The Securities and Exchange Commission was sharply criticized by
both U.S. lawmakers and the fraud investigator who blew the whistle
on Bernard Madoff's alleged Ponzi scheme Wednesday, describing the
regulator as scared to pursue cases against top securities firms
and investors.
"You are both a captive regulator and a failed regulator," Harry
Markopolos said of the SEC in highly anticipated testimony to a
U.S. House subcommittee.
Markopolos detailed his nine-year effort to alert federal
regulators about Madoff, who is accused of engineering one of the
largest swindles in U.S. history. The SEC was "unable to
understand" the complex financial instruments involved in the
alleged fraud, Markopolos said, and regulators were not interested
in pursuing investigations against influential firms and
investors.
"The SEC was never capable of catching Mr. Madoff," Markopolos
told a U.S. House Financial Services subcommittee.
Markopolos described his efforts in the terms of a Tom Clancy
novel, sprinkling his testimony with talk of intelligence networks,
the Russian mob, drug cartels and collecting information from
"field operatives." He claimed he feared for his life as he sought
to expose Madoff's actions, even making sure to remove his
fingerprints from an envelope with Madoff information he handed to
former New York Gov. Eliot Spitzer during an appearance in
Boston.
"When you are zeroing out mobsters, you have a lot to fear," he
said. "If [Madoff] would have known my name, and he had a team
tracking it, I wouldn't have been long for this world."
Reached at his office on Wednesday, Spitzer said he had
"absolutely no recollection" of ever meeting Markopolos.
"Obviously, I wish people had listened to him," Spitzer said.
Lawmakers agreed that Markopolos was right to take precautions.
"When you deal with the kind of characters that you were trying to
bring to the bar of justice, you have to be concerned, not only for
yourself, but to family members that are near and dear to you,"
Rep. Al Green, D-Texas, said.
In order to ensure his safety, Markopolos said that in December
2005, he contacted a reporter at The Wall Street Journal, resulting
in a number of phone calls and emails. Markopolos said he suspects
that senior editors prevented a reporter from the newspaper's
Washington bureau from flying to Boston to meet and discuss the
Madoff issue.
"I believe that senior editors at that publication respected and
feared Mr. Madoff and wouldn't let [the reporter] get on that plane
no matter how much he wanted to get on that plane," Markopolos said
in response to a question.
Dow Jones & Co., which is controlled by News Corp. (NWS),
publishes the Wall Street Journal and Dow Jones Newswires. A Dow
Jones & Co. spokeswoman declined to comment on Markopolos'
accusations.
Markopolos also said that Madoff is not alone. He plans to turn
in a "mini-Madoff" to the SEC's inspector general Thursday and
urged lawmakers and regulators to pursue Madoff's alleged
accomplices, including the feeder funds that brought in additional
funds.
"My team was out there in the field talking to the Madoff feeder
funds and identifying who they were," Markopolos said. "There are
12 more out there lying low in the weeds in Europe that you have
not heard of yet."
Lawmakers on the panel lavished praise on Markopolos, while
focusing their criticism on the SEC for missing warnings about
Madoff for years.
"Unfortunately, our regulators failed to follow his road map and
heed his warnings," Rep. Paul Kanjorski, D-Pa., said. "As a result,
thousands of investors were hurt."
Rep. Scott Garrett, R-N.J., the subcommittee's ranking
Republican, said the alleged Madoff fraud was not a result of a
lack of regulation, but instead a lack of coordination and
information sharing among regulatory bodies such the SEC and the
Financial Industry Regulatory Authority, or Finra.
The entities, Garrett said, didn't pay enough attention to
Madoff's broker-dealer operations.
"At least some of the things, had they been implemented earlier,
at least in this case, it appears that the improprieties would have
been discovered much earlier," Garrett said.
SEC officials testifying before the panel repeatedly said that
they could not discuss specifics of the Madoff investigation, which
brought angry rebukes from some lawmakers. In a letter sent
Wednesday to Kanjorski and Garrett, SEC Chairwoman Mary Schapiro
wrote that the hearing "cannot have been satisfactory for you" and
that she and SEC staff "understand that you must have adequate
information to fulfill your oversight responsibilities."
Schapiro said that she wanted to set up a "prompt" meeting with
Kanjorski and Garrett.
The Madoff case, along with similar alleged frauds that have
been uncovered in the last two months, have focused criticism on
the SEC as federal policy makers consider a wholesale overhaul of
the U.S. regulatory system.
The group of SEC officials declined to speak specifically about
the Madoff case, but said they were doing their best to protect
investors.
"I think I speak for everyone when I say we hate fraud," said
Linda Thomsen, director of the SEC's division of enforcement.
Lawmakers, however, weren't impressed.
"Your job is to prevent fraud, not to hate it," Kanjorski said,
alternately describing the SEC's testimony as "oatmeal" and a
"traveler's guide" that didn't address the issues exposed by the
Madoff case.
-By Patrick Yoest, Dow Jones Newswires; 202-862-3554;
patrick.yoest@dowjones.com
(Chad Bray contributed to this report.)