Fire And Brimstone As Madoff Tipster, Lawmakers Unload On SEC

Feb 5 2009 | 12:34am ET

In one of the most highly-anticipated visits to Capitol Hill since former star pitcher Roger Clemens’ one year ago, Bernard Madoff whistleblower Harry Markopolos did not disappoint, telling a Congressional panel that U.S. regulators would be unable to find first base at Fenway Park.

Markopolos, whose written testimony blasted the Securities and Exchange Commission for “investigative ineptitude” and “financial illiteracy,” struck the same notes during more than two hours of testimony before the House Financial Services Committee’s subcommittee on capital markets yesterday. He said the SEC “roars like a mouse and bites like a flea” and that its staff lacks “financial expertise,” with several top staffers sitting right next to him.

Due to the SEC’s failure to heed his warning nearly 10 years ago that Madoff was running “the world’s largest Ponzi scheme,” as well as his subsequent efforts to expose Madoff, “a fraud that should have been stopped at $7 billion in 2000 has now grown to $50 billion,” Markopolos said.

He later said, in response to question from one of the subcommittee members, that he plans to “deliver a mini-Madoff to the SEC tomorrow.”

“Hopefully, they listen to me this time.”

Markopolos added that losses in the alleged Ponzi scheme are probably less than half of the $50 billion figure bandied about since Madoff’s arrest in December. He said that investors likely lost between $15 billion and $25 billion invested with Bernard L. Madoff Investment Securities, and that higher estimate includes the firm’s phony returns, which averaged double-digits for years.

Still, Markopolos said that more direct fallout from Madoff’s downfall is still to be revealed, telling the panel that he knows of a dozen more Madoff feeder funds that have still not been publicly identified. He also pooh-poohed the notion that Madoff could have acted alone.

“He had a lot of help,” Markpolos said. “A robust information technology business and people taking in money and sending out money.”

But most of Markopolos’ testimony before the fawning congressmen dealt with what needs to be done to fix the SEC and the U.S. regulatory system. He pushed for a new regulatory body that would include the SEC, Commodities Future Trading Commission, Federal Reserve and an insurance regulator, and castigated the NASD as a “corrupt organization.” He also blasted the SEC’s internal cooperation, testifying that he and SEC official warned him “that the relationship between the New York and Boston SEC offices was about as warm and friendly as the Yankees-Red Sox rivalry, and that New York doesn’t like to receive tips from Boston.”
 
Of course, greater cooperation and coordination wouldn’t solve the problem, in Markopolos’ eyes. He said the SEC employees “3,500 chickens, and we need to get some foxes in their there,” closing his testimony with this zinger: “If you flew the entire S.E.C. staff to Fenway Park, they wouldn’t be able to find first base.”

Markopolos’ fury fell not only on federal regulators, but also on the press. He told the panel that he contacted The Wall Street Journal more than three years ago, but that his contact at the newspaper was not allowed by his editors to pursue the matters.

“Unfortunately, neither The Wall Street Journal nor SEC were inclined to even pick up a phone and dial any of the leads I provided to them” he said, adding that he suspected “that senior editors of the Journal respected and feared Mr. Madoff.”

He also quipped about Wall Street firms who might have suspected or known what Madoff was up to, “those in glass houses don’t throw stones.”

The hearing included numerous legislative paeans to Markopolos’ greatness. Rep. Jackie Speier (D-Calif.) called his “a modern Greek hero,” while Rep. Michael Capuano (D-Mass.) offered him the job of overseeing a whistleblower program at the SEC. Markopolos said he could not take up such a post for at least two years.

Nor was Markopolos the only one with unkind words for the SEC. Rep. Paul Kanjorski (D-Pa.), who heads the capital markets subcommittee, castigated the agency’s representatives at the hearing for asserting privilege in refusing to answer the lawmaker’s questions.

Kanjorski, who said a lack of cooperation from the SEC is hindering the House’s investigation of the Madoff scandal, called the move an “abuse of authority” and threatened to issue subpoenas to force SEC officials to testify.

Another panel member, Rep. Gary Ackerman (D-N.Y.), got into a shouting match with the SEC’s acting general counsel, Andy Vollmer.

“I am frustrated beyond belief,” he said. “We are talking to ourselves and you are pretending to be here. You’ve told us nothing. What the heck went on? What went wrong? One guy with a few friends and helpers found this fraud over a decade. You guys couldn’t find your backside with two hands when the lights are on. You have totally failed in your mission.”

Later, he yelled at Vollmer, “Your contribution to this proceeding is zero. We thought the enemy was Mr. Madoff. I think it’s you.”

RELATED STORIES

Madoff Whistleblower Blasts ‘Nonfunctional’ SEC
Whistleblower Doesn’t Revel In Being Right About Madoff
Red Flags, Regulatory Failings On The Road To Madoff’s Fall


In Depth

JOBS Act Propels Real-Estate Crowdfunding Platform

Oct 21 2014 | 2:57am ET

If D.J. Paul were a real estate development, he would be described as “multi-use...

Lifestyle

Balyasny Pays Over $6M For Lakefront House

Oct 22 2014 | 10:29am ET

A venture headed by hedge fund manager Dmitry Balyasny just paid $6.2 million for...

Guest Contributor

Hedge Funds Weather A Data Management Perfect Storm

Oct 22 2014 | 12:28pm ET

From a regulatory standpoint, nearly every development since the crisis has placed...

 

Videos

Editor's Note

    Guidelines for Guest Articles

    Oct 22 2014 | 9:46am ET

    We are always looking for guest articles from hedge fund managers and buy-side firms.

    If you are interested in submitting a contributed piece for possible publication on FINalternatives, please take a look at the specs. Read more…

 

Futures Magazine

October 2014 Cover

Deeply flawed risk benchmark

Most traders agree that proper risk management is the key to successful trading. However, many traders depend on the deeply flawed measure of standard deviation as a benchmark of risk. Here we put it ...

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.