But as a new report made clear on Tuesday, one top official received a pass: David M. Becker, the S.E.C.’s general counsel, who went on to recommend how the scheme’s victims would be compensated, despite his family’s $2 million inheritance from a Madoff account.
Mr. Becker’s actions were referred by H. David Kotz, the inspector general of the S.E.C., to the Justice Department, on the advice of the Office of Government Ethics, which oversees the ethics of the executive branch of government.
The report by Mr. Kotz provides fresh details about the weakness of the agency’s ethics office and reveals that none of its commissioners, except for Mary L. Schapiro, its chairwoman, had been advised of Mr. Becker’s conflict.
It says Ms. Schapiro agreed with a decision to keep Mr. Becker from testifying before Congress, where he would have disclosed his financial interest in the Madoff account.
Mr. Kotz’s inquiry also produced evidence that at least one S.E.C. employee had been barred from working on Madoff-related matters because of a conflict, suggesting there was a double standard at the agency.
The findings are another black eye for an agency that has tried to be more aggressive in recent years after failing to uncover the Madoff fraud. More recently, the S.E.C. has been criticized for routine destruction of some enforcement documents that might have been useful in later investigations.
The agency has also been criticized for its slow pace in writing new financial regulations mandated by the Dodd-Frank law and for the dearth of cases brought against individuals at major financial companies that were involved in the mortgage crisis.
Federal conflict of interest law requires government employees to be disqualified from participating in a matter “if it would have a direct and predictable effect on the employee’s own financial interests.”
Nevertheless, Mr. Becker “participated personally and substantially in particular matters in which he had a personal financial interest,” Mr. Kotz wrote in his report.
Though the referral was made to the Justice Department’s criminal division, it could be handled as a civil matter. A Justice Department spokeswoman declined to comment, other than confirming the referral.
Mr. Becker’s tie to the Madoff situation came from a Madoff account held by his mother, who died in 2004. Her three sons inherited the account and closed it shortly thereafter, with a $1.5 million profit, based on Mr. Madoff’s fraud.
Mr. Madoff carried out an enormous Ponzi scheme for more than a decade, costing investors more than $20 billion in actual losses. He is now serving a 150-year sentence in a prison in North Carolina.
Mr. Becker’s lawyer, William R. Baker III, said in a statement that the report confirmed that Mr. Becker had notified seven senior S.E.C. officials about his late mother’s Madoff account, including Ms. Schapiro and the agency’s designated ethics officer.
“The inspector general concluded that ‘none of these individuals recognized a conflict or took any action to suggest that Becker consider recusing himself from the Madoff liquidation,’ “ wrote Mr. Baker, a lawyer at Latham Watkins who worked at the S.E.C. for 15 years, working alongside Mr. Becker at times. He said the report contained “a number of critical factual and legal errors,” but declined to enumerate them. Mr. Becker left the S.E.C. last February.
Among the actions taken by Mr. Becker that were cited in the report were his efforts to influence the deliberations concerning how Madoff victims would be compensated, which could have had a direct impact on his financial standing. The report cited testimony from a witness who said that by early 2009, Ms. Schapiro indicated that most of the S.E.C. commissioners had agreed on a method that would give investors a claim to only the money they had put into their Madoff accounts. This might have meant the Beckers would be able to keep only around $500,000 of the $2 million withdrawn when the account was closed, Mr. Kotz’s report said.
This article has been revised to reflect the following correction:
Correction: September 20, 2011
An earlier version of this article incorrectly identified Luis A. Aguilar as a Republican. He is a Democrat.
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