Congress panel probes Madoff amid reform calls

WASHINGTON (Reuters) - A congressional hearing into the alleged $50 billion Bernard Madoff fraud provided a platform on Monday for proponents of sweeping financial oversight reforms.

"Clearly our regulatory system has failed miserably and we must rebuild it now," said Rep. Paul Kanjorski, a Pennsylvania Democrat who chaired a hearing with witnesses that included the internal watchdog of the U.S. Securities and Exchange Commission.

Inspector General David Kotz has set a January 16 deadline for SEC staff to turn over Madoff records and said "social and professional relationships" may have influenced investigators.

Kotz said he would examine complaints lodged with the SEC about Madoff's business over the years, as well as agency staff's contacts and relationships with the Madoff family.

"It is our opinion that the matters that must be analyzed regarding the SEC and Bernard Madoff may go beyond" issues targeted for internal inquiry by SEC Chairman Christopher Cox, Kotz said in written testimony given to members of the House of Representatives Financial Services Committee.

Madoff is accused of running a fraud that ensnared investors and charities around the world.

The Madoff case has emerged as a rallying point for Democrats intent on overhauling financial regulation this year, with the help of the incoming Obama administration as it moves to stabilize the troubled U.S. financial system.

The Madoff affair "fell through the cracks of our regulatory system," Kanjorski said. "It now appears that regulators should have detected the Madoff wrongdoing earlier because of the red flags raised by others."

The scandal should be the "final prod" for reform of the financial regulatory structure, former SEC Chairman Arthur Levitt wrote in the Wall Street Journal on Monday.

The newspaper also reported that Bernard L. Madoff Investment Securities LLC was examined at least eight times in 16 years by the SEC and other regulators, who often had suspicions. But it said officials never uncovered the alleged $50 billion Ponzi scheme that investigators now believe began in the 1970s.

(Reporting by Kevin Drawbaugh; Editing by Tim Dobbyn)