Harry Markopolos is a hero (even if he doesn't want to be)
Harry Markopolos was an unknown accountant and derivatives expert in Boston who uncovered the Madoff scam back in 1999. He and his team independently compiled the evidence that proved Madoff was running a ponzi scheme back in 2000 when the fraud was only $7 billion and submitted their findings to the SEC. In 2001 when the fraud had grown to $20 billion they tried again and were ignored again. In 2005 Mr. Markopolos wrote a letter to the SEC with the following title: "The World's Largest Hedge Fund is a Fraud", believing that he was handing them the roadmap and the flashlight to go get the crook with neon lights around it in case they still had trouble seeing it. He handed the SEC their case against Madoff on a silver platter, yet the agency charged with protecting investors ignored every warning and piece of evidence they were given for ten years.
Markopolos testified before the House Financial Services Committee today, explaining how he uncovered the scheme. The really amazing thing about this hearing is that the House now wants to know what Mr. Markopolos recommends they do to fix the regulatory problems of the financial industry and what failures he personally encountered in the agencies that were supposed to be listening to his warnings. I have never heard such stark condemnations expressed so eloquently and such complex issues explained so plainly. It's difficult to pick out just a few quotes from this hearing to highlight because he made so many standing ovation worthy comments, so many, in fact, that two of the congressmen petitioned him to take a high ranking job at either the SEC or a new whistleblower agency that would oversee the SEC. He turned them down, but they are clearly going to keep trying to get him on the team.
Congressman Gary Ackerman: "What was the key tipoff that made you think that Bernie Madoff was a fraud?"
Harry Markopolos: "The key tipoff - and it took me about five minutes to figure out that he was a fraud - so it took extensive time and research...I basically read his strategy description and I knew that wasn't the source of his returns. I knew right away by looking at his performance charts. I wish I had a white board and easel here, but I don't so I'm going to give you a hand signal so I can show you what his performance return line looked like. It was a 45 degree angle without any variation. It went in only one direction: Up. It never had variation like the market does."
Congressman Gary Ackerman: "Did somebody hire you to do this investigation?"
Harry Markopolos: "No, I did it on my own."
CGA: "How were you compensated and how much time has this taken out of your week or your year?"
HM: "There was no compensation. We did it for the flag, the flag of the United States of America. We saw him as a clear and present danger to the capital market system and to our reputation as a capital market...When you have a bad player on the field, a dirty player, you want him removed from the playing field. I tried to remove him from the playing field, but the referee wasn't listening."
Congressman Brad Sherman: "Did you have a chance to bring your accusations to FINRA or the NASD?"
Harry Markopolos: "I would have never taken them to the NASD or FINRA. I had a lot of bad experiences as an over the counter trader in the late 80's with the NASD. What I found them to be was a very corrupt self-regulatory organization, where, if you took a fraud to them, they would ignore it as soon as they received it. They were there to assist industry by avoiding stricter regulation from the SEC."
Congressman Gary Ackerman: [Regarding methods for verifying daily stock trades]"The SEC could have done that too?"
Harry Markopolos: "If they knew how to do it, they could have done it and if they had the willingness to do it they could have done it, but they did not."
CGA: "Are you suggesting they don't know how to do that?"
HM: "I'm suggesting that if you flew the entire SEC staff to Boston and sat them in Fenway Park for an afternoon, they would not be able to find first base."
Congressman Brad Sherman: "Are there some mini-Madoffs and medium sized Madoffs; Could somebody do what he did and not be as powerful as he was?"
Harry Markopolos: "There is. I plan on turning in at least a one billion if not bigger mini-Madoff to the SEC's inspector general tomorrow. I hope this time they actually listen to me."
For Congressional testimony, especially about financial matters, this was some riveting stuff. It's amazing to me that Markopolos did all this thankless, unpaid work and kept at it for a decade while people who are paid to do this work didn't lift a finger. Markopolos cited incompetence and corruption in these federal agencies. I agree with him, but I think simple apathy might be playing a big hand here too. What incentives does anybody at the SEC have to investigate these matters? People in government service typically don't get promoted for being stars at their jobs; promotion is pretty much dependent on time served. It makes riding your desk and keeping your head down a much more attractive option.
Based on the ire of the Congressmen and women participating in today's hearing, I think whoever is about to get served tomorrow by Mr. Markopolos is going to have about 1 hour to get to a bus station because I doubt the SEC will be allowed to ignore him ever again. Nevertheless, he should consider posting his latest findings in a public forum, so that the people can also play a hand in demanding that our watchdogs do their jobs. A blog, perhaps ;)
Mr. Markopolos doesn't seem to want any notoriety from this (yet) and he seems uninterested in trying to make a buck off what could easily be overnight celebrity status, so I'm not going to post a picture of him. How about this image of a burnt up computer instead?
Markopolos testified before the House Financial Services Committee today, explaining how he uncovered the scheme. The really amazing thing about this hearing is that the House now wants to know what Mr. Markopolos recommends they do to fix the regulatory problems of the financial industry and what failures he personally encountered in the agencies that were supposed to be listening to his warnings. I have never heard such stark condemnations expressed so eloquently and such complex issues explained so plainly. It's difficult to pick out just a few quotes from this hearing to highlight because he made so many standing ovation worthy comments, so many, in fact, that two of the congressmen petitioned him to take a high ranking job at either the SEC or a new whistleblower agency that would oversee the SEC. He turned them down, but they are clearly going to keep trying to get him on the team.
Congressman Gary Ackerman: "What was the key tipoff that made you think that Bernie Madoff was a fraud?"
Harry Markopolos: "The key tipoff - and it took me about five minutes to figure out that he was a fraud - so it took extensive time and research...I basically read his strategy description and I knew that wasn't the source of his returns. I knew right away by looking at his performance charts. I wish I had a white board and easel here, but I don't so I'm going to give you a hand signal so I can show you what his performance return line looked like. It was a 45 degree angle without any variation. It went in only one direction: Up. It never had variation like the market does."
Congressman Gary Ackerman: "Did somebody hire you to do this investigation?"
Harry Markopolos: "No, I did it on my own."
CGA: "How were you compensated and how much time has this taken out of your week or your year?"
HM: "There was no compensation. We did it for the flag, the flag of the United States of America. We saw him as a clear and present danger to the capital market system and to our reputation as a capital market...When you have a bad player on the field, a dirty player, you want him removed from the playing field. I tried to remove him from the playing field, but the referee wasn't listening."
Congressman Brad Sherman: "Did you have a chance to bring your accusations to FINRA or the NASD?"
Harry Markopolos: "I would have never taken them to the NASD or FINRA. I had a lot of bad experiences as an over the counter trader in the late 80's with the NASD. What I found them to be was a very corrupt self-regulatory organization, where, if you took a fraud to them, they would ignore it as soon as they received it. They were there to assist industry by avoiding stricter regulation from the SEC."
Congressman Gary Ackerman: [Regarding methods for verifying daily stock trades]"The SEC could have done that too?"
Harry Markopolos: "If they knew how to do it, they could have done it and if they had the willingness to do it they could have done it, but they did not."
CGA: "Are you suggesting they don't know how to do that?"
HM: "I'm suggesting that if you flew the entire SEC staff to Boston and sat them in Fenway Park for an afternoon, they would not be able to find first base."
Congressman Brad Sherman: "Are there some mini-Madoffs and medium sized Madoffs; Could somebody do what he did and not be as powerful as he was?"
Harry Markopolos: "There is. I plan on turning in at least a one billion if not bigger mini-Madoff to the SEC's inspector general tomorrow. I hope this time they actually listen to me."
For Congressional testimony, especially about financial matters, this was some riveting stuff. It's amazing to me that Markopolos did all this thankless, unpaid work and kept at it for a decade while people who are paid to do this work didn't lift a finger. Markopolos cited incompetence and corruption in these federal agencies. I agree with him, but I think simple apathy might be playing a big hand here too. What incentives does anybody at the SEC have to investigate these matters? People in government service typically don't get promoted for being stars at their jobs; promotion is pretty much dependent on time served. It makes riding your desk and keeping your head down a much more attractive option.
Based on the ire of the Congressmen and women participating in today's hearing, I think whoever is about to get served tomorrow by Mr. Markopolos is going to have about 1 hour to get to a bus station because I doubt the SEC will be allowed to ignore him ever again. Nevertheless, he should consider posting his latest findings in a public forum, so that the people can also play a hand in demanding that our watchdogs do their jobs. A blog, perhaps ;)
Mr. Markopolos doesn't seem to want any notoriety from this (yet) and he seems uninterested in trying to make a buck off what could easily be overnight celebrity status, so I'm not going to post a picture of him. How about this image of a burnt up computer instead?
posted by LvG at
7:30 AM
2 Comments:
I read this before the evening news today. I was pretty disappointed that they gave it like a 10 second passing mention. It's fascinating!
Well my dear, you should read Mr. Markopolos prepared testimony here: http://financialservices.house.gov/markopolos020409.pdf
My writeup doesn't really do justice to all the work this man did and how skillfully he explained it to the committee. It also doesn't include the Q&A that followed after this, but the House Financial Services Committee archives the telecasts, so you'll be available to watch again.
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