Official Washington — and, no doubt, thousands of victims of Ponzi mastermind Bernie Madoff’s $50-billion investment ripoff– were mesmerized this week as fraud investigator Harry Markopolos told Congress how he spent nine years blowing the whistle on Madoff to the Securities and Exchange Commission.
Despite a mountain of evidence provided by Markopolos to the SEC’s Boston Regional Office — repeatedly, and increasingly in greater detail, during 2000-2008 — the SEC did not even bother to investigate Madoff.
”Nothing was done,” Markopolos told the House Special Committee on Finance. ”There was an abject failure by the regulatory agencies we entrust as our watchdogs.”
Among the mind-boggling revelations from Markopolos in his testimony:
— Working with a team that included financial risk managers of several major hedge funds, an investigative journalist, and a former U.S. Army airborne ranger infantry officer with intelligence-gathering experience, Markopolos (who himself is a Special Forces veteran) determined as early as June 2005 that Madoff’s Ponzi scheme was beginning to unravel and that Bernie was intensifying his efforts to lure in new victims to keep the scheme going.
— Investigative journalist Micheal Ocrant actually infiltrated Madoff’s operation for Markopolos’ team.
— SEC lawyers prevented the SEC’s trading and portfolio management experts from initiating any investigation of Madoff. ”My experiences with SEC officials lead me to conclude that the SEC securities lawyers if only through their investigative ineptitude and financial illiteracy colluded to maintain large frauds such as the one to which Madoff later confessed,” Markopolos testified.
— Madoff marketed a ”split-strike” stock purchase and conversion strategy to his clients that was deliberately so complicated even market professionals would have trouble keeping track of all the moving parts. ”[Madoff] knew most [of his clients] wouldn’t understand it and would be embarrassed to admit their ignorance, so he would have less questions to answer.”
— Despite the complexity of his offerings, Bernie’s stock performance charts were unsophisticated and easily identified as bogus when analyzed by experts. Markopolos says it only took him four hours to prove mathematically that Madoff was a fraud. ”Madoff’s math never made sense, his performance charts were clearly deceiving, and his return stream never resembled any known financial instrument or strategy.”
— Madoff’s ”results” were so outlandish they were ”equivalent to a major league baseball player batting .966 and no one suspecting that this player was cheating.”
— Madoff played ”hard to get” and exuded an air of exclusivity (sometimes demanding an initial investment of at least $20 million from new clients) as a lure to unsuspecting rich investors. Several European royal families invested heavily in his Ponzi scheme.
— Markopolos diagrammed Madoff’s Ponzi operation on a whiteboard at a meeting in October 2005 with Mike Garrity, Branch Chief of the SEC’s Boston Regional Office. Garrity forwarded the information to the SEC’s New York office, which had jurisdiction over Madoff, but the New York SEC office refused to initiate an investigation.
— Markopolos offered his dossier on Madoff to an investigative reporter at The Wall Street Journal’s Washington bureau in 2006, but the newspaper’s senior editors apparently did not give the reporter approval to pursue the story.
Markopolos also offered a theory regarding why Bernie turned himself in on December 11, 2008.
The fraud investigator believes that after the financial credit markets completely froze last fall, several major funds that had provided steady streams of investment capital to Madoff asked him to liquefy their assets and redeem them. Madoff’s fictional ”strategy” of investing in highly liquid, blue-chip stocks made him appear to be the most reliable money man to turn to for converting investments into instant cash.
In other words, with the financial system collapsing around them, investment fund managers quickly turned to the most trusted investor they knew — a man with a golden reputation, a financial genius they had entrusted with untold billions for years.
Surely, this courtly guru who moved so easily through the world’s elite portals, this mensch with the Midas touch, could end their fiscal nightmare. All it would take, they thought, was one wave of Bernie’s hand and a frozen glacier of assets would instantly transform into a bubbling, life-saving gusher of liquidity.
Then they watched in horror as the man who never was dropped a dime on himself.