AFP Interviews Man Who Exposed Madoff To SEC Back in 2000

By Pat Shannan When Bernard Madoff was finally arrested and exposed to the world as a charlatan, the one person who was not shocked by it was Harry Markopolos, the amateur fraud investigator who had been screaming to the SEC for nearly a decade. Had SEC officials listened to him from the beginning, Madoff’s stolen take would not have reached half of the estimated $65 billion that it finally did.



As a portfolio manager for a large equity derivatives asset management firm in Boston, Markopolos had sharpened his insight in this venue far beyond that of any ordinary detective. When his firm’s partners returned with literature from a New York conference where they had learned of Madoff’s remarkable success, they asked him to reverse-engineer this high performing strategy in order that the Boston firm might offer this successful product to their own customers.



Speaking to a crowd of more than 2,000 at the American Certified Fraud Examiner’s conference in Las Vegas in July, Harrry Markopolos explained how it took him but a few minutes to determine that “Madoff didn’t know the first thing about portfolio construction mathematics” and that he could not have been using this described strategy to earn the returns he was advertising.



When he reported what he suspected to his superiors in early 2000, they deep-sixed the whole plan, but Harry did not. There were too many red flags. His sleuthing had just begun, and his eventual team was made up of “four ordinary men” who were not paid for their after-hours endeavor but whose persistence finally paid off with the public exposure of a ponzi scheme magnified far beyond the imagination of even Charles Ponzi himself.





The Social Security system, legalized by government sanction, is the only ponzi scheme known to have expanded larger than that of Madoff. In 1920, in Boston also, Italian immigrant Charles Ponzi advertised that he could double an investor’s money in only 90 days and immediately had throngs flocking to his office door. Word got out that had delivered exactly what he promised, and exactly 90 days later, the dozens of investors turned into hundreds.



Soon it was thousands. Ponzi, of course, was paying off the old investors with the funds from the new ones. He was eventually caught, prosecuted and jailed; and his name still lives in notoriety.



Markopolos knew at first glance that Madoff was not doing what he claimed and began to see Madoff as a brilliant con artist who, much like Ponzi, knew how to prey on the depravity of man and his greed.



He says, “Under existing securities law, if you tell clients that you are using Strategy A to invest their money but, in fact, you use an undisclosed Strategy B, you’ve committed fraud.”



From that point on for Madoff, it was only a matter of watching the stock boards closely and publishing his imaginary investments after they had increased in value. He created an illusion of an investment strategy that was not ostentatious enough to attract suspicion but sufficient to reflect a small but steady profit return every month. And while his naïve investors remained satisfied, the discerning eyes of Markopolos were opening wider.



In May of 2000, he submitted an 8-page report to the Boston Regional Office of the Securities Exchange Commission (SEC) listing red flags and mathematical proof of a major fraud but got no reply. He re-submitted his evidence to the Boston and other SEC offices in 2001, 2005, 2007 and 2008, to no avail. By this time, Markopolos was realizing that Madoff had been operating with protection from the inside.



In late 2008, when the stock market crumbled and investors rushed in to redeem their investments, Madoff ran out of cash, turned himself in to authorities, and pleaded guilty in federal court last March 12th.



Markopolos said that all the members of his team feared for their lives during the long investigation and he for more reason than any of the others because of his visibility. He was the one who was submitting all the complaints each year, and he knew that any leak from the SEC could make him a marked man.



He explained that the “offshore feeder funds” were only one step removed from organized crime. “If organized crime knew that Madoff was stealing their money, he would have been killed. Therefore, if Madoff had ever found out that we had a team tracking him through Europe and North America and that he risked getting exposed, it was a good bet that he would have had several billion reasons to want us silenced first. To compartmentalize the damage, I was the only one who went to the SEC.”



No one there knew Markopolos had an assisting team in the field. But Markopolos has proof that the SEC was culpable, too, and says publicly that he has tremendous anger at the agency and sadness for the victims. He says that there were SEC lawyers who were “in bed with Madoff ” and helped destroy lives.



“Madoff paid people to look the other way,” says Markopolos and reminds us that there is a federal report scheduled to come out by the end of the year. He emphasizes that unless there is a cover-up, “the SEC will cease to exist.”



Harry sounds like he must have read the 9-11 Commission’s Final Report and other government balderdash. Both he and we are watching and anxiously waiting for the report, but we do not expect it to be seriously detrimental to the SEC. The likely conclusion will include finger-pointing and the firing of a very few scapegoats. It’s the bureaucratic way. If the National Commission on Terrorist Attacks can completely ignore the collapse of a 47-story building at the World Trade Center, we cannot foresee the government dismantling one of the giants in its controlling bureaucracy just because a lot of lawyers lied, cheated and broke the law. Nothing new here.



Pat Shannan is the assistant editor of American Free Press. He is also the author of several videos and books including One in a Million: An IRS Travesty and I Rode With Tupper, detailing Shannan’s experiences with Tupper Saussy when the American dissident was on the run in the 1980s. Available from FAB for $25 each.



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