Democrats press for reforms at Madoff hearing

WASHINGTON (Reuters) - A congressional hearing into the alleged $50-billion Bernard Madoff fraud drew calls from Democratic lawmakers for an overhaul of financial regulation as their confidence ebbs in the U.S. Securities and Exchange Commission.

"Clearly our regulatory system has failed miserably and we must rebuild it now," said Rep. Paul Kanjorski.

The Pennsylvania Democrat chaired a committee hearing Monday on the scandal involving one-time Wall Street powerbroker Madoff, who stands accused of running a massive fraud that touched investors and charities around the world.

Witnesses at the House Financial Services Committee hearing included SEC Inspector General David Kotz, who pledged a thorough inquiry of the agency's handling of the case.

The SEC has been under fire for not uncovering the Madoff fraud until Madoff's sons told authorities he had confessed to them. The investor protection agency has also been blamed for not following up on tips, and missing a number of red flags such as Madoff's ability to generate a steady rate of return in all types of market conditions.

"Many of us have lost confidence in the SEC," said Rep. Carolyn Maloney, a Democrat from New York.

"Where can we go to get the proper oversight? I don't have trust in them (the SEC) for the future," she said.

Rep. Brad Sherman, a California Democrat, said the SEC and the Financial Industry Regulatory Authority, a broker watchdog, should have been enforcing the securities laws in this case.

Leaders of the Senate Banking Committee said on Monday the panel would examine the SEC and FINRA's performance. Chairman Christopher Dodd and Richard Shelby, the top Republican on the committee, asked the SEC to produce documents, including complaints about Madoff's firm.

Rep. Spencer Bachus of Alabama, the ranking Republican on the House panel, said he saw no need at this stage for broad new laws or rules for the securities industry.

"What we may have in the Madoff case is not necessarily a lack of enforcement and oversight tools, but a failure to use them," Bachus said.

LIFE SAVINGS VANISH

Madoff investor Allan Goldstein, 76, told lawmakers he had entrusted Madoff with all he had; his life savings had vanished "in the blink of an eye."

"Ruth (Goldstein's wife) and I thought we were living the American dream. Our dream as well as many others has turned into a nightmare," said Goldstein, who said he has been forced to cash in his life insurance to pay his mortgage.

It is not clear whether investors will be able to recover any of their money. The trustee for the Madoff investment firm has identified over $830 million in liquid assets of the defunct brokerage firm that may be subject to recovery.

The Securities Investor Protection Corp, set up by Congress to help investors at failed brokerage firms, has $1.6 billion on hand and a $1 billion line of credit with the Treasury Department. The maximum amount SIPC can give a single investor is $500,000.

SIPC President Stephen Harbeck told Congress the demand for funds from Madoff investors will be in excess of any previous case and the group may need help from the government.

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

He 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 inquiry by SEC Chairman Christopher Cox, he said.

Kotz, who has already issued reports critical of SEC investment bank oversight, said he would analyze broad issues such as how the SEC's enforcement unit handles complaints and the relationships between various divisions.

RALLYING POINT

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 Wall Street Journal reported in its Monday editions 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.

U.S. prosecutors asked a judge on Monday to revoke the bail terms for Madoff, claiming he was a flight risk. A U.S. magistrate judge withheld a decision and asked both sides for additional written information this week.

(Reporting by Rachelle Younglai, Kevin Drawbaugh, John Poirier; Editing by Tim Dobbyn)