Patterico's Pontifications

12/18/2008

SEC Was Warned About Madoff

Filed under: General — Patterico @ 7:21 am



The Wall Street Journal writes:

In 1999, trader Harry Markopolos wrote that “Madoff Securities is the world’s largest Ponzi Scheme,” in a letter to the SEC. More recently, multiple SEC inquiries and exams in 2005 and 2007 found only minor infractions.

I listened last night to a radio interview with Markopolos (Marko! Polos!), who said that he had sat down with Madoff as part of his research for a newsletter recommending opportunities to investors. Markopolos said that there were so many red flags raised by Madoff’s presentation that he can’t imagine anyone giving his fund a clean bill of health — if they had actually done their job.

These people missed so many warning signs, they might as well have been L.A. Times editors reviewing a Chuck Philips story.

The Wall Street Journal says “the SEC’s failure is business as usual. The real news would be a case when the SEC did prevent a fraud.”

I’m not necessarily saying the President should fire the SEC Chair (although he could — he could remove him as chair, and fire him entirely if there is cause). But balls were dropped. Tom Blumer has more, and reminds investors not to trust the chuckleheads at the SEC.

26 Responses to “SEC Was Warned About Madoff”

  1. Remember how much grief McCain got for suggesting that Chris Cox should be fired ? Some flub. For all his faults, McCain was our last chance for a straight shooter for a while. Now we will get “The Chicago Way,” hot and hard.

    Mike K (2cf494)

  2. Markopolos (Marko! Polos!)

    An immigration officer at Ellis Island left out the “u” in Markopoulos. “Poulos” is literally “colt” — Markopoulos is “Markson”. And so much for today’s Greek lesson.

    I spoke to a victim of Madoff two days ago. He was “recommended”. It was the only way Madoff would take on new clients victims. There may be actions against “recommenders” as victims come forward.

    nk (bdc27b)

  3. Since I have not seen Madoff’s party affiliation mentioned, is it fair to surmise that he is a Democrat?

    JD (7f8e8c)

  4. Madoff has contributed extensively to Democrats, though some Republicans have also received contributions. It is worth remembering that in 1999 Bill Clinton was President; he was responsible for the SEC that looked the other way on this matter.

    DC (587c6c)

  5. “It is immoral to allow a sucker to keep his money.”
    Canada Bill’s corollary.

    C. Norris (c5a513)

  6. Haven’t we had these questions about whether the President should hold on to Cox in the past? NTTAWWT.

    daleyrocks (5d22c0)

  7. With the caveat that I’m not out to defend the SEC…

    Some of the reports don’t make sense. For example, supposedly Madoff didn’t register as an investment adviser until 2006. Thus, any SEC reviews prior to that would have been of his broker-dealer operation, which was registered and (allegedly) separate from whatever he was doing on the investment advice side (I’m guessing these were the reviews that produced the ‘minor infractions’). And there are some other reports that indicate the SEC hadn’t yet gotten around to reviewing Madoff as an investment adviser (they supposedly try to review all new registrations sometime in the first year or so of operation). If so, this would confirm my thinking that the 2005 and 2007 reviews were of something other than the ponzi scheme.

    It’s possible that the SEC would have looked into his investment advisory business to see if he should have registered (there are rules on what level of activity makes someone subject to registration). The SEC is pretty aggressive in going after people who should register but haven’t so I doubt that, if the 2005 review was of the investment advisory business, if he had failed to register that the SEC’s review would have been characterized as finding only ‘minor’ infractions.

    But, having said that, again from news reports, Madoff had been investing other people’s money for a long time, certainly before 2006, so I am puzzled as to how he could have avoided registration until 2006.

    And I am surprised that the SEC staff didn’t look more aggressively into the claims that Madoff was running a ponzi scheme, and especially if he was doing so without having registered as an investment adviser(it’s perverse, but the SEC seems to get more incensed about somebody committing fraud if they’re not registered than if they are registered). This is the type of thing the SEC staff lives for, finding unregistered advisers who screw the public. They have a long track record of going after people, alleging they engage in providing advice and thus need to register, and political donations aside, somebody handling billions of dollars and not having registered is too juicy a target for the SEC staff to just let drop, especially since they’re not the ones directly influenced by political donations, like (some) prosecutors, they’re motivated more by making a name for themselves that they can leverage into a high-paid private sector job and nailing a big fish like Madoff would have let them write their own check.

    And finally, the WSJ ought to know better than to criticize the SEC for not preventing a fraud; do they likewise criticize the criminal justice system for not preventing crime? First, they have no way of knowing how many frauds would have taken place but for the regulatory structure, just as we don’t know how many banks would have been robbed if they police (and prosecutors, at least those in LA) weren’t out doing their job. Second, fraud by its nature involves breaking the rules and rule breaking is something that, by definition, can only be detected after the fact (at least until Tom Cruise invents a machine that tells us in advance the name of the broker who is about to move his client’s funds into an offshore account). But the WSJ just doesn’t like the SEC and they apparently aren’t above stooping to this level to blast an agency with which they’ve had differences. imagine that, the WSJ arguing that a government agency should be even more aggressive, with even more rules, regulations and restrictions. That’s rich.

    steve sturm (369bc6)

  8. daleyrocks wrote: Haven’t we had these questions about whether the President should hold on to Cox in the past? NTTAWWT.

    The trouble with Clinton was that he was asking other people to do that.

    L.N. Smithee (d29858)

  9. “Heckuva job, Chrissy.”
    “Heckuva job, Timmy.”

    Tim Geithner and Chris Cox, charged with keeping Wall Street honest, have a lot to answer for. I guess they were all too busy reading Sarbanes-Oxley statement. Of course, no one will ask them the tough questions. They’ll just promote them to cabinet level.

    Add the SEC and the Federal Reserve Board to my list of agencies that should be disbanded.

    Patricia (ee5c9d)

  10. Well, it looks like Cox will soon be un-employed
    (maybe now he’ll have the time to run for that state-wide CA office he’s talked about in the past),
    but isn’t Geithner slated to be Sec. Treasury – talk about the fox guarding the hen-house, a blind fox it seems.

    Another Drew (b7b852)

  11. JD wrote: Since I have not seen Madoff’s party affiliation mentioned, is it fair to surmise that he is a Democrat?

    He’s given mostly to Dems over the past twenty or so years. His biggest donations are to the Dem Senatorial Campaign Committee — headed by Schmucky Chuckie — which has received $25,000 from Madoff annually since 2005, the latest $25K being given in September of this year. Exceptions were local Pubbies like Alphonse D’Amato, Vito Fossella and some guy named Andrew Saul.

    Jack Abramoff, OTOH, only personally donated to individuals who were Republicans, although he had tentacles through proxies around Dems as well, including Hillary.

    L.N. Smithee (d29858)

  12. […] follow the excellent example set by the SEC and protect the public from nefarious person. Or maybe not: The Wall Street Journal […]

    Just Like the SEC? | Constant Conservative (2816cc)

  13. (Marko! Polos!)

    +

    These people missed so many warning signs, they might as well have been L.A. Times editors reviewing a Chuck Philips story.

    Patterico, thanks for forcing coffee out of my nose.

    Apogee (366e8b)

  14. I think what we’re seeing here is a manifestation of the problem of regulatory capture.

    That said, I’m biased; I didn’t approve of Chairman Cox’s job as a Congressman, and so I wouldn’t have appointed him to his current position.

    aphrael (e0cdc9)

  15. Markopolos was calling his operation a Ponzi scheme as far back as 1999. .

    If I call the cops and tell them a bank is being robbed, that is not the same as “criticiz[ing] the criminal justice system for not preventing crime.” I think the SEC was using Cox as a paperweight.

    MIke K (f89cb3)

  16. How did the New York Times, whose crack journalists could find out about Sarah Palin’s tanning bed in Alaska, miss a decade old, $50 billion fraud, a few blocks down the street?

    Perfect Sense (9d1b08)

  17. Comment by Perfect Sense — 12/18/2008 @ 11:45 am
    Don’t ask us who have believed that the NYT is a failing enterprise for some time.
    You should direct your question to the public-editor of the Times for his response.

    Another Drew (b7b852)

  18. miss a decade old, $50 billion fraud, a few blocks down the street?

    You ask this question, knowing that the same media outlet published Duranty’s fawning pieces on the glory of Stalinism, yet has still refused to return the Pulitzer for said vile propaganda, even after acknowledging the fraud perpetrated on the American public.

    Dmac (e30284)

  19. Not only was Bernie a Democrat his entire nuclear family was as well.

    My guesstimate is that close to 100% of his “victims” are democrats.

    Moral of the story is that they are not to be trusted.

    rab (7a9e13)

  20. “I listened last night to a radio interview with Markopolos…”

    What show? I’d like to hear that.

    Josh (494091)

  21. I’m so happy that they caught up with Martha, she improved the prison diets for many. :)

    TC (0b9ca4)

  22. ‘In 1999, trader Harry Markopolos wrote that “Madoff Securities is the world’s largest Ponzi Scheme,”’

    It ain’t even in the same ballpark as Social Security.

    Dave Surls (9503f1)

  23. My guesstimate is that close to 100% of his “victims” are democrats.

    There’s a certain sense of justice in that.

    Patricia (ee5c9d)

  24. Here’s the deal, or at least A DEAL: I was a commodity broker under the entire term of new SEC commish, Ms. Shapiro, and she was not only incompetent, she knew nothing about the futures markets, commodities in general, or anything about brokers and so on. The futures biz at that time amounted to forging client signatures on all account docs, churning, robbing, lying to clients, and in many cases “bucketing” trades, which is brokerspeak for the practice of settling a trade after the market has closed without the bothersome practice of trading on the exchange floor. I could go on and on but her record is of being a lousy regulator (meaning she didn’t enforce the laws on the books), a crony of all the bad guys, and the (rumored) recipient of gratuities from the people she was supposed to regulate. She did her job by using the industry itself to enforce regulations. Make no mistake, we need enforcement of EXISTING laws not new ones. Many technical analysts point out right now that flat returns over an eight year period is prima facie evidence of fraud; not a red flag, but actual evidence. Nothing will really change under Shapiro other than her under garments and her mind.

    howard432 (cc8b85)

  25. “Many technical analysts point out right now that flat returns over an eight year period is prima facie evidence of fraud; not a red flag, but actual evidence.”

    howard432 – That was also the give away to AIG cooking the books, 14% quarterly earnings increases year after year in a volatile industry, except that nobody could prove how they were doing it until the shit hit the fan in 2005.

    daleyrocks (5d22c0)

  26. […] in 1999… This is pretty sick. The Wall Street Journal writes: In 1999, trader Harry Markopolos wrote that “Madoff Securities […]

    Back in 1999… « Something should go here, maybe later. (c1e831)


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