The U.S. Securities and Exchange Commission voted on a method to compensate victims of swindler Bernard Madoff with some commissioners and staff unaware that the SEC's then general counsel had personal ties to the fraud.

Details of the 2009 deliberations emerged from sources and documents on the eve of congressional hearings on Thursday with SEC Chairman Mary Schapiro, who has said she knew former General Counsel David Becker's mother had invested with Madoff.

Becker's Madoff link, his clearance to work on Madoff matters by the agency's ethics council, and Schapiro's knowledge of the tie, is raising new questions about the agency's competence.

Schapiro told House Republicans in a letter this week that she knew of Becker's ties to Madoff money when he was first hired in 2009, but did not recall informing anyone else. She added that she relied on Mr. Becker to present any ethics-related issues.

Sources familiar with the matter are disturbed and shocked that Becker's potential conflict of interest was not more widely disclosed at the SEC, an agency responsible for policing governance practices at corporate boards.

The scrutiny comes as the SEC is working to repair its reputation for failing to catch Madoff's decades-long, multibillion-dollar, self-confessed investment fraud, considered the biggest in history.

If this was HP or IBM or some company like that, there is clear law that says they have a fiduciary obligation to share that information. It's not hard to move from that analogy to the commissioners, said James Cox, a professor at Duke University School of Law.

He added that if Schapiro knew of Becker's potential conflict, she had a duty to share it with everybody else. There's no doubt about it.

An SEC spokesman declined to comment. Becker could not be reached.

INVESTIGATIONS LAUNCHED

House and Senate Republicans as well as the SEC's inspector general have launched investigations into whether any criminal or civil ethics laws were broken.

Madoff trustee Irving Picard has sued Becker and his two brothers for $1.5 million in alleged phony profits their mother's estate received.

The SEC's ethics counsel allowed Becker to work on Bernard Madoff matters, despite him and his brothers inheriting about $2 million in 2004 from their late mother's investments. Schapiro has asked the ethics counsel to review its procedures.

Stephen Crimmins, a partner at K&L Gates LLP and former senior SEC enforcement officer, plans to tell lawmakers in testimony that Becker was a careful person and disclosed the information about his mother's account.

Crimmins said there was no evidence that anything Becker did as general counsel in any way hindered Picard's decision to file a clawback claim against him and his brothers.

Becker was involved in helping the SEC craft a recommendation on how Madoff's victims would be compensated, including whether some of the money could be clawed back from investors who withdrew more than they invested.

Schapiro will be testifying on the Becker matter and other SEC issues before two congressional panels on Thursday, a House Oversight hearing and another by the Senate Banking Committee.

At first, in early 2009, the SEC took a position that would potentially hurt Becker's financial interests by recommending that investors could only file claims based on net equity, or the difference between what they put in and what they withdrew.

But later that year, the SEC changed course.

People familiar with the matter say Becker was involved in advocating a change which would benefit longer-term Madoff investors by adjusting the payments to account for inflation.

That refined method was a source of internal dissent within SEC staff. When it came time to vote on it, however, there was no mention of Becker's conflict, sources said, and the SEC commissioners voted to accept the new recommendation.

The change was never put into practice, and a federal court last year upheld the trustee's net equity method. Madoff victims are still fighting to get it changed.

Becker left the SEC at the end of February, but has submitted letters to lawmakers saying he was advised that he could participate in Madoff matters.

In a separate report completed earlier this year, SEC Inspector General David Kotz found that the agency does not do a good enough job of documenting conflicts of interest that employees may have which requires them to recuse themselves from working on certain matters.

(Reporting by Sarah N. Lynch; Editing by Tim Dobbyn)

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