Spooky Economy

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Markopolos, a financial analyst and financial fraud investigator, received national attention with his testimony to Congress regarding money manager Bernie Madoff's ponzi scheme. [1]

Approximately ten years ago, Markopolos was asked by his superiors to determine how Bernie Madoff was able to provide his clients with such excellent returns on their investment. His superiors' goal was to create a similar model and thus duplicate Madoff's success for their own clients. After initial research, however, Markopolos suspected fraud in Madoff's methodology and was ultimately able to prove it.

Over a period of ten years, Markopolos documented and warned the SEC (U.S. Security Exchange Commission) that Bernie Madoff was obtaining for his clients returns that were impossible. He submitted his first advisory on May 2000 and four others in the years following. [1@1:29][3@1:30] He provided detailed documentation and worked closely with the only individual at the SEC who would listen, Ed Manion. [3@5:50] Unfortunately, Manion was unable to obtain quick action from a key SEC office because of internal politics at that office. [3@7:26]

The SEC eventually looked into Markopolos allegations on January 2006 and uncovered evidence that it had been misled by Madoff. In spite of this, the investigation was closed 11 months later without a formal investigation because there was “no evidence of fraud”. [1@6:33]

Markopolos asserts that the SEC is staffed with individuals who are not trained to do the job that the agency is charged with “and is incapable of understanding the complex financial instruments being traded in the 21st century”. [3@2:03]

During his Congressional testimony of February 2009, Markopolos denounced the SEC's inaction, believing that action years earlier would have greatly reduced losses by investors.

Quotes

That's typically how the SEC does it. They come in after the crime has been committed. They toe-tag the victims, count the bodies and try to figure who the crooks were after the fact, which does none of us any good.[1@13:19]
I would say that hundreds of people suspected something was amiss with the Madoff operation. If you look at who the victims were not you'll notice that the major firms on Wall Street had no money with Mr. Madoff.[CITATION NEEDED]
[P]eople in glass houses don't throw stones, and self-regulation on Wall Street doesn't work.[1@6:28]
The SEC is... captive to the industry it regulates.[3@9:02]
When an entire industry – that you were supposed to be regulating - due to unregulated, unchecked greed then you are both a captive regulator and a failed regulator.[3@11:20]
They ignored the rating agency scandal. They allowed investment banks to... package and sell toxic securities to investors.[3@11:51]
[The SEC] are totally untrained in finance... Most of them are just merely lawyers without any financial industry experience.[1@7:02]
[SEC attorneys] can check every piece of paper perfectly and find misdemeanors and they'll miss all the financial felonies that are occurring... Even when pointed to fraud, they are incapable of finding fraud.[1@7:18]
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'.[3@10:31]

Personal Concerns

Submitted reports anonymously for fear of harm to him and his team. [3@5:06] Feared for his career and his life during his investigations. [2@0:48] Carried a gun and checked beneath his vehicle for bombs before getting in. [2@1:00] Maintained appearance that he was investigating alone to protect his team and their families. [2@1:13] Became more concerned with every report he provided to SEC that was not acted upon. Became especially concerned for his safety when SEC finally began it's own investigation and had gone “off course on day one”. [2@1:56]

Proposed Solutions

No proposed solutions by Markopolos could be found. He states that the problems he found were:

It can be assumed that he would like to see changes at the Security Exchange Commission.

Must-see Resources

  1. Video: “The Man Who Knew”. A 60 Minutes Interview [March 1, 2009]
    URL: http://www.youtube.com/watch?v=s68FR1MXT8Q
  2. Video: “No One Would Listen: A True Financial Thriller” [unknown; book promotion]
    URL: http://www.youtube.com/watch?v=8pzKyfYI7y4
  3. Video: Video: Testimony before Congress [February 4, 2009]
    URL: http://www.youtube.com/watch?v=uw_Tgu0txS0
  4. Document: Testimony before Congress [February 4, 2009]
    URL: http://financialservices.house.gov/markopolos020409.pdf
  5. Document: Madoff whistleblower blasts SEC's failure
    URL: http://money.cnn.com/2009/02/04/news/newsmakers/madoff_whistleblower/

Added February 18, 2009 Posted December 14, 2010 Revised (n/a)

This is my opinion. It's a work in progress. I hope it's helpful.

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