Lawmaker says SEC hindering House's Madoff
probe
By MARCY GORDON AP Business Writer
Posted: 02/04/2009 07:10:52 AM PST
WASHINGTON—House lawmakers on Wednesday accused the Securities and Exchange Commission of
impeding their probe into the agency's failure to uncover the alleged $50 billion Bernard Madoff fraud.
The clash between lawmakers and high-ranking SEC officials at a House Financial Services subcommittee
hearing came after the man who waged a decade-long campaign to alert the regulators to problems in
Madoff's operations denounced the agency for its inaction. Whistleblower Harry Markopolos also said he
had feared for his physical safety and would turn over new evidence that Madoff had not acted alone.
In loud, angry exchanges, lawmakers threatened to issue subpoenas to SEC officials to compel their
testimony in the case.
Pennsylvania Democrat Paul Kanjorski, the panel's chairman, vented frustration after the SEC's acting
general counsel said the five officials appearing at the hearing couldn't answer lawmakers' questions about
the Madoff case because it's under investigation. The five SEC commissioners voted earlier to assert a
privilege in not having officials answer lawmakers' questions.
Kanjorski accused the agency of impeding the panel's investigation, calling it a "lack of cooperation" and an
"abuse of authority."
Linda Thomsen, the agency's enforcement director, said the SEC takes the Madoff case very seriously, but
asserted there were confidential areas related to the ongoing investigation that could not be publicly
discussed.
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The SEC officials said the agency is looking at possible changes in the wake of the scandal, including more
frequent examinations of investment advisers and improving its process for assessing risk.
Because of the SEC's inaction, "I became fearful for the safety of my family," Markopolos said.
"The SEC is ... captive to the industry it regulates and is afraid" to bring big cases against prominent
individuals, Markopolos said. The agency "roars like a lion and bites like a flea" and "is busy protecting the
big financial predators from investors."
While the SEC is incompetent, the securities industry's self-policing organization, the Financial Industry
Regulatory Authority, is "very corrupt," Markopolos charged. That organization was headed until December
by Mary Schapiro, President Barack Obama's new SEC chief.
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Markopolos discovered additional funds that funneled money to Madoff—whose managers he said willfully
turned a blind eye to his improprieties because they were paid generous fees. Markopolos said he will
present his findings to the SEC's inspector general. If proven, they would substantiate the assertions of many
analysts that the alleged fraud was far too large for Madoff to have conducted alone.
In New York, a trustee liquidating Madoff's investment firm told a federal judge Wednesday that nearly
$950 million in cash and securities has been recovered for investors. Trustee Irving Picard said $111.4
million in cash had been recovered from financial institutions and about $300 million in securities were
identified although it was unclear what they were worth.
JPMorgan Chase & Co. and Bank of New York Mellon Corp. last week said they would transfer a combined
$534.9 million from Madoff's investment firm accounts to Picard. Investors have until July 2 to place their
claims.
European investors who feared they lost millions investing with Madoff have a chance to recoup some or all
of their money from the banks that marketed the stricken funds, according to lawyers in Europe who are
preparing a possible U.S.-style class-action lawsuit.
Back in Washington, the SEC has been sustaining volleys of criticism from lawmakers and investor
advocates over its failure to discover Madoff's alleged $50 billion fraud, which could be the biggest Ponzi
scheme ever, despite the credible allegations brought to it over years. Against the backdrop of the worst
financial crisis since the 1930s, the SEC is being accused of further eroding investor confidence and
lawmakers of both parties are calling for a shake-up of the agency.
Madoff, a prominent Wall Street figure, was arrested in December after allegedly confessing to bilking
investors in what the authorities say was a giant Ponzi scheme, possibly the largest ever. His repeated
warnings to SEC staff that Madoff was running a massive pyramid scheme have cast Markopolos as an
unheeded prophet in the scandal.
"The SEC was never capable of catching Mr. Madoff. He could have gone to $100 billion" without being
discovered, Markopolos testified. "It took me about five minutes to figure out he was a fraud."
Markopolos, a former securities industry executive and fraud investigator, brought his allegations to the SEC
about improprieties in Madoff's business starting in 2000 after determining there was no way Madoff could
have been making the consistent returns he claimed using the trading strategy he touted to prospective
investors.
Markopolos and his team of four investigators fruitlessly pursued the quest through this decade with agency
staff from Boston to New York to Washington, raising 29 specific red flags regarding Madoff's operations.
But the SEC never acted.
Now thousands of victims who lost money investing in Madoff's fund, which was separate from his
securities brokerage business, have been identified. Among them are ordinary people and Hollywood
celebrities—as well as big hedge funds, international banks and charities in the U.S., Europe and Asia. At
least one investor apparently was pushed to commit suicide.
Markopolos disclosed that he anonymously conveyed a package of documents on Madoff to former New
York attorney general Eliot Spitzer, but noted Spitzer took no action. Spitzer's family trust was among the
victims that lost money investing with Madoff.
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Markopolos also suggested that senior editors at The Wall Street Journal may have prevented a reporter from
pursuing leads he provided because the newspaper "respected and feared" Madoff.
Madoff, who was at one point chairman of the Nasdaq Stock Market and sat on SEC advisory committees,
was "one of the most powerful men on Wall Street and in a position to easily end our careers or worse,"
Markopolos said.
Markopolos recommended ways to revamp the SEC, including replacing its senior staff and establishing a
central office to receive complaints from whistleblowers.
In December, Christopher Cox, then the SEC chairman, pinned the blame on the agency's career staff for the
failure over a decade to detect what Madoff was doing. He ordered the SEC's inspector general, H. David
Kotz, to determine what went wrong. Kotz has expanded his inquiry to examine the operations of the
divisions led by Thomsen, who has been the enforcement chief since mid-2005, and Lori Richards, who has
headed the inspections division since mid-1995.
Schapiro has said that because Madoff carried out the scheme through his investment business and FINRA
was empowered to inspect only the brokerage operation, it wasn't possible for the organization to discover it.
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