Sunday, May 2, 2010

Mad at Madoff

You may be aware of the current efforts in Congress to reform our financial system. You might want to pay particular attention to how the lawmakers treat the enforcement of financial frauds, because up to now, investors appear to have enjoyed very little protection from financial crooks.

I recently listened to the audiobook No One Would Listen: A True Financial Thriller by Harry Markopolos. It tells the story of how Markopolos and a small team of investment professionals discovered the Bernard Madoff fraud and reported it to the Securities and Exchange Commission (SEC) repeatedly, beginning as early as 1999. But, as the title suggests, no one at the SEC would listen.

Madoff, as you know, is the man who pulled off the largest Ponzi scheme in history, and is estimated to have robbed investors of upwards of $60 billion. The lives of thousands of innocent investors were turned inside out by this charming monster of a human being.

Markopolos describes himself as a “quant,” a math whiz who is able to recognize patterns and relationships in numbers that most of us can’t. He worked for a Madoff competitor, and his employer tasked him with discovering—and replicating—the secret to Madoff’s too-good-to-be-true returns. It didn’t take Markopolos long to discover that Madoff’s claimed returns were mathematically impossible to achieve.

Despite repeatedly laying out a clear case to regulators, Markopolos was routinely ignored or treated as a pest by SEC investigators. While the SEC jealously protected its turf and shuffled papers, Madoff managed to reel in sucker after wealthy sucker as he funded a lavish lifestyle that included making many apparently generous charitable donations. At the same time, in a cruel irony, Madoff was accepting massive deposits from many charitable foundations. He was certainly aware that he was guaranteeing the eventual bankruptcy of every foundation that invested with him.

The only thing that brought Madoff to justice was the tumbling stock market of 2008. As investors withdrew their money to pay for other obligations brought on by the national financial crisis, Madoff quickly ran out of money (he had spent it all, of course) and abruptly turned himself in to the FBI.

In appearances before Congress and on 60 Minutes following the debacle, Markopolos excoriated the SEC for its arrogance and incompetence. The agency suffered well-deserved national humiliation, and has promised to reform itself. That possibility may be out of its hands, however: Congress may well restructure the SEC, or possibly replace it with an entirely different organization.

Stay tuned, and have a great week!

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