- The Washington Times - Wednesday, February 4, 2009

UPDATED:

The financial analyst who tried to blow the whistle on disgraced Wall Street investor Bernard Madoff lashed out at federal regulators, telling a congressional hearing that the Securities and Exchange Commission was “overmatched” and “totally incapable” of uncovering Mr. Madoff’s suspected $50 billion Ponzi scheme on its own.

“There was a combination of incompetence and an unwillingness to take on a big player like Mr. Madoff,” Boston financial analyst Harry Markopolos told the House Financial Services capital markets subcommittee Wednesday morning.

In his first public testimony since the Madoff scandal broke in December, Mr. Markopolos said it took him four hours to figure out that Mr. Madoff’s financial empire was built on fraud but that he could not get the SEC to investigate his charges despite nearly a decade of trying.


“A fraud that should have been stopped at $7 billion has now grown to $50 billion,” he told the panel.

The SEC “was overmatched, too slow and too inexperienced to understand” what Mr. Madoff was doing, Mr. Markopolos said.

Mr. Madoff was arrested in December after admitting to his sons that his legendary investment fund was based on fraud. The SEC has launched an internal investigation to try to determine why it failed to uncover the fraud sooner.

Victims of the scheme include charities, universities, investment funds, Hollywood celebrities, municipalities and individual investors. Many elderly investors have seen their entire savings wiped out.

By turns scathing and sarcastic, Mr. Markopolos said he doubted there were many SEC investigators who even understood a “split-strike conversion” — the investment method Mr. Madoff claimed he used to run up an improbable record of profits in good markets and bad. He said that two investigators in the SEC’s Boston office took his concerns seriously but that senior SEC officials and the agency’s New York office showed no interest in the probe.

“If you flew the entire SEC staff to Boston and sat them in Fenway Park for the day, they would not be able to find first base,” he said.

The analyst said he even feared for his life after his nine-year campaign to expose Mr. Madoff’s activities failed to bear fruit.

He said the SEC was “totally incapable of doing the math” that would have exposed Mr. Madoff’s fraud, calling it a “captive agency” beholden to the capital industries it is supposed to regulate.

He also rejected the idea that Mr. Madoff could have pulled off his fraud on his own, as the New York investor has claimed.

“He had to have lots of help,” Mr. Markopolos said. “He needed a robust [information technology] sector. He had to have people taking in money from new victims.”

Lawmakers praised Mr. Markopolos’ doggedness in trying to bring the Madoff scandal to light, noting he had provided the SEC with 29 “red flags” in a detailed report four years ago. The report’s title: “The World’s Largest Hedge Fund Is a Fraud.”

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