More Madoff Madness

You may have seen that as far back as 1999, an investment manager named Harry Markopolis attempted to alert the SEC of the likelihood that Bernard Madoff was running a ponzi scheme.  He presented statistical evidence to strongly suggest that Madoff simply could not have produced his published investment results using the strategy he claimed to employ.  

Markopolis was rebuffed by the SEC (and yes, initially, this was on Clinton's watch) but persisted in trying to make his case.  In November 2005 he produced the attached 19 page, single-spaced memo to SEC, which is breathtaking in its thoroughness and prescience:     

http://online.wsj.com/documents/Madoff_SECdocs_20081217.pdf

I highly recommend that you take a little time and read the memo.  Some of it was a little too technical for me -- I don't fully understand the hedging strategy that Madoff was purporting to use -- but what comes across is how incredibly logical Markopolis was in his analysis and how inconceivable it is that the SEC would not have found this a worthy basis to perform a detailed audit of the Madoff operation.  (In fact, Markopolis has a number of practical suggestions to the SEC, which, if followed, would have quickly uncovered the fraud.) 

The SEC, along with the Justice and Treasury Departments, was once an agency with an elite reputation for expertise and integrity.  Clearly that sense of mission and excellence has been lost as the agency has become drawn ever closer to the industry that it is supposed to regulate.  So this will be yet another mission for the Obama administration.  Replacing Christopher Cox with someone who actually believes the markets need regulating might be a good place to start.  I wonder what Eliott Spitzer is doing?        

Comments

[Joe Klein's conscience]

Obama doesn't have the stones to appoint Spitzer to that post. Not after the prostitute stuff. And no, it won't matter that "Diapers" Vitter is still in the Senate.

[Glenn Fayard]

Ah, fuck Spitzer (...?), if we want some semi-famous guy we can think up drunk on a Monday night, why not just Paul Krugman?

[Sir Charles]

Glenn,

Not even for $5,000. . .

[low-tech cyclist]

I've gotten as far as Red Flag #3, concerning the multiple layers of secrecy. It was New Era all over again - if I haven't mentioned it before, I was a faculty member at one of the small colleges whose endowment got taken for a ride in the mid-1990s by the Foundation for New Era Philanthropy, a much smaller Ponzi scheme operating in the (equally unregulated) world of philanthropy.

(Their scam was that if you could raise X dollars and leave it in their account for six months, then a Secret Big Donor would match the money you raised. Like any Ponzi scheme, it worked for awhile.)

[Nathan Williams]

Someone needs to write up, for those of us outside the world of finance, whether it would be normal for the SEC to look into something like this in the first place. I just have no idea if they generally go "hm, this smells bad" and then investigate a lot, or if they normally have particular narrow fields of investigation and enforcement.

[Sir Charles]

Nathan,

I can't claim any expertise in this field, but I do know that agencies generally will pursue matters within their jurisdiction on the basis of something that smells bad.

Given the size and scope of the potential fraud here and the deeply disturbing nature of Markopolis's memo, I would think at least some poking around would have occurred. And it wouldn't have taken much -- a couple of subponae to Merrill Lynch and other traders could have revealed this scam rather quickly.

[murphy]

Red Flag #30 Run by Jew