effort appeared they had the head of the boston office e-mail the head of the new york office directly to make sure that they understand that this is not a complaint that we want to give you because we did not want to take a good one. >> is that an extraordinary kind of communication? >> yes, it was pierre >> they followed up a couple of weeks later to make sure that some --

yes, it was. >> they call it a couple of weeks later to make sure that someone was on it. had they quoted the case -- had they hoarded the case, there would have taken the appropriate steps to uncover the ponzi scheme. >> the silo problem, this is not a unique problem. it happens in private organizations as well as public ones. how serious a problem is that and what do you recommend be done about it? >> on the examination said, that was a concern. they did not understand the investment-manager side. i do believe that that issue has been rectified. now they're doing exams with the joy to grips. that is on the way to being resolved. on the enforcement side is that madoff would say that history was in europe.

but we have an office of international affairs. if you have questions about trading in europe, you go to the office of international affairs. i think it is something that is to be encouraged. if they do not understand particular issues, they need to seek assistance in the agencies. there people in the agency who do understand them. but they need to seek assistance from them so that they can properly conduct the investigation. >> is there an agency task force that sits down and talk about various cases and determines whether or not there should be some cross pollination in their efforts? >> i think that is a good idea. where you have an investigation that involves foreign issues, there should be some recording that efforts were made by the enforcement investigators -- almost like a checklist. there was not sufficient planning. when the first at the complex, they did not sit down and say, how do we go about investing in a ponzi scheme? if they had said that, they

would have gone to an independent third party. they need to have the experience to understand the and they need to be required to take certain steps. >> my time is long since up. i want to make sure that, as we get these reports, whether or not we hold another hearing on this, we want to get that information from you. obviously, we will follow up with it. we wanted to remain in contact with this committee, specifically if there are some statutory recommendations. i want to know whether you think there needs to be. does this committee need to take action beyond holding hearings? is it to provide additional resources or anything else? we want to know if you make any recommendations. >> thank you.

>> doesn't simply providing more resources without structural changes -- does simply providing more resources without a structural changes enough? >> it is steadily more than resources. well -- while resources were an issue, the sec spent years investigating madoff, but did not do the proper thing. additional people, if they're not want to do the appropriate thing, they will not do the proper thing. >> just wish resources. >> yes. >> in your report, you have been very lengthy and thorough. the sec had inspected the madoff firm as a sort of regulatory seal of approval for the firm. what steps can be taken in your judgment to help investors understand that a firm

registered with the securities exchange commission does not mean that the firm is legitimate or guarantees that it is operating in full compliance of the law? how do we thread that needle? >> i think there has to be a better educational process. that was a significant issue. we have those who reinvested with madoff based on the feeling that the sec had checked off on him. one person had seen the harry markopolos complaint and knew that the sec would see it. the sec needs to do a better job in investigating, but they also need to explain to investors out there what it means when the clothes on investigation. it does not mean that they are doing everything right. bernie madoff used that fact, costly referring to the sec just

-- constantly referring to the sec just having been here, which their work. >> given that failures occurred repeatedly and throughout the different parts of the sec, can we assume that other similar fraud are likely occurring or have occurred without detection? >> we have not looked at others, but there is in the concern that the same pattern seemed to take place across the spectrum. when you look from 1992 to the present, it is very similar, limited focus, not enough aggressiveness in the investigation and examinations, inexperienced junior people not supported by supervisors. it is a great concern.

we spent a lot of time analyzing the madoff situation. but we do not know what else is out there and it is a great concern that the seem to be systematic issues. this ec needs to address those issues in a systematic way -- the sec needs to address those issues in a systematic way. >> you also included a recommendation to approve the way matters are handled. the fact that the typical sec examiner box into a room where there are a bunch of dead bodies are lying around, they noticed that they've clock is 10 minutes ahead. in other words, they noticed the wrong thing. we hope that the culture of the sec is such that the examiners will be rewarded for focusing only on technical violations of

its securities laws rather than the real substance looking behind compliance, checklist, and identifying more serious problems as this. >> that is a concern. we devoted an entire section in the report to interviews that we had with folks outside, in the private sector, who conducted due diligence. we compare them to the sec. they take a more holistic approach. they look at larger issues for, rather than a checklist approach. did you filed this report and so forth. the way to resolve that is to get more import from these -- get more input from these private sector entities. the sec can get -- can have educational opportunities for training from these outside

entities which will help with big picture issues. >> you'll also noted in your report the two spoke with private entities that provided due diligence and provided that madoff's returns were not legitimate. there were many people who suspected that there was something wrong with the madoff firm. what you think that more whistleblowers did not come forward? were there enough whistleblowers, but not enough villages at the sec? >> i think there were sufficient compliance. -- but not enough due diligence at the sec? >> i think there were sufficient compliance. he was using a plain vanilla trading strategy. there was no magic in it. i do not think that there were a

lot of people who did due diligence who necessarily suspected it was a ponzi scheme. they may have suspected he was doing something illegal, but not necessarily a ponzi scheme. >> they have reason to believe that something was not right. >> yes. people told us that they were nervous about coming forward . another issue to look at is encouraging people to come forward. many of the people we talk to about the due diligence asked specifically not to have their name reported. when the report came out, even though we took up their names, they asked if there was no way that their names were in the report. when you have somebody like harry markopolos who was willing to come forward, you have to take that and do the appropriate investigation. but i think something needs to be done to look at how to

encourage more people to file complaints. the folks out in the private industry, they have a good sense of what is going on. >> it is mindboggling that a fraud of such magnitude, $50 billion or more, could have happened. >> absolutely. bernie madoff had a good g reputation. i think that the part in this whole issue. no one really believed that birding madoff could be operating a ponzi scheme. i think that is the reason that many investors continue to invest in him. after doing this investigation, if you get a complaint that says that bernie madoff is operating a ponzi scheme, you have to be able to believe it in order to

conduct an appropriate investigation then you have to allow for the possibility that it is happening and check it out. when you start to check it out and you see that he is saying things that contradictory, you have to keep going. >> he not only fooled the investors. he also fooled the sec big time, did he not? >> yes. >> thank you for your extraordinary and i insightful report. approximately how many tips /complaints, accusations the sec gets each year? >> thousands, i am sure. i do not have a number. >> going forward, are you confident that there is a tree

tree dollarstriage system to identify this? >> one of the things that the sec is doing is revamping the entire system. there has been a major effort, led by chairman shapiro, to revamp the entire process. i think there were some concerns about the system, but they are certainly exerting a great deal of energy to fix that system. >> let me turn to another area. the data and the systems that the sec has, the still pipinstove piping, to grips goi,

one being undermined by the other by made ofoff. can one go to a terminal and look up all the information about an individual or case? >> ironically, the exam program had a system for putting examinations into a database. the problem was twofold. one, the folks who did the exam did not put them. the people who are doing another exam did not check. there were checking at the same time and the one did not put the examine the system and the other one did not look at the system anyway. the sec is making a renewed efforts to make sure that they put information into the databases so that people know what the other side is doing.

>> that is kind of surprising. i was -- i would support -- i would assume that entering the data would be a requirement. they failed to do that? >> yes. >> is that eric -- is that retainer was that -- is that retainer was that one isolated case? >> at that time, we were told that it was not uncommon at all. >> was madoff aware of the structural and cultural shortcomings which allowed him to operate so successfully? did he have better intel then the sec? >> he was certainly aware that the sec was conducting to examinations of him at the same time -- connecting two examinations of him at the same time.

his -- he used his knowledge of the industry to impress the examiners. he knew how to get them off the track that would disclose the ponzi scheme. >> again, this whole area has been extraordinarily shocking to all of us. your report has been extremely helpful and useful. there are changes that you alluded to with respect to technology, with respect to entering cases, different enforcement policies. i presume that the sec seems to be headed in the right direction now. >> absolutely. this thing has affected the sec dramatically. i have met with chairman

shapiro. we're led to make many recommendations. something saturday began the formal report come out. i was asked to provide three things along with it -- some things had begun before the formal report came out. i was asked to provide three things all along the way. the sec understands that things need to be done and they are taking actions. >> this is the final question. the more i looked at institutions and a different aspects, both here and in the glove, culture plays a huge role on how people operate. can you make any comments on the culture of the sec and the culture now? are there variables that you can point to in terms of what has to be changed that are not strictly resourced and not six -- and not strictly an organizational chart? >> there is a new director, mr.

khuzami, who is undergoing a major restructuring. there will be significant changes in the enforcement division. there will be unique to his leadership. don't think that much has happened in that direction in the past. >> thank you very much. >> thank you very much, senator. >> mr. chairman, thank you. let me just express my appreciation for the chairman and the ranking member following up on this. i think it is enormously important. since this story broke, we have all had an opportunity to watch the victims interviewed and the tragic stories. it just makes you want to wait

for them. people who are in their senior years have no chance of making this money back. they're not going to live long enough. i read your report and i reached the obvious conclusion. the federal government blew it. what is your remedy? where do it -- where do they go from here? >> i do not know. there are legal issues for what victims can do. they were not rich people. they did not lose $100 million and have $100 million left. i talk to people who said that december 11 was there 9/11 paire. their lives were devastated. there's no question that we, in the federal government, have to do better. >> i do not want to draw you into a political debate.

this is not the purpose of this hearing. but certain things are happening these days. very big, huge, federal government programs, health care and on and nine. -- and on and on. >> i cannot speak for the health-care system. it is a concern on the sec level. there are so many opportunities that were easy to uncover this, but they were not then. i can understand why there are some concerns about the operations with a government agency. >> that is the other part i take

away from your report. when it came down to it, it was really kind of a no-brainer. you said that it was easy to scratch into this, just below the surface. did you find any evidence of on do influence placed upon the examiner, the examinee, or the investigator? was there anything that caused you to believe that there was more to the story than just sloppy work? >> when we started the investigation, we also came to that kind of conclusion there's no way in the world that this was not just some type of corruption. this many people could not have missed this much. we followed up on numerous leads in that area. we retraced every examination and investigation, reading all

of the e-mails, and we found that there was not evidence of improper influence from the top. we looked into the allegations of eric swanson who married scena madoff. -- shana madoff. madoff was able to use his stature to impress the junior examiners. in that way, he was able to use his influence. but there was nothing we found that was direct. we looked very hard and followed up a lot of leads in that area. there was just no evidence that it happened. if you talk to the examiners and you go through the documents, you can see exactly how it happened. there was no point in time when something switched or that there were about to get something and somebody pulled them off. there was no evidence of anything from the top or improper influence. >> i am not sure if i should be

reassured by that are not. what you just described was massive and complete and total bureaucratic incompetence. there were not even doing it because they were on the tapes were being bought off. -- there were on the take -- because they were on the take or being bought off. >> the junior officers spent a lot of time working on it. but there were not going in the right direction. there were not doing the right thing. there were just spinning their wheels. if they had gone to an independent third party, it would have come out appeare. >> $50 billion plus got out the back door before this thing collapsed. the reality is that we do not

know that we have caught up with it so much that it collapsed. you have statements being published every month. you have investigators and they're turning things inside and out trying to figure out the sun that. you have an organization that is apparently claiming that it is during trades and it is not doing trades. you have customers that are calling in and say, what is going on here? for all intents and purposes, it is acting like it is actually doing something when, actually, which is really doing is getting the money out the back door. i appreciate the importance of this question, but it is important to ask. do you believe that bernie madoff, with all of that going on, acted alone? >> i am really not in a position to be able to know.

we really did not look into that aspect of the operations. we focused on the sec. i do not know if i can give an educated answer on that question. >> why do you not give an uneducated answer? >> i could do that on any answer, i guess. it seems to be that, with a pretty large enterprise, that it would be very hard for him to pull it off himself. but that is not based on any information that i found in the investigation. >> what i am driving at is this. you probably hear it -- you probably have people in the hearing room who were victims and have people who are watching this on tv that are victims. their lawyers and themselves are trying to figure out where this tangled web leads. if we follow in this direction, there may be assets out there that we have not tapped into

yet. people are so the only wanted pennies on the dollar by pursuing that, but that is still something. that is why i think that question is enormously important. if we have any role, it is to protect the public. and i think you are saying, beyond any shadow of a doubt, the federal government, with this agency that is supposed to protect the public, failed miserably. so help me try to figure out how this committee embraces this very difficult issue and picks up the mantle for these poor people and helps them do what we should have done years ago, which is protect them pierre >> one thing i can say is that, -- protect them. >> one thing i could say is that they are working very

earnestly to ensure that, if there are people out there who worked with bernie madoff, that they come to justice. i can assure you that a lot of actions are being takien in that respect. there are questions about how to refund the investors the money. but we are not specifically involved with that. as i said, i heard heart wrenching stories myself about people whose lives were destroyed because of what happened. it was through no fault of their own. i talked to people who said, weren't you surprised that you kept getting these solid returns when everybody else was losing money in the market? one person said to me, i was very concerned about it. but three days before madoff confessed, i got a statement. it showed that i still had money in it. when you get a bank statement, do you go to the bank and see if the cash was still in there? he believed that the cash was

still there. he had no reason to believe it was not there. he was concerned about it, but he saw that there was a statement. why would he believe that it was all made up? >> as you know, in another life, i worked with an inspector general. groups really appreciate the work of our inspector general. do you find it shocking, flabbergasting, that you have a whistle blower, a road map that pretty well lays out a ponzi scheme, that you folks were not brought into this earlier? if i had gotten a letter like that, i would have fainted.

was revived, i would have called my inspector general, my general counsel, my deputy, the white house, and everybody else under the sun to say we have to do something about this. >> yes. we found that all of these complaints were kept at relatively low levels. our office was not involved. it was muddy and at the level of the compliance office. it was relatively junior and midlevel folks that made the decisions, looked into it, and closed the case. really, the commission was never informed about it. there were not informed about the markopolos complaint. -- they were not informed about the markopolos complaint. >> thank you, mr. chairman. >> those are great questions tonight. i think we all share those questions as well this committee is going to take a look at the victims and the compensation

issue to some degree. certainly pursuing, whatever is worth, this could not have been a one-man operation. you cannot take $50 billion and engaged in some actions over this length of time and do it by yourself. that defies logic, in my view. i welcome the fact that there is a serious investigation being pursued and that they may offer some opportunity of compensation to victims. there may be other means as well. we need to examine that possibility. it is a flabbergasting case. we are interested in other recommendations you would make. let me turn to senator menendez. i would like to recommend that he go forth with his questions

and that those of us who go to cast votes can come right back. senator menendez, why do not go ahead? >> thank you, mr. chairman. i have the same dismay he has about how the securities and exchange commission worked in this regard. i know you raised the question as to whether we cannot have a successful agency do this? so how do we have a successful agency do something else? it is similar to the consequences before you were the secretary of agriculture. it is the discrimination that black and hispanic farmers faced in the department of agriculture

that has been recognized in a big settlement. the question is, do we have less of a department of agriculture or do we correct what was wrong? in this case, do we correct what was wrong with the sec? i look at it in that vein. i clearly believe that the sec staff, from everything that i have read, was grossly untrained and uncoordinated and lazy in their investigations. 1 sec team consisted only of lawyers without any traders in it, the slacking the expertise to do a lot of the critical analysis and questions that were necessary to do the job. you mentioned the lack of coordination between new york and washington offices. they were independently

conducting investigations and found that madoff would use that against them. repeatedly not sending documents for third-party verification of transactions that madoff supposedly made, they believe that the document they've got back would be too voluminous for them to review. it does not take a fraud investigator or a rocket scientist to figure out that the verifying information with third parties is necessary to find out if someone's veracity is legitimate or not. it is pretty amazing to me. i am a lawyer by training, but i do not think it even takes a lawyer to understand third party veracity is important. so who is held accountable for this grossly incompetent performance? >> i think the entire sec should be held accountable for what happened clearly, there are

systemic problems. for that reason, we are having reports of recommendations to deal with the systemic issues. i also recommended that my report be sure to the extent that there are current sec employees that are still here and the supervisors of those employees to make a determination on an employee-by- employed basis. >> how many people made mistakes in these botched investigations? >> i would say over 20. >> of those 20 people, to your knowledge, how many have been fired because of this gross incompetence? >> i do not believe that anyone has been fired specifically due to this report. >> it seems to me that you could not run a company and you cannot conduct a government service in

which you have gross incompetence and those are people are allowed to stay at their jobs. i'd look for to see what the sec is good to do here. the first thing you have to do is clean house. if there's a culture of incompetence, you have to change that culture at the end of the day. .

>> at least in the investigation, they at any time feel power was necessary. the truth is, they could have gone to the independent third pears without s. the s.e.c. certainly hat ability to get records from n.a.s.d. the s.e.c. oversees them and the s.e.c. can get d.t.c. records as well. when we did our investigation, we went to d.t.c. and asked for the records and they provided it. there was no problem. there was no question, they could have received the information, even without a . >> it wasn't a denial of information, it was their gross incompetence in pursuing it. >> they never asked for the right information or followed through on the requests. >> now, mr. kotz, you were not the inspector general during it period of time. let me preface my question. appreciate your work. who is at the s.e.c. is in

charge of making sure investigations are done properly and leads are followed up on? >> i would say the heads of the enforcement division are responsible for that >> now, and i -- i agree with you, but didn't we have inspector generals of the department during this period of time? where were they? >> there was an inspector general that came in prior to me. >> where were they? >> i mean, we had a 16-year period here from 1992 to 2008. where was the inspector general? >> there was never a complaint brought to the inspector jenal's attention. the office was not aware of any issue. in fact, the office of inspector general can't go out and do a poncey scheme investigation. >> you have reviewed this and in the 16 years, there was in the

one complaint at the inspector general's office about what madoff was doing. >> that's correct. that's critically important. let me ask you one last question. isn't it something to consider that -- that an effective and objective audit of madoff's would have quickly revealed his scheme, since madoff's funds was nonpublic, he was not required to have an audit from the p.c.a.o.b. doesn't -- doesn't this scandal show the need to more closely monitor private firms as well as public companies? >> i think that's correct. i think that that would have assisted in this process to the extent that the s.e.c. didn't catch it, you would have had another avenue to catch it. i agree with that. >> one final question. in your opinion, based upon what you have found in terms of this incompetence and negligence,

those are my words, should other s.e.c. investigations be reopened based on the incompetence in this case? >> if there is certainly information leading them to believe that the same circumstances occurred, then i would say yes. >> thank you so much. >> we stand in recess until the call of the chair. thank you. [captions copyright national cable satellite corp. 2009] [captions performed by the national captioning institute]

>> the hearing quill come to order. senator dodd had a pressing engagement so he asked me to share this hearing. what we're going to do since i'm the last questioner of the inspector general, i'll give a brief opening statement and ask the inspector general questions and get along to the second panel. there will be one other person coming back to ask questions when i'm finished. first inspector general, i want to thank you for testifying and conducting this investigation of the s.e.c.'s failure to ferret out bernie madoff's decades long fraud. with everything we know about

the scope and scale of the fraud, i was still stunned by the details of your report. in fact, i'm starting to believe that the only thing more amazing than the size of his poncey scheme was the failure of the s.e.c. to catch him. like the old saying goes, the s.e.c. parent my couldn't hit the broad side of a partner, if you gave them a shotgun and directions. and in fact, we'll see later from mr. mar cop liss, i read the -- the what he sent to the s. crefment. it was almost like color by numbers. they only had to color in the number six little lines and they would have found the whole thing. it is amazing. as you absolutely made clear, there was so many warnings and inconsistencies, you would think that the madoff fime file would have been one giant red flag. and yet, time and time again, tips were ignored, inquiries were way laid, he was able to

bull yit agency into submission before full investigations were even started. just breathtaking. i worry not only about the s.e.c.'s ability to catch the next swindler, but also about its ability to do its most basic job, which is to i don't have see the capital markets. one thing that has begun clear to me -- as our markets have evolved, the s.e.c. has not kept pace. while the financial world has only gotten more and more sophisticated, the agency has --ee at best, stood still. if not gone backward and in terms of staffing and resources and sophistication. i have great confidence in the work of chairman shapiro. but frankly the s.e.c. is outstaffed. they oversee 35,000 entities. the sheriff of wall street is trying to police a town of how

witters with a six-shooter. the s.e.c. neets more resources, but it is only one of two regulators that must go begging to congress every year for appropriations, even though it brings millions more in fees than allowed to spend. this leaves the s.e.c. without a stable source of funding that would allow them to invest in the personnel and technology they need to keep pace with the markets they're supposed to police. that's why i plan to introduce legislation, allowing the s.e.c. to keep all of the transaction and registration fees it collects from public companies so, it can attract and retain the kind of expertise, required to catch sophisticated thieves and invest in the technology required to monitor today's rapidly expanding and increasingly complex markets. the bottom line is, while the s.e.c. play need new laws and new tools, they had all of the laws necessary on the books to catch madoff.

they didn't have the personnel, the expertise, the sophistication, organization. they need better people. more of them. better paid and people who are paid enough that they stay a long period of time. they don't just come for three years and leave and go to a hedge fund. because, a lot of this is simple sexporningse. the s.e.c. people didn't have it. nowoff few quick questions for you, because i know my colleague has been waiting patiently. and he's always patient but very good. and so, let me ask you these questions. first, if you had to assign a letter grade to the s.e.c. for its performance in the six madoff investigations, what would it be from a to f? >> f. >> if you could go lower, would you go lower? >> perhaps. >> i don't know what. your report highlights the inexperience and lack of

resources, as important causes of the s.e.c.'s failures in this case. so, would you support the concept, i'm not asking you the language, but the concept of the bill i planned to introduce that would result in millions more dollars in funding for the s.e.e.c. by allowing the fees to go directly to funding the s.e.c. as it used to be and would allow them to invest in better and more qualified personnel. >> i think certainly resources was something that we saw that had a an impact in the examinations i was conducting. for example, in one of the major examination, there was no chief, so the examiners were left to their own devices and didn't get enough support. that's because they didn't have an available person. another examination was moving forward, making some progress and they decided to put ton the back burner in favor of another matter. that was an issue also. and that relates to resources. the limited focus decisions

perhaps, also relate to resources in that they decided, that they had the manpower to look at a discreet issue rather than looking at larger issues. there was the request for documents but they were concerned with obtaining mountains of documents, which they didn't feel they had resources to look at. there's no question there were aspects of what i found that relates to lack of resources. >> senator markly. >> u thank you so much. thank you for your testimony. earlier this year, we had the chance to look at this and it is nice to revisit now with your report. your report emphasizes very starkly the number of investigations over a span of 16 years, six investigations, and -- the fact there were -- they were both sophisticate add very straightforward measures that should have, should have caused a -- a real interest on the part of the s.e.c.

on the sophisticated side, we have an str ordinary report. from mr. markoplis with 29 red flags, i read this earlier this year and o-i asked the question of another s.e.c. member, i said,-hour do you get such a sophisticated critique rather than simply something is wrong. i want to ask you the same question. is this quite an unusual document for someone to lay out a sophisticated analysis of a firm? >> we asked that question of many people in the investigation, the answer was almost uniform, that it was very unusual. there were people that told us even people who dealt with complaints directly, who had never seen such a detailed complaint. >> on the one hand, we have a very sophisticate d point and then ev -- many people with simpler observations that there was no evidence of counter parties that a standard consistent return than the hedge

fund doesn't match any hedge fund anywhere under the sun. under varied market conditions that there wasn't evidence of corresponding trades, et cetera and so forth. very simple. i look at this and even a novice investigator, seeing such a sophisticated report on the one hand or simple basic how can this possibly square would -- ought to be intrigued and say there's something here to look after. and i just simply can't accept that it is, it is simply a kiss of inexperience. or a case of resources. was there a general culture of -- of lack of curiosity, or -- lack of wanting to inconvenience us -- big players, lack of reward to investigators, to -- who had hard-hitting

investigation, that damaged their career path. what are the managerial issues. i didn't see in the report a real sign of the culture that generated such failure. >> they were very concerned about the focus being on finishing the investigation and moving on to the next matter. and so, for that reason, the -- they didn't want necessarily to look at the larger issues. they would stick to the more limited issues, which were easier to deal with and were resolved quickly. we were surprised as well, the enforcement investigators simi didn't understand how unusual madoff's investments were. they asked madoff in the testimony. he said he had an amazing gut feel for the market. his gut feel was based on standing on the trading floor. he could feel when the market would move. and madoff was able, he had perfect timing. he was able to get in and out every day in -- nearly the exact

right point. and we asked them, how -- how did you believe madoff's explanation? they simply didn't understand it was so unusual to have such consistent returns over a long period of time that no one else was able to duplicate. >> does this raise serious questions about the type of training that the investigators received? >> yes, i think absolutely. that's one of the things that i think enforcement is now looking to change. i think in the past, the s.e.c. enforcement lawyers were generalists. they were smart and hard workings but they didn't have specialized experience in an area. i don't think in this case that was sufficient. you could be a smart person but if you don't understand options or trading, you're had the capable of doing that type of investigation. i think there's a move toward specialization, which will allow people that really understand how to -- to operate a case to take an investigation. one of our recommendations that we're considering is to require

at least a certain number of individuals on every investigation that had done a poncey scheme investigation before. none of the people had every do not a -- done a ponzi scheme investigation. you can't understand it without understanding how to do it. just being a smart person that is a generalist is not sufficient. >> how could in the face of such a comprehensive report like he compiled. how could the team not include an experienced investigator that would have knowledge of ponzi schemes? >> that's a good question. at in point in time was there anybody on the case who had done a ponzi scheme case before. at no point had they sat down and say, how do we do this investigation? if we don't know because we don't have experience, let's go to our colleagues? they didn't.

they didn't know, the information that was needed and they didn't seek out that information from others. in order to know it themselves. did you happen to -- >> to ask the investigators an awkward question. it would be along this line. were you concerned that if you pushed and prodded the complaints would be made to your superiors and your career might be damaged? >> we asked those questions to all of the major players in all of the examinations and investigations. they said no. we did not find that they were skrned that they would attack bernie madoff or make accusations and their careers would be affected. i think there's enforcement lawyers that would like to bring a case against madoff, but they didn't have the skills to be able to match up with it. >> did the s.e.c. routinely bring in consultants, folks who might have a career -- knowledge, sophisticated knowledge to come in for -- for two hours to review a case or

provide advice or direction or any type of assistness. >> we weren't aware of that happening in the course of the examinations and investigates. when we spoke to folks from the outside, they said they would be willing to do it, if asked. that's an & we're looking at toward recommendations, to encourage private sector folks to explain to the s.e.c. individuals, how to go about and conduct this due diligence. >> the investigations occurred over this 16-year period. that's an extensive length of time, with many, many different folks involved and so, i don't direct this toward anyone individual. we did have from 2005 to 2008, christopher cox who had this management philosophy of light-touch regulation. was there, kind of a -- was there any sort of equivalent investigative branch of being kind of height touch investigators for -- for fear of

i don't know, discouraging inappropriately interfering with firms or so on and so forth? >> i didn't find tavis happening, at least in connection with the madoff investigation. madoff investigations and examinations. >> i appreciate your report very much and the series of -- of recommendations. i'm in the complete my li satisfied. there has to be a factor of a culture of management that affects what type of investigators you hire, whether you hire consultants or press folks to get to the bottom or whether you ask common sense questions about what seems out of sync, whether there's mentors in the department that you can consult with, et cetera. and i just, i feel like, if we're going to have a very successful team in the future, that -- that management philosophy is going to be critical to uting us back on track. >> i agree with that. absolutely. >> thank you senator merkley. and we're going to call our next

panel forward, harry markoplis. >> okay. let's get started and i know that senator dodd has already

introduced the witnesses, so we're not going to do that again. each has a limit, mr. markoplis seven and five each for the others. keep your statements within those limits. there's a clock up there. and your entire statement will be read into the record so it'll be part of the record. mr. markoplis, you play begin. >> thank you, mr. chairman. and thank you ranking member. thank you, members of the committee. i was approximately -- one-third of the inspector -- inspector generals represent, either directly or indirectly, so i could speak to that one-third of the report. and di submit three different complaints to the s.e.c. in play of 2000. and march of 2001 and the fall of 2005. and if the inspector general's report was falsified, inaccurate

or a whitewash, i would be announcing it before you today. but i find this report to be extremely accurate. exceptionally well written and phenomenally well researched and it is very comprehensive. it is hard-hitting. it gelts to the fact of the matter. in a nutshell, the -- the s.e.c. staff was not capable of finding ice cream at a dairy queen. but i never at any point in time saw any criminal activity by any member of the secures and -- securities and exchange commission. i don't believe the activity occurred. i know that the inspector general was very comprehensive in his investigation. he went down all avenues, and he was looking, he was asking pointed questions, asking if there was any inappropriate behavior by s.e.c. staff at the highest levels of the organization. and at the lowest levels of the organization, mainly as a team and branch chief levels and at all levels in between. he never determined that such activity occurred.

i suspect he would have found it. he was digging as hard as he could. certain my, he would have been far less damaging to do reputation of the s.e.c. if criminal activity had been found and they could blame one or two bad apples in the bunch and say it was their fault and they're expg to prison. they were trying hard to mick the criminal case. i don't believe such a case existed. they certainly never found one. i doubt there was ain criminal activity. the report was so well done, the inspector general went down every avenue, and when you do an investigation, you have to go down every avenue and most will be dead ends. this was a typical investigation, except it was exceptionally well purchase performed and i commend it to you. it is great reading for the victims out there and i know you're watching, and you definitely want to read all 477 pages. it is hard-hitting. it is like watching a train wreck in slow emotion no 477 different angles and it has the same tragic ending on each page. it is unbelievable.

sadly, it is true. it is a true report. keep in mind the madoff case was the twilight zone of all fraud cases. there was nothing about this case that was ever believable. the skep, mr. madoff, was in 40 different countries. he had over 339 funds feeding in new victims. over 59 different management companies were involved with mr. madoff. and 40 nations. he had a hot of help. this is perhaps the biggest international conspiracy of modern times. it is a record breaker of cases. it shows the s.e.c. is currently not functional at present but on the right track. the s.e.c. prior to december 11th was not in a fight -- they're winning on all fronts. winning the battle. none of these regulators did their job. basically the financial regulators, stole their pay checks from the taxpayers.

and white collar fraud is a cancer on this nation's soul. it is a white collar fraud sters that cause the most damage. not the vial lend criminals or the bank robbers orr armed robbers or drug dealers. it is the white collar fraud sters, they have the best resumes and went to the best schools and live in the finest homes and yet they cause the most damage. they're the ones that bankrupt our company, destroy pensions and life savings of victims. and let me tell you how this affected me personally. i had lost faith in all government prior to december 11th. it wasn't until i met mr. kotz and saw the investigation that he underwent. and that restored my faith. mr. kotz and the entire firm reaffirmed my faith in government. this hard-hitting report is as long as the day is long. it is a great report. i have three young sons, six and under at home watching today,

when they grow up, i hope they turn out to be like david david kotz. that's what i think of the inspector general. it is a hard-hitting report. i commend it to everybody. i want to thank mary shapiro for allowing this report to be written and released to the public, knowing how damaging it would be to the reputation of the s.e.c. but before you can recover, you have to hit rock bottom and this report takes the s.e.c. to rock bottom. they made tremendous improvements since february 4th. i've seen those improvements. i'm impressed. the reform of s.e.c. is not taking place at feet of government. mary says, it is like her hair has been on fire. it is rapid but it needs to keep the pace going forward. you have to crawl before you can rock and walk before you can run. and right now, the s.e.c. is learning how to crawl over --

all over again. they have been out of the fight and thank you, mr. chairman. >> thank you. thank you, not just for your testimony but for your persist ebs and courage and -- i think when the chapters are written on -- how this happened and how it is corrected, you're -- you deservedly will play a large and stellar role. mr. walsh. >> chairman d ooh, dd and members of the committee, i appreciate the opportunity appear before the committee today to testify on behalf of the securities and exchange commission. my name is john walsh and i am the acting director of the office of compliance and inspections and investigations at the s.e.c. first let me say, without qualification that we all sincerely regret that we did not detect the madoff fraud. as i believe i speak here for

everyone in the examination program, we view the madoff case as terribly unfortunate example of what happens when we fail in our mission. the type of fraud perpetrated by mr. madoff is the kind of misconduct we spend our days trying to uncover. and that is why we feel the way we do. and that is why we are working so diligently to address the problems that -- that contributed to this failure. let me assure you. we have not been sitting idley by awaiting the report. indeed from the time when we first learned of madoff's fraud, we have been working hard to revamp the way we operate. since being appointed acting director last month, my most important goal has been to continue to reshape the examination program. for example, we are actively recruiting staff with specialized industry experience.

and we are enhancing our training programs, including widespread participation in outside courses, such as the certified fraud examiner program. and we are requiring examiners to routinely reach out to counterand custodians and customers to verify that assets actually exist. we are integrating broker dealer and investment a advisor examinations to make sure the right expertise is being deployed in every examination. and we are considering new risk assessment techniques, to more proactively identify areas of risk to investors. we are soming -- insuring that examiners know they have management support as they follow the facts wherever the facts lead. but we know more could be done. so like others in the agency, we are carefully studying the inspector general's report and will continue to do so. the report shows that some

examiners ask the right questions. and it also shows we did not pursue all of the answers. and the report shows that some examiners were moving forward on the right path, but we did not take all necessary steps. to put it bluntly, the report shows that we simply didn't to what we needed to do and investors have suffered. going forward, you have our commitment that we will continue to learn from our mistakes and we will continue to assess how we can improve our examinations. and thank you. >> thank you. >> thank you, mr. walsh for your candor. >> and mr. kazami? >> chairman dodd and members of the committee, if you tu for this opportunity to testify on behalf of the securities and exchange commission. having read the inspector general's report and the missed opportunities, it is cheer no one should or can defend or

excuse or deflect responsibility for the s.e.c.'s handling of the madoff matter. simply stated in this case, we failed in our fundamental mission to protect investors and we must continue vigorously to reform the way we operate. we have reader the -- read the letters fueled with the court in connection with madoff sentencing. it is a sobering and humbling experience. i'm here to commit to you and investors across the country has we'll carefully study the findings of the inspector general's report and any forth coming audits and we will implement the changes necessary to strengthen our enforcement and examinations program. i'm here to personal personally pledge my unwaivering commitment and unconventional efforts for revitalizing the division and restoring the respect and trust of the inspectors with whom we're charged to protect. i know my fellow officers share

this commitment. even before the inspect herb general's report was issued, this agency had begun to institute extensive reforms, including hiring additional staff and streamlining the management and expanding training and restructuring our processes to better share information and leveraging the knowledge of third parties and eliminating unnecessary process and procedure and revamping the way we handle the hundreds and thousands of tips and complaints and referrals that we receive each year. despite the changes, we recognize that more needs to be done. we intend to learn every lesson we can to help build upon the reforms we already put into place. with respect to the division of enforcement almost immediately after beginning my tenure on march 30th of this year, i together with other enforcement staff commenced a top to bottom self-assessment of the operation. and the marching orders were seen creatively and there are no

sacred cows. that resulted in numerous changes we're not implementing. collectively, they have been described as the biggest resorgs in at least three decades of the division of enforcement. and these changes which will begin to traci some of the issues raised by the inspector general include creating five specialized investigative units, national in scope, where we will combine expertise and training and industry and investigative know-how to conduct smarter and more proactive investigations. to reduce management levels by 40% and deploy the experienced investigators back full time to the critical work of conducting front line investigations. and establishing an office of market intelligence, a single unit within the enforcement division, armed with enhanced technology, where we will collect and analyze and prioritize and monitor the more than 700,000 tips and complaints the agency rae ceives annually. and over the past year, the criticism surrounding the s.e.c.

and the madoff fraud has been sharp and steady. we have taken the lessons to heart. we're in the process of implementing a far reaching program of change and improvement. there has been no complacency, it is not business as usual. there's an institutional wide commitment to heighten levels of tenacity and professionalism. criticism from the s.e. cafment arising from the fraud should not on cure the 75-year tradition of rigorous enforcement from the thousands of public servants who worked tirelessly every day to protect the investing public. these saff members continue to vigorously investigate wide ranges of activities. cases relating to the credit crisis and market abuse and the accounting and financial fraud and sfruckchurred products and fraud involving heng funds and investment advisors, to take one example, since schapp pir rhea took leadership, the s.e.c.

filed 45 investment actions involving ponzi schemes, substantially more than the same period in 24u7b8. the mission is investor protection. this is a terrible reminder to each of us of the consequences love not getting the job done properly. this is a lesson we can and should not forget. our mission is to hold wrong doers accountable. as we hold others accountable, we must also be able it accept responsibility for our failures. we stand ready to do so. and again, on behalf of the commission, we pledge our commitment to everything in our power to regain your confidence and the qufed of the investing public. thank you for your time. >> thank you. >> i have a bunch of questions. the first, i want to ask mr. walsh, she was there at the time, it is still, when you read mr. kotz's report and you see mr. markoplos' statement, you

know, when i got to congress in 1980, the s.e.c. was one of the premier civil service organizations and wow has it gone down hill. it is amazing. of course it'll mar the reputation. my first question, you can speak from -- you know, free associate a lit. how the heck did this happen? markopolos said he couldn't find fraud. and kotz said he couldn't find fraud, it was incompetence, but the incompetence, when you read the report, you didn't have to have training as -- as an investigator to do the follow-up that might have revealed this to happen. you only had to have an i.q. of

100 and a semi-desire to find out what happened. and you didn't have to have a burning desire. you didn't have to turn over every stone. so, please, share with us, because i'm still befuddled and maybe mr. khuzami, you've spoken on this a little bit, share with us how this happened. because most people if they read what happened, they would say there's got to be fraud. someone had to deliberately do these things to let mad involve escape. we have no evidence of that, it is unfir to leap to that conclusion and i don't. but -- i'm just totally befuddled, the most rudimentary. in your own words if you sent a 15-year-old, a sophomore in high school and said, here's what is going on, figure out, just follow it through as a homework assignment, they would know to do some of these things.

and tell me, what was going on here. was there an attitude, we shouldn't look. this soft touch, whatever it is called investigating. just -- you mow, and i don't -- i don't -- cast any shadow on your integrity at all mr. walsh, i need to know, we need to know,ed america needs to know, it is too confounding to accept an answer, well, gee, it was a mistake, a bad mistake, we're sorry. because by the way and this'll be my next question to all of you, it makes you think there must be 30 more of these, maybe not the scope of madoff, there's got to be more. we were in the go-go 2000. other people had to think about this. i read about a brooklyn scheme yesterday. there must be scores more of these if the investigating ability was so rudimentary and so flawed. go ahead, mr. walsh. >> well, senator, i tribute it to two primary causes.

both highlighted by the inspector general and i agree with him. one, i think, was the failure to obtain third-party verification of the information that madeoff was giving them. and this was very unnort nat. >> did the s.e.c. fail to get third-party verification, routinely on just about everything? >> ats the time these examinations were done, third-party verification was used as the exhers believed appropriate. we have changed that. we require third-party verification as a routine part of our examinations. we provided detailed training to examiners it make sure they understand -- >> i'm not asking how you corrected it. i understand that. i'm asking, because you got to know the whole -- almost never was there third party verification? >> it was done occasionally, but too many people decided here it was not necessary in their examination. >> would the s.e.c., you've been there 20 years, would the s.e.c.

the queer you first come in do more third party verification than in the 18th year? >> it is difficult for me to say to quantify and to be honest, i'm really not sure. probably we do, so much more in 2009 than we have ever done before. and -- it is hard to say, sir. i have only been an examiner for some years and i'm the in-house lawyer. >> you're trying to catch somebody who play be fraudulent and you have allegations, pretty serious ones. again, you don't have to be albert einstein you ought to get third-party verification and in the accept the potential defrauder at their word. >> yes, you're absolutely correct. >> and what do you think about this? >> traged examiners know you never go to the person you suspect of the fraud first. you go to that person last. >> exactly. >> you goo to all of the other people in the organization, you

question them and you build a chain of documents and verify everything. here the examiners found and caught mr. madoff in numerous lies and yet they had no -- >> why do you think? it is beif you hadling. >> they had no professional skepticism or no formal training. he didn't dig deeper and increase the scope of the investigation. they didn't request more resources. it was a fade failure of fraud examination 101 and a failure of audit 101 and failure at -- >> it almost seems they had an attitude they didn't want to find had things. >> they lacked any regulatory zeal. they were not compensated or measured on the quality of the exams or the amount of fraud caught. they were measured and rewarded for promotions basically on the number of exams conducted, which is a meaningless statistic. we should care about the number of frauds caught and the numbers

of frauds we detered and the amount of damages we recovered for investors. >> you're saying the basic system of incentives probably wasn't neutral but pushed people aby from diagnose a thorough investigation. >> that's correct. >> yeah. >> mr. khuzami, do you agree? >> i would start differently, especially on the enforcement side. the enforcement division has brought numerous cases based on vague complaints and press articles. the i.g. testified earlier they didn't find evidence that the investigative folks were lazy or not committed. we know that -- that the investigators know how to do the job and there's a long history of cases to underscore that. the question for me was -- this appeared to be -- to use an

overused term, a perfect storm. and that a confluence of event, including a lack of experience by the individuals a lock of --ee of going to sources of can heance, to get advice, and perhaps some personality conflicts, and -- a lack of rigorous supervision, and a -- and a number of other factors mipt that and perhaps mr. madoff himself who while there was a finding that there was not -- not undue influence, you know, it takes a little while for your mind to get around the fact, i suspect, if you're not careful, that someone like mr. madoff play be running a $50 million ponzi scheme. there's indicateses that he had, from the nature of his institutional investors to his stature, to other factors. so i think unfortunately and this was the terrible result is that all of these factors came together to lead to the conclusion, that we missed this. but it wasn't -- for reasons that i think you can draw

significantly greater lessons across the entire division. >> i watch -- i used to watch drag net. i watch law and order. i'm not an investigator, i know that -- that especially if someone brings up a complaint three or four times you go check with someone else. >> that's correct. there was consultation that was made -- >> but you look for third party. you go out. >> absolutely right. >> they would have caught hem cold. >> absolutely right and we do that all categories of our investigations, not just in investment advisor but in every case. >> you're a starting policeman in the investigators unit, you know to do third party verification. >> yes, sir, agree. with can examinations as well. we're emphasizing it strongly, make sure people to thap about >> it seems to me, almost a certainty, given -- how bad things were, with madoff, that

there are probably other ponzi schemes, i don't know how large, that they have have not uncovered yet. >> what do you have to say about that sn >> certainly there are, there's always fraud present. the fraud $sters have smart. this past year, health -- there was help collapsing them because you need money coming in and investors are gun-shy and so we're seeing more collapse. that's why you're reading about so many. i'm sure there is more fraudsters to be caught. >> would you agree there are probably more? >> we're actively looking for more. we have gone out, very vigorously and conducted examinations of entities that have -- >> i take it there's third-party verification now. >> absolutely. >> and what do you think there are more? >> we have actually encountered problems and referred some to the division of enrespect forment. >> do you think there's

likelihood there's more? >> there's always more. >> and would any of them bes in the billion or tens or billions, madoff was 50 billion. and stanford was 8 to 10. >> that's correct. could they be in the billion dollar range? >> there is no indication there isn't, but i agree, that the economic cycle has shaken out a lot of schemes that would otherwise exist. that's why we been able to bring along with concerted effort 45 this year alone. >> the other thing that worries me related to this, with new technology, and increasingly dark markets, it is harder to -- to uncover some of these things. it makes it more difficult. do you agree with that? do you agree it would be more difficult? given the less treans appearance rather than more. >> absolutely right. less transparency, increases a greater possibility of fraud and

wrongdoing. >> it would be an argument, that we ought to light n up the dark markets or shine light into them? >> i think that's connect. >> do you agree? >> absolutely. >> and -- >> yes. >> my father was an exterminator. i know that much. okay. now, let me ask you this. markopolis, as has mr. kotz, the skills, the skills an investigator needs. do the personnel at the s.e.c. have those skills? >> senator, they either have the skills, they have the capacity to develop them, and together with -- with some. reforms that we have undertaken, we will get to the place that we need to be in order to be ready to -- >> are you willing to -- are you able and willing to fire people who just aren't up to the job? >> well, there's -- there's

various restrictions on -- on when we're able to do in that regard. but we can get to where we need to be through a variety of methods. >> we for example, are creating specialized units which will really through -- through repeated investigations of the same nature, additional training, and hiring specialists who are focused in these areas go a long way to creating the expertise we need. >> all right. >> and one example. s.e.c. has a lett of lawyers, lawyer heavy. i think in the division of enforcement, most of the -- of the people are general litigaters. i'm a lawyer. and being a lawyer doesn't necessarily make you good with numbers. that's what you need to know to figure these things out. my question and this is to mr. khuzami and mr. walsh who has the ability to do the ness sess analysis and forensic accounting investigations in this world of very complex truck schur --

structured products and quantitative trading and a lot of it hidden. not hidden for bad purpose, they don't like their trades to be revealed. what percentage of the people at the enforcement and compliance divisions have experience working in the markets trading these products and making quantitative models and develop technology systems, versus the percentage of people who are lawyers? >> look, senator, we are clearly not where we need to be in terms of the acquisition of individuals with some of those skills. that is why the specialized units and the additional hiring will help very much. we're not going to get to a point in the near future where large numbers of our staff have the kind of skills that you're talking about. but that does not mean we'll be handicapped by any means, because what you really need is smr centers of com competent tense, places where they can go for advice. that could exist in the division of enforcement and the sister divisions of the agency and that can exist through training

programs. so while my hiring, my hiring goals play not allow me to go -- to have the kind of --ee >> how many new people have you hired since you came in is >> we received a reappropriation that allowed us to hire approximately 25 a in 2009. >> i helped goat you that. >> you did and we're very thankful for that. >> it is not close to enough. >> agree agree. we have significant requests. >> what do you think of the proposal, all three of you, that i made which is that the s.e.c. should be able to use the -- these that it -- the fees it gets, registration and phones and other things. right now it is about 1.5 billion and they only get 800 million of it. >> and senator, i think from my perspective, it is a good idea, not only for the amount of the funding, but for the predictability of it. we can't even budget --

long-term for certain kinds of projects that -- we can't go into the out years, because we don't know for certain whether or in the the funds will be there. so things like i.t. budgets are long-term projects suffer. >> i suppose, even personnel. personnel knows there's going to be a growing revenue stream and they're likely if they're promoted get salary increases. they'll stay longer. isn't one of your problems lack of experienc? >> that's correct. and also being able to react quickly. some of the banking regulators can hire immediately when they're fays an imminent crisis. they could bring large numbers of people on with specialties. we can't do that. >> they're funded the way we -- we wouldn't have to give you this special little appropriation for a smaller number of people. what do you have to say about those funding things? >> i definitely concur. i need to increase the funding. in the industry. i was in the industry for 17 years, we paid the fees and the money was dive verted to treasury. >> you would support the

proposal. >> i support it 100%. >> how about you? >> we're seeking to aracquet greater expertise to the program, hiring more senior staff, who can come in from the industry and bring their knowledge with them. and -- i believe the proposal you're suggesting sir would really help us do that. >> you know on tapes that were revealed by the media today, here's what madoff said when he coached his employees who were coming in. you play have heard this, it came out today. he said to those who were going to be interviewed by the s.e.c. you don't have to be brilliant with these guys because you know they work for five years at the commission and become a compliance manager at a hedge fund. that's the problem, they're there a short time and they go away. mad jf's analysis as crooked as he was was correct in this area, right? >> certainly we would like to retain our best talent for as long as we can. i don't -- turnover isn't always a bad thing.

you play know, senator -- gee depends on who turns over. >> i worked in an office as a prosecutor where turnover was in the five to seven-year range but it didn't stop it. >> i was glad one of the people turned -- turned over in your office. >> mr. walsh? >> turnover greater today than 20 years ago at the s.e.c. when you started? >> turnover has gone up and down, usually because of what is happening out in the market place. we have had a period of time where it has been relatively low. and i think -- >> since the market crashed. >> yes, sir. >> but before that, was it up higher? >> it was much higher and we also have the same problem, my colleague described that hanging on to the people that we want to keep is always a challenge. >> right. >>off few more questions, but -- senator merkliy has been waiting. so i'll reserve a second round

for me and turn it over it the senator. >> thank you, mr. chair. >> i want to start, mr. markopolos. you said your three sons are watching at home. i want them to know what a great thing you did in reporting your belief there was fraud at this firm. when i first read your 21 -- 29 red flags report, you began it by asking for a confidentiality, very limited circulation of who you were because of concerns for your safety and the safety of your family. i think when you're taking on a multi-billion dollar enterprise, those concerns were very legitimate but you put the -- the interests of our nation and our finances first. took some perm risks and i applaud you for it. >> thank you, senator.

>> i keep coming back to try to understand the cultural factor, because i simply can't believe that the capable -- folks coming out of even if they came relatively freshly out of college, weren't able to see the basic simple elements involved and sometimes, one gives the benefit of the doubt and in some cases, one gives the massive benefit of the doubt. there are cultural factors as it why that occurs. and i'm -- i want to get a sense, is there any kind of regular socializing that goes on between the s.e.c. and -- and the financial world where people know each other and know each other individually and go to -- are invited to parties and are invited togoing to -- to see shows together, to invitations come from the financial community to the investigators, any -- is there any kind of that, that kind of -- mixing

that makes people more friends than adversaries. >> sir, we're very concerned about excessive frat ternization. we feel it could create a conplict of interest and dull people's judgment and the vigor of their work. we have ethical rules where if someone wants to socialize, it must be a widely attended gathering. they should come in for approval in advance. we take that very seriously. so i would hope that -- if there is that level of frad earnization, that a conflict has arisen, swron who is engaging in that will certainly be recused for any future work relating to that firm. >> the industry doesn't invite people for conferences in hawaii. >> well they do invite people to conferences and they could be valuable for gathering intelligence and picking up on risks and trends and sometimes just the chatter in the background in the industry. but again, that goes to a very careful review and approval process to make sure that the people that go to those

conferences don't suffer from conflicts of interest while they're there. >> anyone else want to comment on that? >> well, it is perhaps less of a problem in enforcement because we by definition have an adversarial or potentially adversarial relationships with the institutions and individuals that we regulate. on the other hand, there's value in that kind of outreach and participation, because we're able to enform the investing community and the institutions of what we think is wrong and where we think they should be cleaning up their act. so long as you maintain a proper distance, i think those kind of arrangements can be beneficial. >> i would definitely like to comment. i don't think the s.e.c. staff is out there enough with industry professionals at the conferences. they do not allow time off for staff members to attend security analysts meetings to attend economic club meetings, to attend c.p.a. society meetings. they need to get out a mingle. they also need to have something simple, that i carry with me.

a business card. the s.e.c. doesn't provide their own staff with business cards. so how -- how are you going to get a flawed referral if you 0 go to an event and how are you going to find out what is going on, if you're not out there? how are you going to be educated upon the new products that are coming out every day and every month if you're not attending industry events? they don't fund those and allow the time off. i think they need to get out there more. you don't need to fraternize that would be bad but you need to show up and they don't show up. >> is that something you're looking at, in terms of staying up with understanding these exotic financial vehicles and so forth. >> certainly, in terms of training and education, absolutely right. through our specialization efforts and through enharass r hansed training, we're clearly hfing in the direction of acquiring greater knowledge and exposure in those areas. >> yes, sir, i would agree. >> and another challenge and i think it was referred to by the -- by senator schumer is that folks might come to your -- your

organization, mooking down the road and seeing has -- that the possibility of much higher paying jobs and private industry, the same industry that they're regulating is the revolving door and that potential for -- much better -- remunn ration down the road a problem in folks not wanting to be too hard-hitting in their investigationings or vetting key power brokers in the industry? >> senator, this is an issue that we -- came up when i was with the department of justice and continues to come up now. my general view is if you want to attract good talent, there's always that risk. no getting away from it. particularly with individuals that work in cities with high cost of living. that's a risk but -- the alternative, which is to accept people who find themselves less marketable, i don't think there's -- is palatable either. so, but at the same time, my view is that -- that the way that -- an individual makes

themselves potentially marketable, for future em employment, is by no means to pull your punches or somehow not conduct vigorous investigations, if anything it is the opposite. . . employers are not interested in people who are not respected by their colleagues and peers. >> i would add, if i could, we have the procedure when somebody is leaving, we look at their work over a time.

if there is any conflict we can see between where they're going and the work they have done, we will take out to make sure they were not pulling punches or doing things they should not have done. one last question? one of the issues that came up in that situation was about that firm. does the sec review information about who looks at other areas so that the auditor's firm capability reflects the capabilities? is there a change of practice in this area? am i right in thinking that the inadequacy of the auditing function, that this might have been a real clue to the situation? certainly, sir, we're looking at a much more actively today. in fact, that is one of the high risk elements we are

considering as we sift through the community to see if there are in fact other problems working out there. absolutely, it is getting a lot more attention today. >> i think that the sec's incompetent examination greatly served mr. madoff because it suggested to folks, rumors of the investigations, it said the people that this firm is credible and it gave him greater confidence in investing and it just points out how incredibly important this function is, the correct functioning two are americans. i understand that you are doing everything in your power to put the sec back on course, and i thank you for it. >> ok, i have a few more questions, then we will finish up. mr. markopolos, you made 14 recommendations to the sec based on your experience. tell me the two that it

considered the most important. >> the best tool that the sec could use, in my opinion, is the pink slip, a piece of paper that every employee understands. i suspect about half the staff or perhaps more. >> explain to everybody who might be listening. >> is when i get called into account or -- is when you get called into account and get fired for not doing a job. i think they lack some of the basic skill levels. there needs to be a skill level inventory of the staff. everybody's in performance needs to be closely reviewed and we need to weed out the staff. >> there are limitations on the ability to weed out staff. would either of you comment on those? does the sec need to change the rules? are these rules, statutes? do they get in the way? could you generally comment on

mr. markopolos's suggestion of pink slip in people? >> i cannot let that pass without responding to the substance. in my experience in the five months i have been with the division, i would not agree by any stretch of the imagination of the numbers of people that mr. markopolos suggests are deserving of pink slips. i have seen the performance of these people. they're committed, hard-working, excellent and what they do. if there is something that we need to do, it is to train them better and provide them opportunities with greater expertise. >> the question leaps out, if that is the case, how did they miss madoff? if they are so confident? >> senator, as i said, there are a number of variables that came together to cause this terrible consequence. my only point is is not emblematic of the entire division. >> how about the ability to get rid of people who are not -- we can disagree as to how many there might be.

iare your hands tied? >> senator, we're doing more with respect to adopting, for example, in 2010, and enhanced performance management system which allows us to better evaluate senate objectives and the performance of individual attorneys. the ability to impose discipline or to terminate at lawyers has not, in my view, it is not an impediment to achieve what we want to get. a >> mr. walsh? >> i would agree. i think certainly we have a very skilled staff. to me, as i read the inspector general's report, one of the heartbreaking elements is there was expertise on the staff. there were people who could have played the proper role in solving the problem, and adjust for not brought to bear on this particular problem or issue.

>> this is just so confounding. you are saying that your staff is competent, they have the tools, and it just did not happen. it does not add up. mr. markopolos, you want to comment? >> i think is very hard to soar like an eagle when you are surrounded by turkey's. there are a lot of turkeys that need to let go. >> they're saying that you miss them. >> most of the attorneys, i do not think they could find steak an outback. >> they seem like decent people and have very good reputations. the think they're just doing this because that is the job of somebody, to defend their employees, and maybe deep down inside the realize there needs to be more confidence? >> i think so. i think it is the institution talking, not the men. i think there needs to be a different level of compensation,

it needs to be better salaries, and if you pay peanuts, you should not wonder why you went up with monkeys. it need to increase salaries and give them the bonuses they deserve. >> that relates to a second question. there are some recaps in place. the u think that they interfere with the ability to get the best people and retain the best people? would it be better if compensation level changed? city to get the top people? i did not just mean the senior advisers, but maybe crackerjack investigators who get paid more than others, and you cannot do that given the present rules. it is possible to pay the scales, a way of promoting seniority that need to be changed? >> senator, i think that greater flexibility in both the ability and the amount that we could pay people would be very helpful, particularly as we recruit

market specialists, structurers, others who came from wall street, who may have a difficult time finding a job now but may find themselves in demand. >> you would say that we need more flexibility, that the top salaries have to be raised of what you can pay for some certain key people? >> i agree, completely. >> mr. walsh? >> my yes, sir, that would really help us attract talent that we need. we're constantly competing with wall street to draw in the people the skills that we need. >> that was your first. i asked you for two, mr. markopolos. it did me the second. >> the second, almost as important, would be to minimize if not eliminate the attorneys at the sec. the attorneys are running the

show, and they have failed miserably. it is time to give people with capital market experience a chance. i think we have to do better. we know the frauds of the 20 century, we know the math, we know the derivatives, we know how they're put together. there are too many lawyers and law is too low a bar of behavior. a securities law is down here. at the behavior we need to shoot for is appear, good ethics, good transparency. >> those are separate issues. one is making the standard heyer. that has to be done statutory late? >> i think the glorious -- think the lawyers on a look at the low bar. >> the first one is that the you think the actual standard of criminality has to be changed? >> yes, you need to increase the bar and make it more expensive and give these guys more tools.

>> the gentleman agree, that we need regulatory or statutory changes defining fraud? >> senator, i do not think it is much the definition. >> i mean the other crimes, too. >> we generally do not lack for statutory vehicles to charge individuals. there are issues with respect to our ability to have jurisdiction of a security based swap agreements and hedge funds, which would greatly aid our investigations, as with the requirement that hedge funds and others -- as would the requirement that hedge funds and others have a trail. >> mr. walsh, anything dad? >> i agree with my colleagues on that. >> what about the second comment. the comet was too many lawyers, not enough market experience. >> go ahead, please. >> we are all about increasing specialization.

that is the thrust behind the reforms. at the same time, there are a stunning examples of work and complicated areas that the staff has done. one of our flagship offices in new york, many of the same groups that were involved in this case did be sham finite reinsurance cases involving afg and others, highly structured complicated transactions, and transactions were done solely to augment balance sheets and earnings. we did those cases, we did them well, $800 million worth of parties that went back to investors, 24 enforcement actions, criminal actions. we have that capability. we can do a lot more with some specialized expertise. >> examination program actually has relatively few lawyers. i am a lawyer for the program, but they're only 13% of us.

most examiners are count -- most examiners are accountants. i believe where we need to grow, and i agree with you on this, is to have more financial analysts, treading specialists, people understand difficult valuation issues. >> very logical. if you do not have those resources right now? >> we do not. a belmont just to reiterate, the final legislation i've introduced, very much needed, if we're going to stop all these features teams, you agree? >> that might be the single best thing you should do. >> mr. walsh? mdot yes, sir. a >> mr. markopolos? >> yes, sir. >> last question, on a conference call, about the madoff exam, "a senior level examiner reminded the junior examiners that madoff was a very well connected, powerful person, which one of the new

york examiner's interpreted to raise concern for them pushing madoff to hard." mr. markopolos, did you feel that madoff's standing interfered with the investigation? >> i do. i think there's a protected species on wall street where some are given a free pass and go after the small fry. >> mr. walsh? >> it is very difficult. i think the inspector general concluded that while there was no direct interference in the examination by supervisors, he did conclude there could of been a secondary effect on what happened. we're taking this very seriously. we have established an internal hotline soak sec and sanders anywhere around the country, at this and is the belief that they're being intimidated or firm is acting inappropriate the, they can call the hotline and will run on my desk and on a

number of senior people who work with me. we're moving quickly. am i think what they're saying is, what you would not call a hotline. what mr. markopolos is agreeing and what the inspector general was saying, because they he was a powerful person, a sort of instinctively might not have been as tough as if he was a less powerful, less well- connected person. it is not a hot line that is going to change that. let me ask, what are you doing to deal with the issue that both the inspector general and mr. markopolos have pointed out to try to get into the sort of psychological barriers? >> i think the way to deal with something like that is the tone of the top and communication and involved supervision, supervisors and managers who recognize situations or perhaps a more junior person may sit be susceptible to that kind of influence and a supervisor

intervenes in closely monitors to mention that does not happen. >> anyone want to add anything? if not, we will close the hearing and thank you for your time. at any more comments, mr. markopolos? >> no, i do not. them anymore metaphors? you are pretty good. >> no, all set. >> any further comments? >> no. >> i like metaphors, as people know. i think all of you for coming, and a hearing is closed. -- i thank all of you for coming, and the hearing is closed. [captions copyright national cable satellite corp. 2009] [captioning performed by national captioning institute]

>> up next on c-span, today's comments on health care from president obama. and reaction from senator john kyl, congressman erick kanter, and a group of senate democrats. later, a look at a campaign finance law case currently before the supreme court. >> on tomorrow's "washington journal," a look at poverty in the u.s. with the brookings institution. that freedom works as a sponsor of this saturday's taxpayer march on washington -- freedom works is a sponsor of this saturday's taxpayer march on washington. and the national journal report on what spain is doing to combat al qaeda. "washington journal" begins at 7:00 a.m. eastern here on c- span. >> is there more than one definition of conservative? saturday, sam tananehaus, the

new york times book review author on the death of conservatism. and look at the complete schedule online at booktv.org. >> following wednesday night's speech, president obama today spoke about his health care plan. he is joined by representatives of the american nurses association, a group that is endorsed his proposal. this is 15 minutes. [cheers] >> all right. hi, guys. thank you. thank you. thank you so much. it is good to be with all of you. please sit down, everybody.

it is just great to be with nurses again. it is great to be with becky. i want with knowledge -- i want to make sure i get them in order. this is linda. that is sonya. i want to acknowledge dr. mary wakefield, our health resources services administrator. thank you, becky for your leadership. i want to thank you for leading an extraordinary organization, the american nurses association. i was mentioning the first time we met that when i was in the state legislature i was the chairman of the health and human services committee, and one of my strongest allies in

springfield, illinois, was the nurses' association. we did a lot of work together to make sure that nurses work it did -- nurses were getting treated properly, they were getting the time off the needy, getting the ratios they needed, and so i have a wonderful history working with all of you. as a consequence i want to say thank-you for all the support you are providing for health insurance reform for the american people. i am so pleased to be joined by all of you. i have said before, i just love nurses. i do not know what it is. i love nurses. michelle knows about it. [laughter]

i will never forget how compassionate, professional, and how dedicated nurses have been to michele and i when we needed it most. when our daughters were born, one of our best friends is an ob-gyn. the truth of the matter is we only saw her for 10 minutes. that was it. she was one of our best friends. the rest of the time we spend with nurses who not only east the nerves of the anxious father but make sure that michelle was doing ok. when sasha was diagnosed with meningitis, it was one of the scariest moments of my life, and she ended up being a hospital, and we did not know whether she was going to be permanently affected by it. it was the nurses walked us

through what was happening and made sure that sasha was ok. that continues -- but obviously in tougher times, when my mother passed away from cancer, when my grandmother passed away. each time nurses were there to provide extraordinary care, but also extraordinary support. i am thankful for that. as a father, and as a son, grandson, i will be in debt due within and men of your profession. millions of other families feel the same way. you are the bedrock of our medical profession, on the front lines. [applause] you are on the front lines of

health care in small clinics and in large hospitals, in rural towns and big cities across this country. few people understand as well as you why today's health care system so badly needs reform. when part of the problem is the uninsured, and this morning the census released data showing not only the poverty rate increased last year, but also the number of uninsured rose in 2008. we know from surveys that since the root test box looks -- since the recession intensified, the situation has grown worse. the ranks of the uninsured have grown by 6 million people. that is 17,000 men and women every single day. during this period of time the number of adults who get their

coverage at the workplace has dropped by 8 million people. i do not have to tell you about all the problems plaguing the system. the fact that they do not just affect the uninsured. most americans have insurance and have never had less security and stability than they do right now. because they are subject to the whims of health insurance companies, many people fear that they will lose their insurance if they move or if they lose their job, they change jobs, or the insurance will not cover them when they need the most, because insurance companies deny coverage if people have a pre-existing condition. people fear that they will not be covered when they get sick, because there is not a cap on how much a person can pay in out-of-pocket expenses each year. they believe they will be left in financial rules that -- financial ruin. i got a letter from a woman who

had been changing jobs and had just gone to sign up for her do across blue shield policy. in january, before she had taken her new job, she felt a lump and had been referred to do a mammogram. she found out unfortunately she had breast cancer. the new policy said this was a pre-existing condition. she now owes $250,000. this happens all the time all across the country. you see it every day. it is heartbreaking, wrong, and nobody should be treated that way in the united states of america. nobody. [applause] so, the reason i need nurses so badly is because now is the time that act, and i will not permit

this to be postponed or in peril by the usual ideological diversions. we do not need more president -- partisan distractions. if there are concerns about any aspect of my plan, let's address it. we have talked this issue today -- to death. the time of talk is winding down. the time for bickering is passed. we can and have to be the last generation to take up this cause. [applause] just in case folks were not tune in last night -- [laughter] if they were watching "so you think you can dance," a show michelle likes, let me explain

what health insurance reform will mean for ordinary americans. simply put, it will mean that as folks go about their everyday lives, one thing they will not have to worry about is their health care. it will provide more security and stability to those who have health insurance, provide insurance to those who do not, and slow the growth of costs for families, businesses, and our government. for the hundreds of millions of americans who have health insurance, nothing in this plan will require you wear your employer to change the coverage or the arrangement you have. nothing will change if you have insurance. what this plan will do is make the insurance you have worked better for you. it will -- we will put

protections in place that will make it illegal for companies to deny purses -- to deny a person coverage on the basis of pre- existing conditions. [applause] we will make sure that we place a limit on how much folks have to pay for out of pocket expenses. for the tens of millions of americans who are uninsured, we will create an exchange, a marketplace where uninsured americans and businesses can choose help insurance at competitive prices, from a number of different options. by pulling the uninsured and small businesses together as a group, we give companies the incentive to participate and give consumers leverage to bargain for better prices. as i have said from the outset, and repeated last night, one way to give people a choice when it comes to their health care and keep insurance companies honest is by making one of the options available in such a

marketplace a not-for-profit public option. [applause] but let me repeat, because this is the source of the rumor that we're putting some government takeover of health care, it would just be one option among many. no one would be forced to choose it. everybody would believe they would still be getting their private interests. adding it up, it will cost $900 billion over 10 years. that is real money. it is more than wheat -- it is less than we have spent on the iraq and afghanistan wars and it is less than the tax cuts for the wealthiest americans that congress passed at the beginning of the previous administration. [applause] the cost of this plan will not

add to the deficit. the middle class will be rewarded with greater security, and if we are able to slow the growth of health care costs by just a fraction of 1% each year, which will reduce the deficit by four -- $4 trillion. when we stop spending money but that did not contribute to quality, we can spend money on those that can improve quality, we can pay nurses and profs more money to train more nurses so that we can have that quality that we need. one example, a random example. amid all the chatter on tv and radio, with all the falsehoods that are being promoted by talk-show hosts and prominent

politicians, it can be easy to lose sight of what the debate of reform is all about. it is about stories like the one told by an oncology nurse. a few weeks ago she wrote a post about a patient. he was in his 60's, recent grandfather, spent the last three months of his life worrying about medical bills. she wrote, "my patient thought he had planned well for his needs. he never thought he would wake up with a diagnosis of leukemia." that is why we need health care reform. that is why we need health care reform. i am absolutely confident that if you continue to do your part, you guys have a lot of

credibility, you touch a lot of people's lives, people trust you, if you are out there saying it is time for us to act, we need to go ahead and make a change, if all of us do our parts, not just here in washington but all across the country, then we will build the -- bid farewell where health care is the source of worry. america will join the ranks of every other advanced nation by providing quality insurance to all its citizens. we're going to me that this year with your help. thank you. god bless you. thank you, guys. [captions copyright national cable satellite corp. 2009] [captioning performed by national captioning institute] >> republican congressman eric cantor and senator john kyle respond to the president's speech last night on health

care. they are followed by democratic senators. >> my counterpart will be here momentarily. i have been asked about my reaction to the remarks last night, and i am disappointed. for a couple of reasons, first of all, if his goal last night was the clarifying the specifics of his proposal on health care reform, and to try to reach out to those with whom he has had this agreement to attempt to reach a bipartisan compromise, it seems to me that he failed significantly on both grounds. let me start with the second.

i do not think you reach out to people by continually to rodgers beach referring -- by continually throughout the speech referring to their arguments the way he did. i have never heard a more partisan speech by a president in that house chamber. i have listened to five presidents now as a member of the house and senate. the terminology used, like partisan spectacle, unyielding ideological, bogus claims, the president is good at setting up strongman and knocking them down nobody can have a disagreement based on a valid opinion. the arguments are false, it is a lie. to my republican friends, i say that rather than making wild claims, here is an issue that has been subjected to distortion, do not pay

attention to the scary stories. he did not hear any scary stories from the president last night in his remarks creek said it is time to do kill this plan than to improve it. how about us that have differences of opinion. if you misrepresent what is in the plan, we will call you out. it sounded very much like the chicago politics that i know he is familiar with. but i was perplexed by the fact that throughout the entire speech it appeared as if he was trying to ram something through with power rather than to refer to what the people have been saying to all of us over the last six or seven weeks. no reference to what the american people have said, no reference to their opposition to his plan, no concept of

listening to what they have to say about what they want. it is basically his way or the highway. the second point has to do with the clarification of what is in his plan. some point i was not clear what he was referring to. when he talked about the fact that there would not be any deficit, he was not referring to either the house or the senate bills because the cbo has projected they will have deaths is -- deficits. more than the lack of specificity was the disingenuousness of his arguments. let me give you examples of why i use that pejorative term. for months, he has been saying, if you like your insurance, you get to keep it. anybody not heard that phrase? we called him out on that.

it is not true, under the bills. even if you like your interests, there is a chance you will not be able to keep it. finally, i gather some of his staff said, mr. president, he cannot keep saying that. they got lawyers did that there -- together, and they said nothing in this plan will require you or your employer to change the coverage with the doctor you have. he repeated that. that is true. but the fact remains for at least three reasons people who have coverage now and like it will not get to keep it. start with the cuts in medicare, and he referred to the subsidies to the medicare advantage plan. a lot of seniors, over 10 million seniors, 22%, of the medicare knowledgeable folks, have medicare advantage plan spirit errors and has one of

the highest rates, 39% of the beneficiaries are enrolled in the medicare advantage plan. under the estimates about a reduction in subsidies, 7 million of those seniors are going to lose their advantage plan. as a direct result of policies in the legislation, people will lose coverage they now like and enjoy it. if the government run plant is part of this legislation -- if the government-run plan as part of this let legislation, a group recognized that over 88 million americans who are currently employed will lose their coverage at the job and be put into the government plan. not because the government requires it, but because the penalties established in the legislation, economically, makes sense for the employer to drop their coverage and pay the

penalty, which is much less than the cost of the coverage. there are other reasons, but those are the primary reasons that under this legislation, if you like your insurance, he will not necessarily get to keep it. close to 100 million americans will not be able to keep their insurance. the point is the way he cleverly said it is thought to suggest that, anybody that suggests this is incorrect. he is technically, legally correct, but it totally misses the point. he did not deal with the critical commentary that was made. i do not think he wants to engage in an honest debate about the details of the plan. he talked about medical liability reform. here again, a very disingenuous to say i will take you up on it. we will revive the bush administration idea to go to the states and encourage them to develop dispute resolution mechanisms. after three different bills -- at least there were two, where

democrats defeated the reform, the bush administration said wish to be talking to the states about what they should do. the was never any effort to pursue it, but the idea was to encourage states to develop alternative dispute resolution mechanisms. that is hardly medical liability reform. the president is serious about taking this effort, he will entertain the idea is that we proposed about medical liability reform, including things like health care courts. senator cornyn and i have, the arizona and texas reforms, which have made a big difference in our two states. that was not a genuine proposal. by putting the secretary of hhs in charge, we can see what happened to it. she was director of the kansas

state trial lawyers association for many years. he talked -- he said the proposals i would put forth would not apply legally. that is a correct statement. it is also correct the democrats defeated proposed amendments in the house that would have required some verification of eligibility. if there is no verification of eligibility, the it is probable illegal immigrants will end up receiving the benefits of the legislation. he says no federal dollars will be used to fund abortions. representative kantor will speak to this because that is where the amendments are in the house. it was defeated earlier. i wonder what that tells you. finally, he made this last point, not a dollar of the medicare trust fund will be used pay for the plan. the trust fund is broke.

what he is doing is cutting payments to providers and cutting the allotment to the insurance plans that provide medicare advantage options, and those two things will result in a reduction of choice, and i submit a rationing of care to seniors. production of choice because the plans largely go away, and when you pay the doctors and hospitals less, even then they are being paid to the, something has to give. seniors are concerned it will be their health care, and have every reason to be concerned. the point is not that we are taking money out of the trust

fund to pay for something, the fact of the matter is instead of helping to make the medicare trust fund healthier, the reduced payments to providers and cut the allocations to medicare advantage in such a way as to disadvantage seniors without creating any money to pay for anything else. i did not hear anything about how these plans were going to be paid for last night. we could go through all the different ways in which people are taxed, individuals, big businesses, small businesses, premium holders will end up paying taxes. no detail about that. bottom line, i thought the speech was partisan, uninformative, disingenuous, and not likely to encourage those who have honest disagreements with him to be able to work toward some kind of common solution. republicans remain committed to working together if we can achieve that, you know about

our ideas, we have repeated many times, i would be happy to repeat them again here, and that is what we would like to see, push the restart button and engage in real bipartisan discussions rather than the kind of threats that were the major thrust of the president's remarks last night. my colleague and counterpart from virginia, representative eric cantor. >> there is no question that the bar was set very high for this president in his speech last night. his performance did not match his expectations and i do not think he did reach that bar. if we listen to his speech, what was a striking was there was a disconnect between his message and where the american people are in terms of their fear of where washington is headed in terms of changing

their health care. i know that i wanted to hear some specifics. a lot of us did. what we heard is much of what the president has been out seen before. in fact, there were at least 100 speeches prior in which the president talked about health care. not much new came out of the speech. the president did say he is open to the republicans bringing forth ideas. i am going to take him at his word just like we at the to take him at his word when we began the process in january over the question of the spending stimulus bill that was in the makings then. i am hopeful that this process will result in a better product for sure, especially as we are dealing with something that is so personal to the american families. if the president is serious and

wants our participation and wants our input, i think we ought to start in three directions. one is to provide and make sure the american people know that we are going to guarantee that there will be no government substitute for the decision- making power that patients and doctors have over their health care. two, that there will be a guarantee for the american people that there will be no government rationing, that there will be no government force discrimination on any basis, as far as health care access and delivery is concerned. and, third, to guarantee to the american people that we are not going to break the bank in passing a health care bill. people are cognizant of the enormous amount of debt, and they're asking the question, who is going to pay for all this? if we can get straight on these

type of pre requisites and have some substantive agreement on that, there are some things that we can work together on. the present mentioned senator mccain -- the president mentioned senator mccain last night and his proposals. these are individuals who may face a disease such as multiple sclerosis, that tend to cause insurance premiums to skyrocket, that may find themselves in the individual market and an able to afford coverage. senator mccain has opposed all -- has a proposal. i like the term universal access programs treat these are efforts i think we can have agreement on and deal with. the other issue is the issue of portability. the president was right in

saying he should not have to lose your health care if you lose your job. let's go ahead and more on that. we can do that. we can provide the flexibility and the insurance -- in the insurance laws to make sure that no one can lose their health care if they lose their job. the area of medical liability reform. i was very disappointed by the proposals being suggested by this president, and that somehow we are going to be able to accomplish real reform, the end of lawsuit abuse by administratively engaging in pilot projects. we know the american -- we know and the american people you cannot effect tort reform at something with state law to affect the operation in state law to finally address, getting the lawyers out of the examining room which would bring down the cost of health care in this country. >> questions?

[inaudible] one reason they have not been achieved before this is an amorphous notion that we can cut waste, fraud, and abuse from medicare. it is very hard to do. there is nothing specific in these bills that's just how that is to be done. the two ways it road or kerr -- the to this id will occur is reductions in the medicare advantage plan and the other 60% by reducing payments to providers. the other half, the other half

of the trillion dollar cost comes in all these taxes that i mentioned, the taxes on jobs, small business, chronically ill, which is the limitation on flexible savings accounts, penalties for the middle class. there are a series of new taxes which are designed to raise the other 1/2. [inaudible] >> all of us who know show wilson know that he did the right thing and apologize -- in apologizing to the white house. i do not think anyone accepts the type of outburst and the

lack of decorum in the house chamber, and i think joe wilson has shown as much and he has done the proper thing. as far as any other type of protest going on in the house, i was unaware of it around me, but i will tell you that we all do need to dedicate ourselves to working in a civil manner to address a very important issue for the american people. there is some support disagreements about how we can effect health care reform in this country. if you listen to what the president said, it is almost as if there is a certain amount of tone deafness on the part of the white house. the american people are clearly in a position where they think that washington is going to produce a replacement for the health-care system that they know. if you then take the facts that most people in this country have health care, most people that have it like it, it is just too expensive and aggravates the number of uninsured.

if we can start with what works and guarantee that we are going to preserve those principles and the operation of what works and then tried to defect piece that does not, i think we can all seemed to move towards a final product that actually it gets it right. if the president would demonstrate that it is more important we get it right then get it done, i think that would go a long way, as well. [inaudible] >> a group has for years been a highly respected think tanks and research and tv -- and ended the that the value its proposals, and i have never heard anyone contend that they

have been biased or that they have an agenda, which they pursued in their work. if anybody would like to make that presentation, it can certainly be evaluated. there is a difference in assumptions between the cbo and the group with respect to proposals. that is the reason why there are different outcomes in research. i think the assumptions that the group made are better of assumptions than those made on one of the particular pieces of analysis. i have seen nobody contend that the group has not approached their work in a totally objective and constructive way. >> could you envision a time when you would put together the kinds of things have been talking about into a bill and present it on the floor, and

what you think of biden's suggestions, to have a final bill to vote on? >> somebody else needs for the room. republicans have been talking about a variety of approaches to the cost and access issues, both in the house and senate. they are fairly well known. my personal suggestion is that we should go ahead and introduce six or seven bills that embodied these individual principals, so that we can take it one bite at that time. it will not scare anybody if we create a piece of legislation that allows a small business to join together and negotiate with insurance companies with the same power as big businesses. it should not scare anybody to have legislation -- some object -- to allow insurers to compete across state lines. that will cause some insurance

companies to get their backs up because they do not like the composition -- competition. consumers like that. on malpractice reform we should have specific bills. senator cornyn and i are working on this. senator coats worn -- coburn also has one. let's start with good ideas and do not try to reform the whole way that health care is delivered, but try to target specific solutions to is this a problem spirit my personal preference is rather than put them in a big comprehensive bill, because that is harder to get a big comprehensive bill done. a 1300 page bill, people did not read it. republicans have those

proposals, and some of us will go ahead and introduce the legislation and see if we can keep -- -- see if we can get people to buy into that. let me take this last one. [inaudible] correct. >> it seems like a new low on a very important issue. will we be able to get beyond these personal things to do

with the issue at hand? >> it is not constructive to a bipartisan dialogue. my honest compression of the president who spoke in a very partisan and political way last night, a way that i think is not constructive, it is my obligation to put out the fact that this is not the way you get people to cooperate. he did not say if you disagree with us we're wrong to call you out and use all those pejorative terms he used. it is harsh for me to criticize him for doing that, and it may certainly seen that way, i think it is honest, and i am trying to convey something here, which is if you want cooperation, that stood at over board. push the reset button and talk about things that you know which had been concerned about four years. did not say we will meet you halfway on medical malpractice by trying to encourage states to gauge -- to engage in resolution. that is not the -- meeting us halfway. i'm trying to make a point here, which is i cannot think

the president of advanced the bipartisan ball last night. that needs to be pointed out in clear, honest language. i am ready to drop that at this moment to engage in real bipartisan conversations if we can do that. thank you. >> it is fair to say that the president's speech was a game changer. he spoke directly to the american people and the american congress. the details he outlined will provide guidance for what we are going to do here in the senate and in congress generally.

everything he talked about will be legislation that preserves patients' choice, lowers costs, and improves care. that is what this debate is all about. i think it is also important that on some of the morning shows, even republicans have acknowledged clearly that the legislation he talked about is not care how -- does not provide health care for illegal immigrants and there are no death penalty. senator mccain said that very clearly, and i appreciate that. the president came to congress and offered an olive branch to the members of congress. he included prado -- republican proposals to his plan. he referred to a specific number of senators, mccain, hatch, he took a page out of

president bush's page. there is no question that the president is sincere that this is the time we do something, whether just talk about that, and in spite of the efforts of those who tried to derail the plan and maintain the status quo, as the president said last night we are 90% done with the hard stuff, and we got to get the details done now. when chairman baucus lays down a bill next week, i think we will find there is going to be room for a vigorous debate on what is on to take place in the senate. that is the way it should be. the bottom line is we have to rein in skyrocketing costs that they can -- breaking the back of the people.