At Madoff Hearing, Lawmakers Lay Into S.E.C.
By DIANA B. HENRIQUES
WASHINGTON — Securities regulators could not cool the
white-hot Congressional fury on Wednesday over their failure
to act on tips that might have exposed the Madoff scandal
almost a decade ago.
At a contentious hearing by a House Financial Services
subcommittee, Harry Markopolos, a private fraud investigator
from Boston, detailed his persistent but futile efforts to
spur the Securities and Exchange Commission to investigate
Bernard L. Madoff, going back to 1999.
Mr. Madoff was arrested in December and charged with running a
giant Ponzi scheme — the very accusation Mr. Markopolos said
he made repeatedly to S.E.C. employees in Boston and New York
to no avail.
Lawmakers spent the rest of the hearing in a heated dialogue
with senior S.E.C. staff members, getting little satisfaction
and suggesting the agency was the problem.
In the torrent of criticism that Mr. Markopolos and lawmakers
heaped on the S.E.C. and its senior staff members, some
complaints were serious — that the agency lacked the expertise
to tackle major frauds by big players and had no systematic
way of dealing with whistle-blowers. Others were sarcastic,
with Mr. Markopolos saying regulators seated in Fenway Park in
Boston would have trouble finding first base.
The agency’s officials repeatedly tried to explain that they
could not discuss the handling of the Madoff case without
jeopardizing that pending investigation — and were repeatedly
cut off by lawmakers who demanded specific information about
the handling of the case.
Representative Paul E. Kanjorski, Democrat of Pennsylvania and
the hearing chairman, criticized the official position as an
expression of arrogance that he said was at the root of the
agency’s regulatory failures.
Congress is in the midst of creating regulatory changes that
could change the agency’s fate, Mr. Kanjorski warned the panel
of official witnesses. Lawmakers want immediate candor about
the handling of the Madoff matter, not generalities, he said.
But the hearing became a collision of frustrations that, at
one point, prompted Mr. Kanjorski to accuse the staff members
of refusing to cooperate with a branch of government that
could wipe their entire agency off the regulatory map, if
necessary.
Representative Gary L. Ackerman, Democrat of New York, was
more blunt in his condemnation of the S.E.C. officials sitting
before him: “We thought the enemy was Mr. Madoff. I think it
is you.”
Mary L. Schapiro, the new chairwoman of the S.E.C., later
released a letter to the subcommittee’s senior members,
conceding that the hearing “cannot have been satisfactory for
you.” She asked to meet with them promptly to work out “a
course forward” that would both provide accountability and
maintain the integrity of continuing investigations.
“There needs to be a full accounting, both of Mr. Madoff’s
activities and why we did not detect the fraud, which we truly
regret,” she said.
The hearing had opened with Mr. Markopolos telling the panel
he had discovered another possible fraud, a $1 billion Ponzi
scheme, that he would report to regulators on Thursday.
Neither he nor his lawyers would provide any additional
details.
Mr. Markopolos also said he would tell regulators about a
dozen private foreign funds — which he said were “hiding in
the weeds” in Europe — that raised money for Mr. Madoff and
had sustained major losses.
These funds have not yet been publicly identified, he said.
And their silent victims most likely include investors of
“dirty money,” including Russian mobsters and Latin American
drug cartels, he said — although he acknowledged that he did
not have specific information about such investments.
A lawyer for Mr. Markopolos said later that his client would
make his reports to the S.E.C. inspector general, with whom he
will meet on Thursday, and “through other channels.”
Linda Chatman Thomsen, the S.E.C. enforcement director, told
lawmakers that the agency staff had demonstrated its
willingness and ability to pursue major fraud cases, including
70 Ponzi schemes. Still, it missed opportunities to zero in on
Mr. Madoff, who was arrested Dec. 11 at his New York apartment
and charged with operating a Ponzi scheme whose losses he put
as high as $50 billion, according to the civil and criminal
complaints against him.
Ms. Thomsen said the agency, under Ms. Schapiro, would work
hard to improve its receptiveness and responsiveness to
whistle-blowers like Mr. Markopolos. But her responses did not
seem to satisfy any of the half-dozen lawmakers who stayed at
the hearing after Mr. Markopolos left.
They had been far more riveted by Mr. Markopolos’s testimony,
which at times seemed to enter verbal territory more often
explored at organized crime hearings. He referred to his fear
that he would be killed if Mr. Madoff learned of his
investigation. At one point, noting his experience in military
intelligence, he described an offer he made to “go undercover”
for the S.E.C. — a proposal that was rebuffed.
And he recalled wearing gloves as he assembled a package of
information he planned to slip to Eliot Spitzer, when he was
New York’s attorney general, so he would leave no
fingerprints.
While one lawmaker asked whether this all wasn’t “a little
paranoid,” others agreed that Mr. Markopolos was wise to be
cautious, given the scale of the fraud he was trying to bring
to light.
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