When Bernard Madoff was arrested and charged with running a giant Ponzi scheme many people were shocked — but not Harry Markopolos.
He's the man who looked at Madoff's investment returns a decade ago and figured they didn't add up. Markopolos made several attempts to persuade the Securities and Exchange Commission to investigate, all for naught. He had no trouble Wednesday getting people to listen. He told a congressional panel in Washington that the SEC is a failed regulator that was unable to protect investors.
'The Key Tip-Off'
Markopolos said it took him just five minutes to figure out that Madoff was running a scam. He only had to look at a performance chart for Bernard L. Madoff Investment Securities.
"It was a 45-degree angle without any variation," he said. "It went in only one direction: up. It never had variation like the market does, like this. And that was the key tip-off."
Markopolos and his staff did some more digging and came to the conclusion that Madoff was cheating his investors. As that investigation went on, Markopolos says he feared for his safety and that of his family. So he presented his findings anonymously to the SEC; only a few officials knew his real name. He said he kept returning to the SEC to urge it to take up the case and was repeatedly ignored.
"Unfortunately, as they didn't respond to my written submissions in 2000, 2001, 2005, 2007 and 2008, here we are today," Markopolos said.
Meanwhile, Madoff's operations grew bigger and he attracted more investors, Markopolos said. He made it clear to the congressional panel that he thinks the SEC fell down on the job.
"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," he said. "If a $50 billion Ponzi scheme doesn't make the SEC's priority list, then I want to know who sets their priorities."
Markopolos said the agency has too many lawyers and not enough people who really understand how Wall Street works. He also said the SEC officials he was dealing with in Boston were thwarted by a turf war with the agency's New York office. And, he said, the commission was simply scared.
"Mr. Madoff was one of the most powerful men on Wall Street. He owned a prestigious brokerage firm," Markopolos said. "He and his brother held numerous top-level positions on the most influential industry association boards. Clearly, the SEC was afraid of Mr. Madoff."
SEC Officials Weigh In
Markopolos' testimony was followed by that of several SEC officials whose unhappy task it was to defend the agency. They insisted they couldn't comment on Madoff's case because the investigation was ongoing, but each official spoke at length about the SEC's mission and operations. The chairman of the House Financial Services subcommittee, Rep. Paul Kanjorski (D-PA), accused the officials of impeding his panel's investigation.
"I like oatmeal, and that's about how I classify the testimony I heard today," Kanjorski said.
Kanjorski asked SEC Enforcement Division Director Linda Chatman Thomsen how the agency could have overlooked what Madoff was doing when Markopolos had all but spelled things out for it. Thomsen said that missing a big case was a nightmare for her staff.
"There is nothing that makes a member of my staff happier than bringing a case," Thomsen said. "The only thing that makes them happier is a big case, and if it's against someone of some notoriety or fame, that makes them happier still."
In this case, however, regulators failed to catch one of the biggest cases of all. And how that happened is something many people are determined to understand.