Markopolos: SEC Should Improve or Die
Harsh words for banking regulators as well
By Pamela J. Black
October 5, 2009
Whistleblower Harry Markopolos slammed the Securities and Exchange Commission on Saturday, saying the federal agency should reform itself or perish, as he outlined how the agency ignored his evidence of the multi-billion dollar Ponzi scheme run by financier Bernard Madoff.
“The SEC has to get better or die or be killed,’’ Markopolos said in a presentation Saturday at the Investment Management Consultants Association (IMCA) Fall Professional Development conference in Atlanta. It was the latest criticism leveled by Markopolos at the SEC over the Madoff scandal. The SEC has been hammered with condemnation from its own inspector-general to Congress for failing to detect Madoff’s wrongdoing that led to investors being bilked out of billions of dollars.
Markopolos, a fraud investigator and former chief investment officer at Rampart Investment Management Co. in Boston said the SEC needs “to hire capital markets people instead of lawyers and they need to pay whistle-blowers enough money to make them comfortable.” Markopolos began investigating Madoff’s returns as far back as 2000.
In his speech detailing how he and a team of three others investigated the Madoff fraud, Markopolos called the SEC lawyers probing the Madoff firm “untrained and unskilled.” He said: “Sending the SEC lawyers against derivatives traders is like sending guppies against sharks.”
Markopolos added that it was easy enough to prove that Madoff’s reported trades were fakes by checking with outside parties such as the Federal Deposit Insurance Corp. and counterparties such as JPMorgan Chase. He said he and his team learned a great deal by attending hedge fund conferences, figuring out the identities of the Madoff feeder funds and asking them if they could get in on the action.
Markopolos said the bulk of Madoff’s money went to pay the early investors 12% a year. Those investors made out fine but were now "laying low in the weeds hoping to avoid the six-year claw-back.” Madoff spent 3% to 4% to pay feeder funds, funds of funds and private client banks in order to get more clients, Markopolos said. And, he argued that those feeder funds deceived clients by claiming to do due diligence and in some cases claiming to have had a multi-manager investment strategy when they were, in fact, 100% invested in Madoff.
The now imprisoned Madoff “paid [the feeder funds] enough to make to not ask questions,” Markopolos said. Many of those funds assumed Madoff was front-running money in order to make his returns which meant he was involved in criminal activity, Markopolos said. “They figured he may be a crook, but he was our crook.”
“The SEC has a long way to go,” said Markopolos. He had harsh words for banking watchdogs as well. “If the SEC was asleep, the banking regulators were comatose.”
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