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Investigator to rip SEC in testimony on Madoff case

By Ross Kerber
Globe Staff / February 4, 2009
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The Whitman investigator who tried to blow the whistle on investment manager Bernard Madoff will go before Congress today to unload a blistering attack on federal securities regulators, who he claimed repeatedly failed to heed his warnings on the now-accused swindler.

In testimony he is scheduled to give to a congressional subcommittee, Harry Markopolos details a litany of lost chances by officials at the Securities and Exchange Commission to follow through on repeated warnings he sent them about Madoff from as far back as 2000.

"There was an abject failure by the regulatory agencies we entrust as our watchdog," Markopolos wrote in the testimony.

He said the lack of action by the SEC led to a period when he feared for his safety, as Madoff for many years was a pillar of Wall Street who also served in powerful positions, including a governor of the Nasdaq stock market and vice chairman of the securities industry's regulatory agency.

In December, federal prosecutors arrested Madoff, who they said confessed to running a Ponzi scheme that is estimated to have cost investors a record $50 billion. Major charities and corporate investors around the world have disclosed huge losses after parking money with Madoff.

One feature of Madoff's scheme that allowed the manager to remain undetected for so long, Markopolos said, was the way in which drew investors into his company: by playing hard to get. Markopolos recalls an overseas trip he took in 2002, where he learned that several European royal families had invested with Madoff, and bankers were bragging about the special access Madoff had granted them. He said Madoff's coyness was a "masterful use of a 'hook,' " and that "his false lure of exclusivity were symptomatic of a Ponzi scheme."

In his testimony and in recent interviews, Markopolos recommends Congress make big changes to the SEC, which he said is "nonfunctional" and "harmful to our nation's reputation as a financial leader around the globe." Too often, he said, the SEC misses other frauds until the perpetrators give up or turn themselves in.

"Today's SEC staff are more like financial crime scene investigators, coming in after the fraud scheme has already collapsed, toe-tagging the victims, trying to figure out who the bad guys were and how the fraud scheme occurred," he wrote.

One of his suggestions is for the SEC to make its top positions career-capping exit jobs for Wall Street executives, who would have the financial sophistication to spot problems but wouldn't have incentives to go easy on companies in the hopes of later scoring a job. Markopolos also said the agency's approach to staffing investigations is wrong, and that far too few of the agency's personnel have basic financial credentials needed for overseeing the industry.

For example, he said one reason for the SEC's inaction on his tips is because the agency has "too many lawyers and not enough accountants" who could have probed deeper into the complicated issues he was raising.

Markopolos will be followed at the hearing by five SEC officials, who can expect a theatrical grilling from the congressional panel and may wind up serving as rhetorical punching bags for politicians frustrated by what they perceive to be a lack of investigatory zeal at the agency. Even its most recent chairman, Christopher Cox, issued a near-mea culpa citing the agency's "apparent multiple failures" in not pursuing questions about the New York investor, and commissioned an internal review.

"It's beat up the SEC time," said Mercer Bullard, a former SEC official who now teaches securities regulation at the University of Mississippi. "The issues that the SEC didn't follow up on, it's pretty egregious."

An SEC spokesman said agency officials would not comment yesterday. Mary Schapiro, President Obama's pick to head the agency, isn't slated to testify today. But at her confirmation hearings last month, she vowed to reinvigorate the agency's enforcement activities to restore investor confidence and to promote more accountability and disclosures for investors.

A question now is whether such changes would make officials more open to figures like Markopolos. A former employee of a Boston investment firm, Markopolos has laid out how he first contacted the SEC in Boston in 2000 with his suspicions about Madoff, after he and colleagues were unable to duplicate the trading strategy that Madoff claimed produced steady returns for investors.

Referred to the SEC office in New York, Markopolos continued to raise questions with officials about Madoff through much of this decade; his most recent warning came in April 2008, eight months before Madoff himself allegedly confessed. At various points in his remarks, Markopolos praises certain staff in the SEC's Boston office for encouraging him to press about Madoff, but writes that overall state regulators in Massachusetts and New York have proven more aggressive at stopping fraud than the federal regulators.

Ross Kerber can be reached at kerber@globe.com.

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