Harry Markopolos – American Antidote

Madoff Scheme Could Have Been Stopped Much Earlier

Viewers of the peerless television series, The Wire, saw a complex, multi-layered, dramatic chronicle of the failures of American institutions. David Simon and his fellow writers dissected drug law enforcement, the blue-collar middle class, political reform, public education and the news business. I don't know if Harry Markopolos is a fan of The Wire, but his dissection, actually, his evisceration of the Securities and Exchange Commission (SEC) at a U.S. House Subcommittee hearing Wednesday was as riveting as reality television gets. Thanks to Harry, you can add the SEC to the growing list of failed government institutions.

Markopolos, a former investment manager turned independent financial fraud investigator and analyst, spent nearly nine years trying to convince the SEC that Bernard Madoff was using a Ponzi scheme to steal money from investors. Madoff has allegedly admitted to what Rep. Paul Kanjorski (D-PA), Chairman of the Financial Services Subcommittee on Capital Markets, called "the largest known instance of securities fraud."

According to Mr. Markopolos, the SEC lacked the auditing skills to comprehend the evidence he repeatedly presented to them. It took Markopolos less than five minutes with Madoff's numbers to become suspicious, and a few hours for him to confirm that Bernard Madoff was a bad boy. That was nearly a decade ago, long before investor's losses reached $50 billion. Here is a portion of his opening statement:



A few of the points Harry Markopolos made in his testimony:

• Money from illegal operations makes up 5% of worldwide currency. Based on conversations with overseas investors, 20% of the investments in Madoff's funds were organized crime, Russian mob, and Latin American drug money.
• FINRA (Financial Industry Regulatory Authority) is corrupt – it protects corporations.
• NASD (National Association of Securities Dealers) is RICO (Racketeer Influenced Corrupt Organizations Act).
• Ethics is a higher standard than the law.
• Individual investors had no way to understand what Madoff was doing with their money, but the feeder funds that channeled capital to him were too greedy to acknowledge obvious red flags.
• Eliminate the SEC – zero them out of the budget and instead, provide lucrative incentives for whistle blowers who report financial misconduct.

The real money quote came near the end. Responding to a query from Rep. Kanjorski, Mr. Markopolos said: "I'm suggesting that, if you flew the entire SEC staff to Boston, sat them in Fenway Park for an afternoon, that they would not be able to find first base."

SEC Panel Strikes Out

The next panel to testify was made up of department heads from the SEC and FINRA. If anyone expected them to vigorously defend themselves, or shed some light on what went wrong, they were mistaken. The department heads were evasive, hiding behind ongoing investigations, and filling committee member's 5 minute question period with redundant ramblings. Committee Vice Chair Rep. Gary Ackerman (D-NY), whose district was hit hard by Madoff's scheme, expressed outrage:



It's encouraging to see the House of Representatives attempting to take its role seriously after sleeping through the warning signs of the financial collapse. Time will tell if they are up to the task. The SEC, regardless of its level of competence, analyzes, investigates and enforces regulations and laws enacted by Congress.

Harry Markopolos is scheduled to meet with SEC Inspector General David Kotz on Thursday. Markopolos is expected to turn over evidence of other fraudulent dealings.

Video of the Wednesday hearing is available on C-Span's site.