Madoff to SEC watchdog: Agency held me in awe

By Rachelle Younglai

WASHINGTON (Reuters) - Bernard Madoff believed U.S. Securities and Exchange Commission employees were too dazzled by his stature on Wall Street to properly probe his operations and uncover his massive fraud, documents released on Friday showed.

According to a jailhouse interview with the SEC's inspector general in June, Madoff said the only problem with the SEC was that he "had too much credibility with them and they dismissed the Ponzi (scheme)."

Madoff, 71, pleaded guilty to the biggest investment fraud in Wall Street history, involving as much as $65 billion. He was sentenced to 150 years' imprisonment later in June and is incarcerated at a medium security prison in North Carolina.

Inspector General David Kotz has already found that the agency bungled five probes of Madoff, missed red flags and dismissed tips and complaints that might have discovered the Ponzi scheme, in which earlier investors were paid with money from later investors.

On Friday, the SEC released hundreds of documents including interviews, emails and other materials gathered in Kotz's investigation of the SEC's failure to catch Madoff until he confessed in December.

Madoff told Kotz that SEC investigators did not ask him questions about the Ponzi scheme because "everybody dismissed this aspect."

There was "never any hint" that the SEC was looking for signs of a Ponzi scheme, Madoff told Kotz in the June 17 interview at a New York correctional center. Madoff told Kotz this was "primarily because of the reputation I had."

Madoff painted a picture of a cozy relationship with top SEC officials. He called current SEC Chairman Mary Schapiro a "dear friend" -- a claim Kotz rejected, saying his office did not find any evidence to support Madoff's claim of a close relationship with Schapiro.

Schapiro became SEC chairman in January after spending more than 10 years at brokerage watchdog FINRA. She had been an SEC commissioner between December 1988 and October 1994.

Madoff also said he knew SEC Commissioner Elisse Walter "pretty well," and said he and former SEC Chairman William Donaldson were "sort of competitors" who had "mutual respect."

An email to Walter seeking comment was not immediately returned. According to the documents, Walter told Kotz that she knew Madoff in a professional sense. "I would not say that I know him pretty well," she said.

Madoff told Kotz that he went to lunch with former SEC Chairman Arthur Levitt to complain about Internet stocks. Madoff said Levitt then "went on TV. and gave a warning about it."

Madoff said he knew Levitt before Levitt went to the SEC. Levitt headed the American Stock Exchange from 1978 to 1989.

Levitt told Reuters on Friday that he knew Madoff and it was possible they had lunch when he was at the exchange. However, Levitt said he had no recollection of meeting with Madoff for lunch when he was SEC chairman from 1993 to 2001. "I find that very unlikely," Levitt said.

Madoff told Kotz that he started his scam when he could not put his strategy to work. He said he thought: "Fine, I'll just generate these trades and then the market will come back and I'll make it back ... and it never happened."