Chasing Madoff

We watched “Chasing Madoff” on TMN last week. While Bernie Madoff is a well documented disgusting person, it is even more disgusting that, when he brought Madoff to their attention, an honorable and courageous man like Harry Markopolos met resistance from the SEC, the nominal protector of financial markets in the United States.

It started in 1999. When asked to design an options portfolio to compete with Madoff, Markopolos decided, after less than 5 minutes, that the Madoff fund had to be a fraud.

The options market is extremely volatile. There is no real-world situation that can give an options fund the regular returns Bernie Madoff was showing. “Such a distribution simply doesn’t exist in finance.”

Being thorough it took Harry another 4 hours to prove it to his own satisfaction. You might wonder why the fraud lasted until late 2008.

Between 1999 and 2007 Harry delivered increasingly well supported cases to the SEC. They did nothing. He talked to journalists and others, again nothing. He thought there might be risk in trying to bring down someone who had stolen $50 billion. He got a permit to carry a gun because he feared for his life. He became obsessed. I personally know of no person who would have put up with what he did just because it was the right thing to do.

As for the SEC, perhaps we could argue that they did something but the fraud was so cleverly disguised that they missed it. While I am not privy to the details, I know that in this sort of audit, when you see something that is patently impossible, you look until you find why. Sometimes it is your own misunderstanding. I once spent 4 hours looking for a fraud because an entire day’s sales receipts had gone missing. Turned out to be Good Friday.

All strings have two ends. If you find one end, like the impossible record of earnings, you need to look for the other. Apparently it is possible at the SEC to have a string with only one end.

Had the crash of 2008 not appeared, it is possible that Bernie would still be in business. Only the drying up of new money, the fuel for a Ponzi scheme, caused the situation to come to light. The SEC had nothing to do with it.

Harry has written a book about it. No One Would Listen We should all pay attention. Here’s why.

It is certain that Madoff did not run the only fraud in the US in those years. There are likely some running now. Possibly large ones. The SEC did not find Madoff, probably the biggest and one that was dropped at their door with a well constructed brief. What would their likely success be with a more clever and smaller fraud?

Brooklyn Congressman Gary Ackerman is magnificent on this point, I doubt you would believe it, if it was fiction. See YouTube Worth a look at the comments following too.

There is a simple reason they do not fix this sort of thing.

They are a bureaucracy and bureaucracies value the process over the results. Agencies like the SEC are counterfeits They look like the real thing but they are not. Many of the senior people value their positions more than their duties.

The really bad news. The SEC is not alone. There are a lot of agencies and departments with the same attitude at the top and not just in the United States. They don’t actually want to do anything, especially something inconvenient. After all Bernie was very prominent and powerful. They like the prestige and the pay more than they like the dirty work of making things right. That needs to be addressed.

Bernie was sentenced to 150 years and will be eligible for parole in 2129. Given the difficulty of prison life, I suspect that there are many of his clients, friends, associates, employees and even family praying a familiar Jewish blessing for him. “May you live to be 120.”

Retributive justice.

As an investor pay a little attention. Things that are too good to be true should be avoided. People do not pay high yield because they are nice guys, they do it because they have to do so to get your money. You might wonder about that.

We need more stand up guys like Harry Markopolos. Help them when you can.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. | Twitter @DonShaughnessy | Follow by email at moneyFYI

2 Comments on “Chasing Madoff

  1. You could draw an interesting comparison contrasting how Canada deals with its own “little Bernies”. Consider the case of my former neighbor Robert Lech. After blowing $170,000,000 of his clients’ money, he’s due for release in October.

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