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Madoff Whistleblower Faults SEC, Say He Feared For His Safety

Feb 4, 2009 | Parker Waichman LLP A financial expert who for years tried to get federal regulators to investigate Bernard Madoff told a Congressional hearing today that rivalries between Securities and Exchange Commission (SEC) offices allowed the former investment advisor's alleged Ponzi scam to go unchecked for years.  Harry Markopolos, a money manager who says he spent nine years investigating Madoff, told members of the House Financial Services Committee that the SEC's inaction on his tips led him to fear for his life and that of his family.

Madoff - once a chairman of the Nasdaq stock exchange - was the founder and primary owner of Bernard L. Madoff Investment Securities LLC. The firm is primarily known for its business in market-making, or serving as the middleman between buyers and sellers of shares. However, Madoff also oversaw an investment-advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.

In December, Madoff was arrested on one charge of securities fraud.  According to the FBI complaint against Madoff, his investment-advisory business was largely a Ponzi scheme.  The FBI said Madoff  “deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars.”

Now that as much as $50 billion invested with Madoff may have vanished into thin air, many are asking why the SEC did not act on the suspicions of Markopolos and others.  

"I gift-wrapped and delivered the largest Ponzi scheme in history to them, and somehow they couldn't be bothered to conduct a thorough and proper investigation because they were too busy on matters of higher priority," Markopolos told the committee. "If a $50 billion Ponzi scheme doesn't make the SEC's priority list then I want to know who sets their priorities."

 In his testimony, Markopolos said he figured out Madoff was a fraud in "about five minutes" by looking at his promotional material and seeing that the graphs representing Madoff's investment returns were a straight line going up at a forty-five degree angle.  Markopolos 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 said that over 10 years, he and a team of investigators brought 29 specific red flags regarding Madoff's operations to SEC offices in New York, Boston and Washington, DC,  but no one at the commission ever acted on his tips.

According to Markopolos, he was told by an SEC official that relations between the Boston and New York offices were hostile.  " Regional turf battles definitely played a part -- a determining factor, in fact -- in the handling of this case," he said.

Markopolos also said he anonymously conveyed a package of documents on Madoff to former New York attorney general Eliot Spitzer without results.  And he suggested that the venerable newspaper, The Wall Street Journal, may have prevented a reporter from pursuing leads he provided because the newspaper "respected and feared" Madoff.

Finally, Markopolos told the committee that he and his investigators had at times feared for their safety because Madoff had nothing to lose.  "Mr. Madoff was already facing life in prison if he were caught, so faced little to no downside to removing whatever threat he felt we posed," Markopolos said.

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