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SEC Slammed During Madoff Hearing for Ignoring Alleged Ponzi Scheme

February 4, 2009 at 6:40 PM EDT
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Lawmakers and a whistle-blower blasted the Securities and Exchange Commission during Congressional hearings into the case of Bernard Madoff, a Wall Street investor accused of massive fraud. Kwame Holman reports.
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JIM LEHRER: And next tonight, an update on the Bernard Madoff case and whether the government did its job. That was the subject of a congressional hearing today as the Securities and Exchange Commission continued to come under fire.

NewsHour congressional correspondent Kwame Holman has our report.

KWAME HOLMAN: Democrat Paul Kanjorski, chairman of the House Capital Markets Subcommittee, today praised a private investor who says he saw financier Bernard Madoff’s $50 billion Ponzi scheme as a fraud nearly 10 years ago and alerted authorities about it.

REP. PAUL KANJORSKI. D-Pa.: Mr. Markopolos was justifiably relentless in ringing alarm bells.

HARRY MARKOPOLOS, former investment fund manager: You, above all others, deserve to know the truth about this agency’s failings, and I will do my best to explain them to you today.

KWAME HOLMAN: Harry Markopolos, once a successful fund manager, investigated Madoff’s firm on behalf of some private investors. He said he reported Madoff’s scheme to the Securities and Exchange Commission.

HARRY MARKOPOLOS: As today’s testimony will reveal, my team and I tried our best to get the SEC to investigate and shut down the Madoff Ponzi scheme with repeated and credible warnings to the SEC that started in May 2000, when the Madoff Ponzi scheme was only a $3 billion to $7 billion fraud.

We knew then that we had provided enough red flags and mathematical proofs to the SEC for them, where they should have been able to shut him down, right then and there, at under $7 billion. But, unfortunately, the SEC staff lacks the financial expertise and is incapable of understanding the complex financial instruments being traded in the 21st century.

Investor sounded alarm in 2000

KWAME HOLMAN: Markopolos laid out numerous warnings he presented to the SEC, the agency responsible for securities fraud enforcement. He said, if they'd been heeded, it would have stopped Bernard Madoff from allegedly bilking his clients out of billions of dollars.

HARRY MARKOPOLOS: And, again, in November 2005, when Mr. Madoff was at $30 billion, 29 red flags were handed to the SEC, and yet again they failed to properly investigate and shut down Mr. Madoff's operation.

I told the SEC exactly where to look, providing them with a long series of clear warnings that any trained investment professional would have immediately understood. Inexplicably, the SEC never acted upon those repeated and multiple warnings over a nine-year time span.

KWAME HOLMAN: Markopolos said SEC investigators are inexperienced and the agency needs major reforms.

HARRY MARKOPOLOS: The SEC is also captive to the industry that it regulates and it is afraid of bringing big cases against the largest, most powerful firms.

Mr. Madoff was one of the most powerful men on Wall Street. He owned a prestigious brokerage firm. He and his brother held numerous top-level positions on the most influential industry association boards. Clearly, the SEC was afraid of Mr. Madoff.

I gift-wrapped and delivered the largest Ponzi scheme in history to them, and somehow they couldn't be bothered to conduct a thorough and proper investigation because they were too busy on matters of higher priority. If a $50 billion Ponzi scheme doesn't make the SEC's priority list, then I want to know who sets their priorities.

Scheme was 'easy to see'

KWAME HOLMAN: Bernard Madoff was such a powerful figure, Markopolos said, that he feared for his life in trying to blow the whistle on Madoff's scheme. Madoff remains under house arrest in New York where he faces charges of running a scheme that lost billions of dollars individuals gave him to invest.

Markopolos told the committee the Madoff scheme was easy to see.

HARRY MARKOPOLOS: Everything that my team and I investigated was a matter of public record. It was basically marketing materials from the Madoff feeder funds, and it was interviews collected of those feeder funds.

We never had the access that the SEC had. We couldn't walk into his office, collect his documents. We never saw his smoking gun e-mails. We never talked to any of his staff. We did not have the inside smoking gun evidence available to us, but the SEC certainly did.

SEC staff won't discuss case

KWAME HOLMAN: This afternoon, Markopolos was replaced at the witness table by representatives from the very agency he was attacking: the SEC.

But five SEC staff members had told the committee they were prohibited from discussing the Madoff case because it's the subject of several ongoing criminal and civil investigations and because of executive privilege.

LINDA THOMSEN, Securities and Exchange Commission: We cannot answer as to the specifics.

KWAME HOLMAN: Instead, they made general opening statements, prompting this response from Chairman Kanjorski.

REP. PAUL KANJORSKI: You know, I like oatmeal, and that's about how I classify the testimony I heard today. You know, I don't know whether that testimony was written that way and presented that way in order to be a slap at this committee or the chairman himself, but it's not appreciated.

KWAME HOLMAN: Linda Thomsen is director of the SEC's Division of Enforcement.

LINDA THOMSEN: I think I speak for everyone when I say we hate fraud. We hate the fact that people are victimized by fraud. We wish it never happened. We wish we could get to everyone...

REP. PAUL KANJORSKI: But your job is to prevent fraud, not hate it.

Congress frustrated with testimony

KWAME HOLMAN: Democrats and Republicans on the committee repeatedly showed frustration that the SEC's staff would not explain how a 2006 examination of Madoff's operation resulted in no action. Occasionally, they simply blasted the regulators.

REP. GARY ACKERMAN D-N.Y.: Like hell you won't. What happened here? That's the question. Do we start with hear no evil, see no evil, or do no evil? Take your pick.

KWAME HOLMAN: New York Democrat Gary Ackerman.

REP. GARY ACKERMAN: You know, most of us speak English, and we're having a hard time getting an answer from you.

ANDREW VOLLMER, Acting General Counsel, Securities and Exchange Commission: The commission's approved taking this position.

REP. GARY ACKERMAN: The commission has voted the position that you will cite executive privilege in not testifying before this committee and answering its questions?

ANDREW VOLLMER: I couldn't say that to you honestly, because the specific reasons...

REP. GARY ACKERMAN: Obviously.

ANDREW VOLLMER: ... weren't discussed and given by the commission.

KWAME HOLMAN: Investigators from the SEC and other agencies continue to build cases against Madoff. And there was news today that $950 million in cash and securities already have been recovered for investors he allegedly defrauded.