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Congress Asks Regulators for Answers in Madoff Scandal

January 5, 2009 at 6:45 PM EDT
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Congress questioned federal regulators during a hearing Monday about why so many warning signs surrounding the business dealings of Wall Street investor Bernard Madoff went unnoticed. New York Times reporter Alex Berenson details the latest developments.

RAY SUAREZ: Much of today’s hearing focused on how much the Securities and Exchange Commission knew about Bernard Madoff’s alleged $50 billion Ponzi scheme and when.

The SEC was reportedly warned of Madoff’s flawed investment plans years ago, when Harry Markopolos, a former investment firm employee, asked the agency to investigate how Madoff was able to provide steady market returns. At the hearing today was David Kotz, the inspector general of the SEC, who was questioned by Democrat Carolyn Maloney of New York.

REP. CAROLYN MALONEY (D), New York: Many people threw up red flags, and one of them was that Madoff’s returns typically hovered between 10 percent and 12 percent.

People even wrote articles about “don’t ask, don’t tell,” raising concerns about his investment strategy, one in May of 2001 by Arvin Lund, which was in Barron’s. It should’ve thrown up a red flag to investigators, to the SEC, to the general public. Why didn’t these questions that he raised alert the regulators?

In addition, Harry Markopolos, he was in regular communications with the SEC, raising red flags, asking questions. He contacted them in 2000. In 2005, he sent the SEC a 19-page report entitled “The World’s Largest Hedge Fund is a Fraud.”

Why in the world didn’t anyone respond to his allegations? What happened to his report? And did the SEC investigate his allegations?

DAVID KOTZ, Inspector General, Securities and Exchange Commission: Yes, and that’s exactly what I intend to find out. Certainly the articles that you mentioned initially are things that we have to look at to see if the SEC examiners were aware of the articles, reviewed the articles, how they viewed the articles, and whether they factored that into their determinations, or if they weren’t aware of the articles, why weren’t they aware of the articles?

SEC was alerted to suspicions

RAY SUAREZ: The inspector general said he would broaden his investigation into the SEC well beyond the Madoff case. More hearings are expected after the new Congress convenes.

This afternoon, government prosecutors asked a federal judge to revoke bail for Bernard Madoff. They said he violated the terms of his bail by mailing a million dollars worth of jewelry and assets to relatives.

For more on the Madoff investigation, we turn to Alex Berenson, who's covering the story for the New York Times.

And, Alex, we just saw the inspector general promising a more thorough investigation. Has the SEC acknowledged so far that they were given many warnings over the years about Bernard Madoff?

ALEX BERENSON, New York Times: Yes, they have. They acknowledged that almost two weeks ago, in fact. Chris Cox, the head of the SEC, acknowledged that there had been warnings given that the SEC didn't respond to properly.

RAY SUAREZ: And what kind of -- from Harry Markopolos himself, the man who Congresswoman Maloney mentioned, how did he say he was treated by the Securities and Exchange Commission?

ALEX BERENSON: Well, you know, the details of how he was treated we don't fully know, but, clearly, they didn't investigate -- they didn't catch it, and it was there to be caught.

Now, I think it's important to know what Harry Markopolos said and didn't say. He was not an insider from, you know, Bernard L. Madoff Investment Securities coming out and saying, "I know this happened. I can point you to the documents." He was an outsider saying, "This looks too good to be true. Nobody's had returns this stable and this good for this long."

And the SEC, presumably, if it had been -- and certainly if it had been more aggressive -- could have forced Madoff to detail his assets and to detail what he was telling investors his assets were. And when those two things didn't line up, that should have been a very big red flag, but it's clear the SEC never got to that point.

But I think, you know, we need to be clear on what Harry Markopolos said, which was, "This can't be true." It's not, "I have proof this isn't true." It's, "This can't be true."

Some lost life savings

RAY SUAREZ: Speaking of details, Congress members wanted a lot of them today and kept pressing the witnesses about where the money is, how much is left, how will people be compensated? Did they get many good answers?

ALEX BERENSON: They did not, and this has been a great frustration I think both for the public and for all of us who are trying to cover this, that since this started a month ago -- now, it is really almost a month -- almost nothing has come out.

Nothing has come out from prosecutors. Nothing has come out from the SEC. Nothing has come out from Mr. Madoff's family, publicly. There have been a lot of people who are sort of not answering questions.

And, you know, I understand this is an ongoing investigation and can't reveal too much, but I do think that prosecutors and other people have some responsibility to update us on where things stand. And they really haven't done that.

RAY SUAREZ: Later in the day in today's hearing, one Alan Goldstein testified. He put his whole life savings with the Madoff organization, and now is being told that there's almost nothing left, and his losses may run into the millions, and he says he may lose his house.

Is there any indication whether SIPC, the Security Investors Protection Corporation, can help a guy like Alan Goldstein?

ALEX BERENSON: That depends on a lot of things. It will depend on whether he had an account directly with Madoff, whether he had an account through a hedge fund. He may even have had an account through something called the fund of funds. It will depend on how much money SIPC can recover from other investors who may actually have profited from this.

A Ponzi scheme is an incredibly complex entity. And some people may actually have made money while others lost.

And it will depend on how much money they can recover from Madoff and his assets. That's something else we don't know. Did he have assets hidden away? Did his family have assets that the federal government is going to -- or SIPC is going to try to claw back? There's just so much right now that remains to be investigated here.

Cost of scandal is unknown

RAY SUAREZ: It sounds like it's going to take, from today's testimony, a long time before anybody sees a penny.

ALEX BERENSON: That's certainly true. The one good thing, if you are a Madoff investor and have lost money is, it's quite likely you'll be able to deduct your losses on your tax return, and that, at least, you'll -- you'll get something back from the government for what you've lost.

And the other thing to remember, again, is that some of these people might have put in a million dollars 15 years ago. Now they have $10 million, but did they really lose $10 million or did they lose $1 million? I mean, that's a legitimate question to ask, especially considering that if you invested in a lot of other things over that 15 years you might have lost some money, as well.

RAY SUAREZ: So you're saying that some of the dollar figures that are being thrown around may, in fact, be inflated by the fact that it was Madoff telling people that this was what they were worth?

ALEX BERENSON: That is correct. And, you know, that's yet another question. How much money was actually lost, net, and where did that money go?

You know, I talked to one former prosecutor about this very issue, and I said, "Well, you know, Madoff is saying that he cost people $50 billion. Is it possible that's a gross number and the net loss is really much smaller, it really might be $5 billion or $10 billion?"

And this prosecutor said, well, yes, it is, but in general, when people are confessing a crime, they don't overestimate the amount that they've stolen or lost. They tend to underestimate it, indicating that that $50 billion might be a real figure, but, again, we just don't know.

RAY SUAREZ: Alex Berenson, thanks for joining us.

ALEX BERENSON: Thanks for having me.