Bernard Madoff whistleblower Harry Markopolos does not mince words. Ten years ago, he baldly—and presciently—stated that Madoff was running the world’s largest Ponzi scheme. Today, he brings that candor to Capitol Hill, and, based on his written testimony, he’ll pull no punches.
Markopolos will testify before the House Financial Services Committee’s capital markets panel. Alongside him will be five senior staffers from the Securities and Exchange Commission, who are not likely to like what they hear: In his written testimony, Markopolos says the “nonfunctional” SEC suffers from “investigative ineptitude” and financial illiteracy.
“My experiences with other SEC officials proved to be a systemic disappointment and lead me to conclude that the SEC securities lawyers, if only through their investigative ineptitude and financial illiteracy, colluded to maintain large frauds such as the one to which Madoff later confessed,” he wrote.
“There was an abject failure by the regulatory agencies we entrust as our watchdog.”
In his testimony—backed up with some 310 pages of e-mails and financial documents—Markopolos says that Madoff’s “math never made sense, his performance charts were clearly deceiving, and his return stream never resembled any known financial instrument of strategy.”
“To believe in BM was to believe in the impossible,” he wrote.
Markopolos said numerous meetings with SEC investigators bore no fruit. During one meeting with Meaghan Cheung, the SEC’s branch chief in New York, in 2005, Markopolos said he provided a 21-page report alleging that Madoff was running a Ponzi scheme.
“Ms. Cheung never expressed even the slightest interest in asking me questions,” Markopolos wrote. “She never initiated a call to me. I was the one always calling her. She was unresponsive and mostly uncommunicative when I did call.”
Cheung, who in 2007 ordered an investigation into Madoff closed, has denied any wrongdoing.
Markopolos suggested that his pursuit of Madoff made him fear for his life, given his adversary’s positions at the pinnacle of Wall Street’s power.
“Our analysis lead us to conclude that Mr. Madoff’s fund and the secret walls around it posed great danger to those questioning and investigating them,” he wrote. “He was one of the most powerful men on Wall Street and in a position to easily end our careers or worse.”
Markopolos also offered his two cents on how to fix the SEC’s enforcement problem. He called on new SEC Chairman Mary Schapiro to initiate a review of her staff’s strengths—“My bet is that Ms. Schapiro will find that she has too many attorneys and too few professionals with any sort of financial background”—and suggested that the agency should be moved from Washington, D.C., to the New York City area.
“Washington is a political center, not a financial center,” he wrote. “If the SEC wants to attract the top talent, relocating its headquarters to somewhere between Rye, N.Y., and New Haven, Conn., is where this agency will best attract the foxes with the industry experience it so desperately needs."
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