THE SEC WATCHDOG WHO MISSED MADOFF; DON'T BLAME ME: CHEUNG

THE SEC WATCHDOG WHO MISSED MADOFF
DON'T BLAME ME: CHEUNG
By LORENA MONGELLI and DAN MANGAN
January 7, 2009
New York Post

The Securities and Exchange Commission's New York watchdog, under fire for failing to uncover Bernard Madoff's alleged $50 billion Ponzi scheme - despite a dead-on tip by a whistleblower - yesterday tearfully defended herself, arguing that she and the agency did the best job possible.

"Why are you taking a mid-level staff person and making me responsible for the failure of the American economy?" an upset Meaghan Cheung, with eyes tearing up, told The Post.

"I worked very hard for 10 years to make a career, and a reputation, and that has been destroyed in a month," said Cheung, who was the SEC's branch chief of the New York enforcement division during that unit's earlier probe of Madoff's brokerage business.

The 37-year-old has been singled out by whistleblower Harry Markopolos as the woman who failed to detect the scam despite his lengthy warnings. It was Cheung who signed off on a 2006 SEC investigation that effectively gave Madoff the all clear.

She said, "I was shocked" to learn last month that Madoff had been charged with - and confessed to - operating a massive Ponzi scheme at his Manhattan firm that swindled thousands of investors.

"I think it's a tragedy," said the married mother of two, who is a graduate of Yale University and Fordham University Law School.

But when asked if she would have done anything differently in her Madoff probe - which ended with "no evidence of fraud" - she demurred.

"I can't answer that," said Cheung, who left the SEC in September for personal reasons unrelated to Madoff. "If someone provides you with the wrong set of books, I don't know how you find the real books."

"Everyone in the New York office behaved ethically and responsibly and did as thorough an investigation as we could do," said Cheung. "I supervised some lawyers and I was supervised by many levels above me. I'm just mid-level management."

"I had no incentive to give anyone a pass. I had an incentive to bring cases that should be brought, especially big cases," she said. "I was not influenced, and I don't believe anyone in the New York office was influenced, by any other desire than to find out the truth. . . There is no other reason to work there for so long, except that I love what I do." She added, "No one in my office had any incentive to miss something like this."

Regarding Madoff specifically, Cheung said, "I never met the man. I had no personal connection, no financial connection, no social connection."

Cheung spoke outside her Flatiron District co-op after media reports detailed how the SEC failed to catch Madoff even after investigating his Manhattan broker-dealer firm at least eight times over 16 years.

Some of those reports have noted an April 2008 e-mail that Markopolos wrote another SEC exec.

"Cheung, branch chief in New York, actually investigated [Markopolos' claims] but with no result that I am aware of. In my conversations with her, I did not believe that she had the derivatives or mathematical background to understand the violation," Markopolos wrote.

Cheung said that when she read a critical New York Times piece on Sunday mentioning that e-mail, she was on a plane with her children, and that she burst into tears.

As for Markopolos' reference to her supposed lack of mathematical acumen, Cheung said, "Investigations are conducted by lawyers and examiners and investigators. We have experts available to help us."

Cheung and other SEC staffers had met Markopolos in New York in November 2005, after years of him suggesting to the agency that Madoff was an arch-crook. Markopolos once had worked at a rival firm, but Cheung told The Post, "I didn't have enough interactions with [Markopolos] to be able to judge his motivations."

Markopolos gave the investigators a long memo that flatly said that "Madoff Securities is the world's largest Ponzi scheme."

Soon after, in January 2006, the New York branch of the SEC opened an enforcement case on Madoff based on Markopolos' claims. The document authorizing that probe is signed by three SEC staffers: Cheung, attorney Simona Suh, and Assistant Director Doria Bachenheimer.

But after interviewing Madoff and a principal of Fairfield Greenwich Group -his biggest hedge-fund investor - as well as reviewing documents, the SEC probe "found no evidence of fraud," according to a case closing recommendation signed off by those three staffers.

The probe did find that Madoff had violated regulations by acting as an investment adviser without registering, but said he should not be disciplined because he had remedied the situation.

Philip Michael, a lawyer for Markopolos, said the failure by Cheung and the other probers to find Madoff's fraud suggests that "she just didn't understand what was going on" even after Markopolos gave her a road map.

Brad Friedman, a lawyer for Madoff's victims, called the SEC's failure to find the fraud "stunning."

"They had every red flag in the world," Friedman said. "Even with a map and a flashlight, they couldn't find it."

As to why the SEC didn't discover the fraud, Cheung said. "We still don't know exactly what happened. We don't know when it started."

"It's personally very upsetting, especially, since I am not able to respond in any substantive way. . . I'm not in a position to defend myself. I am forced to see one side of the story," Cheung said, referring to Markopolos' characterization of her.

"He has no basis to judge what we did or did not do in any investigation because we're not able - as we told him at the time - we were not able to give him updates as to what we were or were not doing with his information. And that is a strong commission policy, that we do not disclose what is happening in a confidential, non-public investigation. And that is for the benefit of everyone."

"There's nothing I can say about what we did in this investigation other than to say we worked as hard as we could," she said. "I was not influenced, and I don't believe anyone in the New York office was influenced by any other desire than to find out the truth."

"With the SEC, we'll never have search warrant authority to knock down somebody's door, and search his secret records, and nobody would want to live in a world where we could do that," she said. "We conduct investigations professionally and without regard to the stature of the people. You should be able to see that from the kind of cases that we bring."

Cheung adamantly denied looking the other way for future gain in the financial industry. "Any allegations that we were somehow swayed by the prospect of a high-paying job are ridiculous and unfair. . .. Allegations of impropriety and unethical behavior are so unfair and hurtful."

She said, "I have never been pressured to walk away from a case by any of the career staff or division of enforcement. I don't believe the New York office has ever walked away from a case based on influence or the reputation of individuals involved. We have investigated fraud and pursued it."

As for her future, "I am staying home with two kids now," she said. "I didn't leave for a high-paying job. My reason for leaving was purely personal. I never interviewed for another job."