The SEC and Madoff: The Need for Authentic Leadership in Regulatory Agencies

No scandal in recent memory highlights government regulatory ineptitude quite as clearly as the Security and Exchange Commission’s failure to uncover Bernie Madoff’s Ponzi scheme, a scheme that bilked investors “of an estimated $65 billion” (Shafritz, Russell, & Borick, 2011, p. 362).  Madoff, a wealthy, prominent, industry insider, perpetrated his scheme on unsuspecting investors beginning as early as 1992 and the SEC had received and investigated no less than six complaints between 1992 and 2008, when Madoff finally confessed (U.S. Securities and Exchange Commission Office of Investigation, 2009).   Why was the SEC so slow to respond to tips and complaints about Madoff?  More importantly, what institutional changes have been implemented at the SEC to assure that the regulatory agency is a more effective regulatory body in the aftermath of Madoff?  This author finds that while the SEC’s internal investigation has revealed some of the systematic causes of their failure, and has worked to address them, the most notable and enduring failure of the SEC was a leadership failure that remains unaddressed, prompting a call for SEC leaders to adopt the principles of authentic leadership to develop an ethical organizational identity.

On Causes of the SEC Failure

            In the wake of the SEC’s failure to catch Madoff, despite the numerous complaints, the SEC conducted an internal investigation to determine why they failed to uncover Madoff’s Ponzi scheme during the course of their many investigations (Wingfield, 2009).  The SEC (2009) report found that a) investigations and examinations went uncompleted, b) the agency failed to collaborate both internally or externally, c) the agency lacked resources,  d) the agency lacked needed expertise, and e) the agency did not have needed process, systems, or controls.  Equally important, the agency found a) no conflict of interest or impropriety in their handling of the case, and b) no attempts by senior SEC officials to influence the investigation (U.S. Securities and Exchange Commission Office of Investigation, 2009).  In addition, the report is notable for the focus on the specific SEC transactions with Madoff over the years, rather than investigation of systemic problems within the agency that contributed to the failures.  As a result, the SEC (2009) report does not address the role of organizational processes, leadership, or culture, in the failure to uncover Madoff’s scheme, rather it ends suggesting employees involved in the failure should be put on a performance plan.

In light of the SEC’s failure to identify systemic issues, it is worthwhile to review outside criticism of the notable SEC failure.  For example, Shafritz, et al. (2011) suggest the SEC was subject to the phenomenon of ‘agency capture’ whereby a government agency is overly influenced by industry economic interests.   Galbraith (2009) describes the problem endemic to most government regulatory agencies thus:

Regulatory bodies, like the people who comprise them, have a marked lifecycle.  In youth they are vigorous, aggressive, evangelical, and even intolerant.  Later they mellow, and in old age – after a matter of ten to fifteen years—they become, with some exceptions, either an arm of the industry they are regulating, or senile. (p. 166)

In the case of the SEC’s examination of Madoff, the mid-level bureaucrats that examined Madoff appeared overly cautious given Madoff’s stature as a giant in the investment world (Shafritz, et al., 2011).  In particular, because the career path of many in the SEC is in the very firms they are charged with regulating, the agency is susceptible to the ‘revolving door’ phenomenon (Barkow, 2010).  Agency capture, therefore, can be considered an individual choice of self-interest over agency purpose.  What, if anything, has the SEC done in the aftermath of their public failure, to reform the agency, and how will the agency address agency capture?


SEC Reforms

            Because of the intense public scrutiny following the SEC’s failure to prevent Madoff’s Ponzi scheme, the agency has published a list of reforms they have undertaken.  While the list of reforms is fairly comprehensive, this author will seek to outline reforms pertinent to the discussion in this paper.  First, the SEC (2012) reorganized their enforcement division and added industry experts to their staff.  Second, the SEC centralized the tracking and distribution of tips and complaints into a computer database (Lynch & Goldstein, 2011; U.S. Securities and Exchange Commission, 2012).  Third, the SEC (2012) has put internal process controls and a governance structure in place to assure appropriate follow-up and disposition on examinations.  Although, given the tactical nature of the reforms, this author thinks it likely that additional oversight failures are likely, primarily because organizational culture and leadership issues remain.

The Need for Authentic Leadership

            The SEC’s failure, in some respects can be considered a failure of leadership and culture.  Indeed, if you considered their failure to detect Madoff’s scheme in light of the larger regulatory responsibilities of the agency, the Madoff failure was one notable failure across two decades of similar failures.  For instance, the SEC failed to detect the widespread corporate fraud of the late 1990’s as corporate giants like Enron, WorldCom, Adelphia, and Tyco bilked investors and employees out of millions.  In addition, the SEC failed to adopt a regulatory position on mortgage lending practices that led to the subprime mortgage crisis.  When one considers the regulatory lapses of the SEC (2012) compared with their avowed mission “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation” (p. 1), one can likely conclude the agency is in dire need of change, but change to what?

Change is, by its very nature, a leadership problem.  As a regulatory agency that has grown too ‘chummy’ with the industry as a whole, where self-interest appears to override agency purpose, the SEC needs to transform rather than simply reform.  Some argue that the institutional design is flawed, and the agency requires a new design to prevent agency capture (Barkow, 2010).  While the existing reforms and new institutional design are important, equally important is a leadership transformation.  Some would argue that the SEC needs a ‘transformational’ leader to guide them into the future.  However, this author would argue that an agency-wide focus on authentic leadership development is more appropriate, because transformational leadership lacks an ethical or moral dimension.

Authentic leadership theory was born out of the corporate scandals of the late 1990s (George, 2006), however the importance of authenticity was described by Lord Polonius in Shakespeare’s Hamlet, “This above all: to thine ownself be true,
 And it must follow, as the night the day,
 Thou canst not then be false to any man” (Shakespeare, 1986, p. 676).  “Though, the working definition of an authentic leader is true to ones self, there is an expectation that being true to one’s self is also upheld by the overarching morality of society” (Tonkin, 2010).  It is in this context, that authentic leadership applies to the problems of ethics and morality in an organization.  Moreover, an authentic leader has the opportunity to drive the ethical identity of an organization through a written code of ethics and authentic leadership behaviors (Verbos, Gerard, Forshey, Harding, & Miller, 2007).  How then, does one tell the difference between self-interested leaders and authentic leaders?

A Tale of Two Leaders

            This author will describe his experience with two organizational leaders to illustrate an example of leadership authenticity.  The first leader to discuss is Jon Doe.  Jon’s day-to-day leadership was centered on the notion of crisis, real or manufactured, given both scenarios were equally useful to drive change.  Insofar as Jon sought to transform the company, using crisis as an enabler, characterized Jon as a transformational leader.  Moreover, Jon’s focus on transformation gave the appearance of the consummate executive, working towards the greater good of the company.  However, over time, Jon would often switch positions on key topics regarding organizational change, depending on the power of the position relative to other positions.  In addition, Jon would reprioritize organizational resources depending on the crisis of the moment, effectively abandoning earlier crisis, irrespective of the state of resolution.  This author’s opinion is that Jon was an opportunist that was expert at aligning his self-interest with organizational interest, rather than an authentic leader.

Contrasted with Jon Doe is Jane Doe.  Jane was an organizational leader that was several management levels below Jon.  Jane worked tirelessly to craft the organizational mission, vision, and values with the team.  In addition, Jane aligned word and deed, being the first to live organizational values.  In this respect, Jane was truly an authentic leader.  As a result, Jane’s organization was poised to make sound, ethical, business decisions even in ambiguous situations.  Moreover, Jane’s team had greater organizational commitment and job satisfaction than Jon’s team.  In essence, Jane was able to interweave the organization’s business identity and ethical identity with the organizational purpose.

The differences between these two examples highlight the importance of understanding one’s motivation.  In dramaturgical terms, an actor or actress seeks to understand a character’s ‘through line’, the overriding motivation that drives the character’s behavior and decision-making.   A leader’s understanding of their own ‘through line’ can serve to define organizational values and ethical identity, a situation desperately need at the SEC.


            The SEC learned much from their self-examination of the failures that led to the biggest regulatory miss of the last twenty years.  However, like any self-examination, there are difficult to reach places and blind spots that led the SEC to reform rather than transform.  Most notably, the SEC self-examination did not recognize the contributing and enduring role played by organizational leadership and culture.  It remains to be seen whether SEC reforms will have their intended effects, however, without the development of an authentic leadership capability within the agency, and the resulting ethical organizational identity, it appears likely that the SEC will remain an agency captured by the interests of the financial industry, rather than the interests of the public.


Barkow, R. (2010). Insulating agencies: Avoiding capture through institutional design. Texas Law Review, 89(1), 15-79.

Commission, U. S. S. a. E. (2012, July 30, 2012). The Investor’s Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation  Retrieved August 19, , 2012, from

Galbraith, J. K. (2009). The great crash, 1929. Boston: Houghton Mifflin Harcourt.

George, B. (2006). Truly authentic leadership. [Article]. U.S. News & World Report, 141(16), 52.

Lynch, S. N., & Goldstein, M. (2011, July 27, 2011). Exclusive: SEC builds new tips machine to catch the next Madoff  Retrieved August 19, 2012, from

Shafritz, J. M., Russell, E. W., & Borick, C. P. (2011). Introducing public administration (7th ed.). Boston: Longman.

Shakespeare, W. (1986). William Shakespeare, the complete works (Original-spelling ed.). Oxford Oxfordshire ; New York: Clarendon Press ; Oxford University Press.

Tonkin, T. (2010). Authentic leadership: A literature review. Research Paper. School of Global Leadership and Entrepreneurship. Regent University. Virginia Beach.

U.S. Securities and Exchange Commission. (2012, April 4, 2012). The Securities and Exchange Commission Post-Madoff Reforms  Retrieved August 19,, 2012, from

U.S. Securities and Exchange Commission Office of Investigation. (2009). Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme – Public Version – U.S. Securities and Exchange Commission Office of Investigation, Retrieved from

Verbos, A. K., Gerard, J. A., Forshey, P. R., Harding, C. S., & Miller, J. S. (2007). The positive ethical organization: Enacting a living code of ethics and ethical organizational identity. Journal of Business Ethics, 76(1), 17-33.

Wingfield, B. (2009, September 2, 2009). New Madoff Report Blasts SEC. The Regulators  Retrieved August 19, 2012, 2012, from


2 Comments on “The SEC and Madoff: The Need for Authentic Leadership in Regulatory Agencies”

  1. […] Bernie Madoff was able to pull off one of the largest and longest running Ponzi schemes in history. Bernie Madoff was a wealthy, prominent, industry insider, who perpetrated his scheme on unsuspecting investors beginning in 1992. Between 1992 and 2008 the SEC received six complaints against Bernie Madoff and his company and did investigate him. Each time Bernie Madoff somehow passed the investigations and proceeded with his scheme. It was not until 2008 when he could no longer keep up with the fraud because of the down turn in the economy he was forced to confess. (U.S. Securities and Exchange Commission Office of Investigation, 2009). […]

  2. […] Bernie Madoff was able to pull off one of the largest and longest running Ponzi schemes in history. Bernie Madoff was awealthy, prominent, industry insider, who perpetrated his scheme on unsuspecting investors beginning in 1992. Between 1992 and 2008 the SEC received six complaints against Bernie Madoff and his company and did investigate him. Each time Bernie Madoff somehow passed the investigations and proceeded with his scheme. It was not until 2008 when he could no longer keep up with the fraud because of the down turn in the economy he was forced to confess. (U.S. Securities and Exchange Commission Office of Investigation, 2009). […]

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