The financial analyst who tried to blow the whistle on disgraced Wall Street investor Bernard Madoff lashed out at federal regulators, telling a congressional hearing that the Securities and Exchange Commission was “overmatched” and “totally incapable” of uncovering Mr. Madoff’s suspected $50 billion Ponzi scheme on its own.
”There was a combination of incompetence and an unwillingness to take on a big player like Mr. Madoff,” Boston financial analyst Harry Markopolos told the House Financial Services subcommittee on capital markets, insurance and government-sponsored enterprises Wednesday morning.
In his first public testimony since the Madoff scandal broke in December, Mr. Markopolos said it took him four hours to figure out that Mr. Madoff’s financial empire was built on fraud, but that he could not get the SEC to investigate his suspicion despite nearly a decade of trying.
”A fraud that should have been stopped at $7 billion has now grown to $50 billion,” he told the panel.
The SEC “was overmatched, too slow and too inexperienced to understand” what Mr. Madoff was doing, Mr. Markopolos said.
Mr. Madoff was arrested in December after reportedly admitting to his sons that his legendary investment fund was based on fraud. The SEC has launched an internal investigation to try to determine why the agency failed to uncover the fraud sooner.
Victims of the scheme include charities, universities, investment funds, Hollywood celebrities, municipalities and individual investors. Many elderly investors have seen their life savings wiped out.
By turns scathing and sarcastic, Mr. Markopolos said he doubted there were many SEC investigators who even understood a “split-strike conversion” - the investment method Mr. Madoff claimed he used to run up an improbable record of profits in good markets and bad. He said two investigators in the SEC’s Boston office took his concerns seriously, but that senior SEC officials and the agency’s New York office showed no interest in a probe.
“If you flew the entire SEC staff to Boston and sat them in Fenway Park for the day, they would not be able to find first base,” he said.
The analyst said he even feared for his life after his nine-year campaign to expose Mr. Madoff’s activities failed to bear fruit.
Lawmakers praised Mr. Markopolos’ doggedness in trying to bring the Madoff scandal to light, noting he had provided the SEC with 29 “red flags” in a detailed report four years ago. The report’s title: “The World’s Largest Hedge Fund Is a Fraud.”
”The SEC was handed this case on a silver platter,” said Rep. Spencer Bachus of Alabama, the committee’s ranking Republican. “I’m amazed they could have ignored what you gave them.”
Mr. Markopolos’ testimony produced some uncomfortable exchanges for a panel of top SEC officials who testified right after him. Lawmakers accused the regulators of failing to see obvious evidence of fraud in the Madoff case, and grew increasingly agitated as SEC officials declined to discuss the case in detail, citing the pending court case and the agency’s internal probe.
Subcommittee Chairman Paul E. Kanjorski, Pennsylvania Democrat, called the testimony given by the SEC officials “oatmeal,” and revealed he had threatened to subpoena SEC officials when the agency balked at allowing them to come before Congress.
“There seems to be a misunderstanding over who created whom and who responds to whom under the Constitution,” he said.
Rep. Gary L. Ackerman, a New York Democrat whose district includes a large number of Madoff investors, said he was “frustrated beyond belief.”
“You’ve told us nothing today, and I believe that was your intention,” he said, repeatedly interrupting the regulators as they tried to answer his questions. “You couldn’t find your backsides with two hands with the lights on.”
Linda Thomsen, director of the SEC’s division of enforcement, said the agency received “hundreds of thousands” of tips on potential fraud and abuse each year, and denied the agency would decline to investigate a figure like Mr. Madoff because of his prominence or the size of his fund.
“Nothing makes a member of my staff happier than bringing cases, and if the case is against someone of notoriety or fame, that makes them happier still,” she said.
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