Incompetence in High Places, Heroism in the Common Place: America at her Worst and Best
On December 10th, 2008, Bernard Lawrence (“Bernie”) Madoff turned himself in to the U.S. Securities and Exchange Commission (SEC). Having chosen the time and date of his surrender, Madoff told two senior SEC officials that he was “finished,” that he had “absolutely nothing,” that “it’s all just one big lie,” and that it was “basically, a giant Ponzi scheme.”
The following day, the SEC issued a statement:
“The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.”
Yes, thank you SEC public relations. It was a Ponzi scheme.
In the same press release, Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement, was quoted saying, “We are alleging a massive fraud — both in terms of scope and duration. We are moving quickly and decisively to stop the fraud and protect remaining assets for investors, and we are working closely with the criminal authorities to hold Mr. Madoff accountable.” The lofty-sounding statement warrants comment:
- “We are alleging massive fraud – ” No, Ms. Thomsen. You are not alleging anything. Mr. Madoff confessed to massive fraud.
- “We are moving quickly – ” Hold this thought. We’ll return to it shortly.
- “We are moving to stop the fraud – ” No, Ms. Thomsen. You are not moving to stop the fraud; you are reacting to a confession of fraud. The fraud has already stopped. Mr. Madoff told you he was finished. It’s over.
- “We are moving to protect remaining assets for investors – ” No, Ms. Thomsen, there are no remaining assets. The investors have been wiped out and there is nothing left. If it was your goal to protect investors, you failed.
- “We are working closely with the criminal authorities to hold Mr. Madoff accountable.” Okay, a generous reader may grant you this, though I would venture to guess, you are actually in effect saving his skin. Remember he did turn himself in to you. Without your protective custody, he’d probably be a dead man.
The Testimony of Harry Markopolos
Now we come to the part about “moving quickly.” Subsequent events shed much unflattering light on the SEC. On February 4th, 2009, Harry Markopolos, a Certified Fraud Examiner and former Chief Investment Officer for Rampart Investment Management of Boston, testified before the U.S. House of Representatives Committee on Financial Services. According to his 65-page testimony,
- In May of 2000 (2000!), he had submitted to the SEC’s Boston Regional Office an 8-page document containing credible evidence of fraud on the part of Bernie Madoff that should have prompted an immediate investigation. Nothing happened.
- In October, 2001, he had resubmitted the original document along with additional information and an explanation of the investment process. Nothing happened.
- In October, 2005, he had submitted an extensive analysis to the SEC. It did result in an investigation which found that Bernie Madoff had “mislead” the SEC about the nature of some of his dealings and required him to change the way he described them. The SEC said it was specifically looking for evidence of a Ponzi scheme during this investigation, but didn’t find any.
- In April, 2008, he sent a fourth submission to the SEC. Nothing happened.
- In the fall of 2008 the stock markets crumbled and the Madoff financial house of cards collapsed, as all Ponzi schemes inevitably do.
Clearly, Madoff perpetrated a fraud – a massive one, to borrow Ms. Thomsen’s phrase. And he will probably spend the rest of his life in prison. So if you consider that holding him “accountable,” then Ms. Thomsen certainly spoke accurately on that count.
The question Americans should be asking is this: Who will hold the SEC accountable? It’s a timely question as the size and scope of the United States federal government continues to swell. Was the SEC merely incompetent? Was there blatant corruption? Complicity? We may never know. Since Mr. Madoff had the luxury of surrendering at a time and place of his choosing, he also had the luxury of destroy evidence that may have shed light on those questions.
The Responsibility of Ordinary Citizens
Many people are rightly angry at Bernie Madoff. But far too few have directed any anger toward the regulatory agency charged with preventing such fraud in the first place – the one who issued a lofty, tough-sounding statement after the perpetrator had turned himself in to them.
Who will hold the SEC accountable? The only right answer is, the people must hold their government accountable. That’s why Harry Markopolos’s story should be told and retold. Harry Markopolos resists being called a hero because he says he was just an ordinary, conscientious American doing his duty. He saw something that was wrong and he called attention to it. He tried to get the responsible government agency to take notice. They wouldn’t. He tried to get the press to take notice. They didn’t. So at great personal risk, he persevered with the investigative whistleblowing until the whole thing finally (Finally!) came out. He did so because it was the right thing to do.
And that, folks, is real heroism.
- No One Would Listen, by Harry Markopolos, published 2011
- Chasing Madoff, the documentary of the pursuit, now available on dvd
- The Wizard of Lies – Bernie Madoff and the Death of Trust by Diana Henriques
- Busting Bernie Madoff: One Man’s 10-year Crusade by Henry Blodget of Business Insider