How SEC Probe Missed Alleged $50B Madoff Fraud, Despite 2000 Tip
Posted Dec 18, 2008 5:28 PM CDT
By Martha Neil
Pressured by his boss at a Boston investment firm to amp up results, after a colleague came back from a trip to New York with news of Bernard Madoff's stellar hedge fund returns, Harry Markopolos tried to figure out how Madoff was doing it.
Try as he might, Markopolos and a colleague couldn't duplicate the returns on paper, even after he enlisted the help of a top mathematician in Boston. So, he concluded, the hedge fund had to be a fraud. In early 2000, he went to the local office of the Securities and Exchange Commission with his suspicions. But, after hearing him out and launching an investigation, the agency's probe went nowhere, reports the Wall Street Journal (sub. req.).
During a May 2000 meeting, Markopolos explained the problem to a SEC examiner and attorney, the newspaper recounts: Although Madoff claimed to be buying and selling options on the Standard & Poor's 100-stock index, the volume of trading there wasn't sufficient to include all of the claimed Madoff trades.
Despite this seeming red flag, however, the SEC essentially took Madoff's word for what was going on, apparently relying on his misrepresentations and incomplete and inaccurate documents, according to the newspaper and other media accounts. A rivalry between the Boston and New York offices of the SEC may also have contributed to the relative ease with which Madoff allegedly hoodwinked the securities watchdog, since the Boston office initiated the investigation but the New York office reportedly was responsible for pursuing it.
Earlier this month, the claimed all-time-record Ponzi scheme finally came to light, after Madoff reportedly confessed it to his sons, who worked with him in his investment firm. Since then, the SEC chief has said that the agency dropped the ball by failing to pursue aggressively "credible and specific" allegations against Madoff dating back at least to 1999, as an earlier ABAJournal.com post discussed.
Although the SEC seemingly didn't have the drive to focus intensely on Madoff, seeing him brought to justice became a consuming interest of Markopolos and some of his associates.
"Some people play fantasy sports, that was how it was with us—Madoff was our fantasy sport," Markopolos tells the WSJ. "We wanted him nailed."
A lawyer for Madoff declined to comment, the newspaper says.
Fortune: Did Madoff Act Alone?
Dow Jones: "Madoff's Rise Fueled By Leverage, Controversial Fees"
ABAJournal.com: "3rd Parties Will Pay for Alleged $50B Madoff Fraud, Experts Predict"