Feb. 4 (Bloomberg) -- Harry Markopolos, a former money manager who sought to convince regulators for nine years that Bernard Madoff was a fraud, said the U.S. Securities and Exchange Commission suffers from “investigative ineptitude.”
Markopolos told Congress today that he contacted the SEC in 2000 after examining Madoff’s investment strategy and determining in four hours that returns exceeding 10 percent weren’t possible. Markopolos, in almost a decade of communication, said only one SEC staff member understood Madoff’s scheme and “the threat it posed to the public.”
“My experiences with other SEC officials proved to be a systemic disappointment and lead me to conclude that the SEC securities lawyers, if only through their investigative ineptitude and financial illiteracy, colluded to maintain large frauds such as the one to which Madoff later confessed,” Markopolos said. Madoff “had a lot of help,” Markopolos said.
U.S. lawmakers, who began investigating Madoff’s case last month, are hearing from Markopolos for the first time as they try to determine how regulators missed his alleged $50 billion Ponzi scheme, the biggest in history. The proceeding may shape the SEC’s fate as Congress debates whether to bolster the regulator or turn its responsibilities over to another agency.
Investors “expected regulators to perform their roles effectively,” Representative Paul Kanjorski, the Pennsylvania Democrat and chairman of the House Financial Services Committee’s capital markets panel, said as he began the hearing. “We need to pursue long-scale reforms.”
Democratic Representatives Bradley Sherman of California and Michael Capuano of Massachusetts, members of the subcommittee, suggested Markopolos consider joining the SEC. He declined, citing family issues.
SEC Officials
Markopolos, 52, testified along with SEC directors Linda Thomsen, enforcement; Andrew Donohue, investment management; Erik Sirri, trading and markets; Lori Richards, compliance and inspections; and Acting General Counsel Andy Vollmer.
The officials, in joint testimony, said the regulator may stiffen audit requirements for money managers and inspect firms more frequently. The SEC is also examining how it evaluates risk and may require investment advisers to provide more information than it currently requires, according to the testimony.
Claims filed against Madoff by the SEC and prosecutors may result in billions of dollars in liability and “decades of incarceration,” the officials said.
SEC Inspector General David Kotz told lawmakers Jan. 5 that he was investigating whether Madoff’s clout and relationships with regulators helped the money manager avoid detection. Madoff sat on an SEC advisory committee and was chairman of the Nasdaq Stock Market.
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