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Report Details How SEC Missed Madoff Scheme

Unseasoned investigators from the SEC were alternately intimidated and enthralled by a name-dropping, yarn-spinning Bernard Madoff as he dodged questions about his financial house of cards, according to a scathing new report on the agency’s repeated failure to uncover the fraud.

The report, by the agency’s inspector-general, H. David Kotz, concludes that numerous “red flags” were missed by the SEC from at least 1992, not just because of inexperience and incompetence, but because investigators failed to follow incriminating evidence in plain sight and were cowed by Madoff, who had an inflated reputation on Wall Street.

The report details six substantive complaints against Madoff received by the SEC, which were followed by three investigations and two examinations. Yet the SEC never verified Madoff’s trading through a third party. Time and again, it was noted that the volume of his purported options trades were implausible. When the enforcement staff received a report showing that Madoff indeed had no options positions on a certain date, the SEC simply did not take any further steps.

The string of lapses was capped by a staff lawyer receiving the highest performance rating from the SEC, in part for her “ability to understand and analyze the complex issues of the Madoff investigation.”

Perversely, Madoff used the SEC’s inquiries as a selling point to reassure investors that the government had scrutinized his operations and found no problem.

It was not Madoff’s cleverness that enabled him to fleece thousands of investors out of billions of dollars, Kotz said. It was the fact that, “despite numerous credible and detailed complaints,” the SEC never took “the necessary, but basic, steps.”

Kotz recounted incidents in which investigators seemed hopelessly out of their depth, far too credulous and perhaps just plain lazy.

A Justice Without Clerks May Be a Justice on His Way Out

The hiring of Supreme Court clerks may be a sort of early-warning system for hints about the justices’ retirement plans. “We’ve started tracking Supreme Court hiring in real time,” said David Lat, the founder of Above the Law, a legal blog.

Justice David Souter’s failure to hire clerks this spring accurately signaled his decision to step down. On Wednesday, the court confirmed that Justice John Paul Stevens, 89, has so far hired only one clerk, instead of the usual four, for the term starting in October 2010. That ignited speculation that Stevens may be planning to step down next summer.

Or it could merely mean that he is keeping his options open.

The alternative is to hire clerks now for a job that might evaporate later, something that Stevens would not do lightly, according to people who know him.

“Justice Stevens is a man who cares deeply about treating people with respect,” said Christopher L. Eisgruber, the provost of Princeton University, a former Stevens clerk and the author of “The Next Justice: Repairing the Supreme Court Appointment Process.”

There is at least some reason, Eisgruber said, to think the justice intends to retire relatively soon. “Justice Stevens would have to be pleased at the thought that his successor would be appointed by Barack Obama, an African-American lawyer from the city of Chicago,” he said.

New Snag for Oracle in Sun Deal

European regulators delayed the proposed takeover of Sun Microsystems by the software company Oracle on Thursday, indicating that the combination could squelch the growth of a popular, free corporate database program owned by Sun.

The decision by the European Commission to extend its investigation into the deal, worth $7.4 billion, is especially sensitive because the Justice Department has already approved the merger. Regulators in the United States questioned Oracle’s market power in some areas of its business but raised fewer concerns than the Europeans about open-source software.

Oracle has tussled with European Union regulators in the past over its ambitions but has overcome initial opposition. In 2004, the commission approved Oracle’s acquisition of PeopleSoft without conditions after subjecting the deal to the kind of in-depth inquiry now under way over its purchase of Sun. The Justice Department had opposed that merger, but lost in a legal battle with Oracle. The following year the European commission also approved Oracle’s acquisition of Siebel Systems, again without conditions.

In announcing the decision Thursday, Neelie Kroes, Europe’s competition commissioner, warned that the acquisition could hamper development of an important software product owned by Sun, which specializes in computer hardware. The product, MySQL, is the most widely used corporate database software in the world, and it competes with software produced by Oracle.

Kroes said preserving access to open-source software was vital when much of the world, including Europe, might just be emerging from a deep slump.

WTO Report on Government
Aircraft Aid Loses Urgency

After five years of bitter and costly litigation between the United States and Europe, the World Trade Organization is expected to deliver a report on Friday intended to set limits on government support for civil aircraft makers like Boeing and Airbus.

But it is coming, economists and industry analysts say, too late to make much difference. The preliminary report, analysts say, is expected to support at least part of the complaint filed in 2005 by the United States on behalf of Boeing, claiming that the European Union and its member governments had funneled tens of billions of euros in illegal subsidies to the European aircraft maker Airbus in the last 40 years.

The most serious charge in the American case, legal specialists say, involves “launch aid,” the low-cost loans extended by European governments to help finance the development of planes.