Mukasey takes himself from Madoff probe

WASHINGTON - The fraud investigation of Wall Street money manager Bernard L. Madoff took some unusual twists yesterday as the U.S. attorney general removed himself from the matter, and the Securities and Exchange Commission looked into the relationship between Madoff's niece and a former SEC lawyer who reviewed Madoff's business.

The developments reflect growing criticism that Wall Street and regulators in Washington have grown too close. Madoff himself has boasted of his ties to the SEC.

Also yesterday, Congress jumped into the Madoff scandal. The chairman of the House capital-markets subcommittee, Rep. Paul Kanjorski (D., Pa.), announced an inquiry to begin early in January into what may be the biggest Ponzi scheme of all time and how the government failed to detect it.

In New York, Madoff showed up at the federal courthouse to sign some papers in his case, wearing a baseball cap and walking silently past a reporter who asked whether he had anything to say to his alleged victims. Free on $10 million bail, Madoff now has a curfew and an ankle bracelet to monitor his movements.

U.S. Attorney General Michael B. Mukasey recused himself from the Madoff investigation because his son, Marc, represents Frank DiPascali, a top financial officer at Madoff's investment firm. The Justice Department refused to say when Mukasey became aware of the conflict.

DiPascali was the Madoff employee who had the most day-to-day contact with the firm's investors. Several described him as the man they reached by phone when they had questions about the firm's investment strategy or wanted to add to or subtract money from their accounts.

Credible and specific allegations regarding Madoff's financial wrongdoing going back to at least 1999 were repeatedly brought to the attention of SEC staff, agency chairman Christopher Cox said Tuesday. Cox said he was gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate the allegations or at any point to seek formal authority from the politically appointed commission to pursue them.

Cox's critics said targeting the staff was Cox's attempt to salvage his own reputation.

SEC Inspector General David Kotz is looking into the agency's failure to uncover the alleged fraud in Madoff's operation. One area Kotz said he would examine was the relationship between a former SEC lawyer, Eric Swanson, and Madoff's niece, Shana, who are now married.

As an SEC lawyer, Swanson helped examine Madoff's securities-brokerage operation in 1999 and 2004. Neither review resulted in any action against Madoff.

Also yesterday, Massachusetts Secretary of State William Galvin's office said Galvin had subpoenaed Madoff's brother, Peter, the chief compliance officer of Madoff's company. Galvin wants the names of the company's Massachusetts investors.