Hedge Fund Manager Harry Markopolos spent the morning educating the members of the House Financial Services Subcommittee about his investigation into the Madoff fund. It was May 2000 when Markopolos first tipped off the Securities and Exchange Commission. At the time, Madoff was about a $3 - 7 billion fund. An expert in derivatives, Markopolos wrote to the Boston office of the S.E.C. warning them that Madoff was running the “world’s largest hedge fund fraud.” As a hedge fund manager, Markopolos had used the same investment strategy Madoff purported to use in marketing materials. Markopolos figured there was no way Madoff could give the kind of steady returns he did using the strategy.
Using only publicly available documents and an excel spreadsheet Markopolos says it took him less than four hours to mathematically prove Madoff was a fraud. It took him longer to write an eight page memo to the Securities and Exchange Commission and meet with S.E.C. enforcement staff to explain his conclusion. Bottom line, the S.E.C. didn’t get it. Markopolos says “financial illiteracy” was common among the S.E.C. attorneys he dealt with over the years. He told the committee, “if you flew the S.E.C. staff to Boston, sat them in Fenway Park, they wouldn’t be able to find first base.”
Comments
Harry Markopolos should be commended by President Barack Obama for doing his part in "healing" the embattled US economy.
Thank God for Harry Markopolos regardless of thow irrascible he appears to be as a human being. It's a damn shame he told the SEC back in 2002 and they did nothing. I am so thankful that he went before congress to let them know the true extent; how long it's been going on, who the principles were, what they have been doing, when it started, etc.
Congratulations Mr. Markopolos for doing your civic duty so well. I just wish there were more people like you! Thank you1
There are so very many schemers out there in the financial world. As old as I am, I got caught by one who sent monthly statements like Madoff with great returns on my investments. However, about two months before he was caught and charged, [eventually jailed] my statements reflected quite bad losses, but even seeing that occurring, I was too dumb to realize I was being had. At the very time the Feds arrested him, but that really didn't help any of us as investors because even though he was forced to make restitution, when one only receives $1 to every $3k - $5k, it only makes your heartache over financial ruin worse. After losing quite a large amount of money, I vowed I would never invest in any market the remainder of my life, and I haven't.
So even though I heard on msnbc today that Madoff will be forced to make restitution, it makes me wonder how they plan to get blood out of that turnip. He can't repay it if he truly doesn't have it. However, he could easily have sent it out to relatives or good friends to hide, or hidden it where only he knows its location prior to telling his sons that the entire deal was nothing more than a huge and very successful ponzi scheme for which they immediately called the police.
Where do people go with similar cases such as Harry's? What law firms or agencies will represent a person, if the person wants to recover damages?
The SEC is operating as an enforcement agency in name only. In reality their purpose is to act as an enforcement buffer. They are their to run interference for the industry. If you create a single agency to officially handle the enforcement of an industry, then all inquiries must pass through that agency giving them the ability to act as a filter. While the SEC is in a unique position to investigate Wall Street they are also in a unique position to suppress inquiry. I am not sure the SEC staff is intentionally aiding and abetting any crimes, but someone staffed/funded them in such a way as to make them intrinsically ineffective. It is only when the &*$# hits the fan or someone like Spitzer does an end run around them that anything of note ever really gets investigated.
I watched the sub-committee hearing. Harry Marcopolous is a genius. They told him he should work for the SEC. And the sub-committee questioned him on ways he would suggest to help reduce the fraud as well as tell about other investors currently at risk. I guess what was most educational, at least for me, was knowing with each new regulation scammers find a loop hole and this is perpetual; regulation then loop hole then scam and so forth. I admire this guy Harry for what he has done and for the fortitude he presents.
Isn't it scary that someone in such a high position in our chief regulatory commission for the financial world was defrauding people with investment schemes? As for the other members of the SEC who did not understand the red flags waving before them, how can we reasonably expect these financially illiterate people to regulate the financial industry? The government did not see 9/11 coming, they did not see Fannie and Freddy about to crumble, they did not see the impending recession, it makes you wonder what else they may be overlooking...
I heard stories about employees at Enron who wondered how the company could be doing what it was doing legally. Their suspicions were confirmed when the company imploded. Sherron Watkins went to the CEO and was told the matter would be investigated. But it was only buried.
I think the fact that Madoff was a big shot in the securities world kept a lot of people who may have been suspicious quiet. But does make you wonder how the SEC could ignore all the red flags Markopoulos pointed out.
Stephanie Dhue,
(Fine post!) Please address this piece of the story, it is really frightening for the people ...
Start here:
http://www.google.com/search?hl=en&q=Harry+Markopolos&btnG=Search
first is:
http://74.125.113.132/search?q=cache:sYwJRO1EyxgJ:online.wsj.com/documents/Madoff_SECdocs_20081217.pdf+Harry+Markopolos&hl=en&ct=clnk&cd=1&gl=us
A few sentences down, see this (WRITTEN IN 2005!):
I have also spoken to the heads of various Wall Street equity derivative trading desks and every single one of the senior managers I spoke with told me that Bernie Madoff was a fraud. Of course, no one wants to take undue career risk by sticking their head up and saying the emperor isn't wearing any clothes but....