Democrats urge reforms at Madoff hearing

By Kevin Drawbaugh and Rachelle Younglai

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 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 a $50 billion fraud. 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.

But Massachusetts Democratic Rep. Barney Frank, chairman of the House of Representatives Financial Services Committee, said it was inappropriate to blame SEC staff.

Rep. Spencer Bachus of Alabama, the ranking Republican on the 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.

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.