Quotes from the Markopolos Book on Bernie Madoff - Brightwork Research & Analysis

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Markopolos’ book No One Would Listen covers the 40 year Bernie Madoff fraud.
The SEC was alerted by others about Bernie Madoff aside from Markopolos.

Introduction

The quotes from Markopolos’ books are quite shocking. These quotes are so amazing, we created a number of articles to make them available to ourselves in an easily findable way so that we could use them in the future.

Quote #1: Who Outside of Markopolos Alerted the SEC to Madoff?

In 2005 the SEC received an anonymous tip from a former investor who had taken his $ 5 million out of Madoff. The informant claimed he was “ deeply concerned that Madoff is running a very sophisticated fraudulent pyramid scheme, ”adding, “ I know that Madoff [ sic] company is very secretive about their operations and they refuse to disclose anything. If my suspicions are true, then they are running a highly sophisticated scheme on a massive scale. And they have been doing it for a long time. ”The SEC has no record of ever investigating this claim.

Reading this, it almost makes me wonder why the SEC believed Bernie Madoff when he claimed to be the mastermind of a $ 50 billion Ponzi scheme. If they had needed any more clues, they received an anonymous letter in March 2008, apparently mailed from the New York Public Library, which concluded, “ It may be of interest to you that Mr. Bernard Madoff keeps two (2) sets of records. The most interesting of which is on his computer which is always on his person. ”

Not many, but a few people outside of Markopolos also alerted the SEC about Bernie Madoff, and they did nothing — that is they investigated Bernie Madoff a single time, and found no evidence of fraud.

Quote #2: What Verification Did the SEC Perform on Bernie Madoff’s Fake Trades?

Every complaint we had made about the SEC was verified in this report. It turned out that some of the investigators “ weren’t familiar with securities laws.”The only time investigators tried to verify that Madoff actually was making the trades he claimed, a letter was drafted to be sent to the National Association of Securities Dealers (NASD) to obtain the necessary trading records — but that letter was never mailed, because the investigators decided that it would have taken them too much time to actually compare those records with Madoff ’ s so – called trades. In fact, if they had sent that letter, just the opposite would have happened — there were no trading records, because Madoff never actually traded. They wouldn’t have spent 30 seconds trying to match orders.

How could the SEC not even have checked his trading records? This brings up the question of whether the SEC is even interested in catching fraud.

Quote #3: The Lack of Research by Bernie Madoff’s Feeder Funds

Another glaring shortfall is in the sad state of HFOF due diligence. For the most part, these fund of funds are nothing more than marketing machines that pretend to conduct exhaustive due diligence. If you don ’t believe me, ask what their budget for due diligence is this year in both dollar terms and as a percent of revenue. If they can’t give you an immediate answer, then they aren’t even taking the time to measure what is supposed to be their most important function — preserving your capital! My observation is that most fund of funds spend a lot more effort on their marketing than on their due diligence which, of course, doesn’t help their investors very much.

I never lost interest; whenever I had the opportunity I’d take a look at his returns — and always shake my head in disbelief. As I finally had to admit to Neil, “ I hate to say it, but Bernie’s pulled off the perfect crime. He finds HFOFs that need his return stream to sell their stupid (high net worth) clients. He’s got to be managing at least $ 30 billion. ”And as long as he was able to raise more money each month than he had to pay out, he could keep going indefinitely; by offering such a high and steady return, presumably he had attracted many clients who were using their investment with him as a savings account.

The feeder funds promised protection and due diligence to investors, in reality, served as nothing but marketing organizations, with many companies simply investing 100% of their assets with Bernie Madoff.

Quote #4: How did Bernie Madoff Get Away With Having so Few Assets?

The bigger problem was that he claimed to be holding T – bills worth roughly $ 160 million at those year – ends and had no trading positions. The obvious question that should have been asked was: What happened to the rest of those billions? (emphasis added) But the auditors had no way of knowing what wasn’t there. If Madoff claimed all his money was in T – bills, there was nothing else for them to look at. I wrote to Neil that “ the audits that show only T – bills worth $ 160 million or so on a $ 1.47 billion portfolio have me wondering where did the missing $ 1.31 billion go?

This seems impossible to not catch. This is not advanced auditing, this is just math. Every time the auditors looked, Bernie Madoff looked like a tiny operation, because it barely had any assets (Bernie Madoff has been paying out money every year and made no return on money as he did not trade). How can anything resembling an audit not have caught this. This is a massive fraud, and not one of the auditors used by Bernie Madoff reported this to anyone.

If the auditors had only bothered to conduct a simple examination, they, too, would have discovered that this was a fraud. Instead it appears that they just assumed that one of the most powerful men on Wall Street could be trusted to actually own the $ 160 million in T – bills he claimed. It would have been simple to check. When you buy a T – bill, there has to be a counterparty selling it to you. There are a limited number of places from which you can buy them. Madoff could have bought them from the Federal Reserve Bank of New York directly or from a primary dealer. He even could have bought them in a secondary market, although most people don’t do that. What the accountants could have done was ask him, “ Say, Bernie, who’d you buy these things from? ”Bernie would have told them something, and then they could have gone to that party and asked, “ Did you sell Bernie Madoff a hundred sixty million dollars ’worth of T – bills? Mind if I take a look at the trade confirmations? ”

If an auditing firm can’t verify anything, and can’t even find a shortfall of billions of dollars the audits seem to serve no other purpose than as Markopolos states — a fake legitimacy to trick investors. If this is all the auditing firms are going to do, they don’t even have to appear on site. They can simply provide their fake audits from a distance.

Quote #5: How Bernie Madoff Engaged in Auditor Hopping

Each of those three statements was done by a different accounting firm. In 2004 Madoff had used a regional firm based in Stamford, Connecticut. In 2005 he had used PricewaterhouseCoopers in Rotterdam, the Netherlands; and a year later he had used PricewaterhouseCoopers in Toronto. Obviously, he was auditor shopping. It meant he didn’t want to have an ongoing relationship with an auditor because the auditor knew too much from the previous year’s audit. Using PricewaterhouseCoopers in different countries was pretty clever. Many people looking at these statements would see the PricewaterhouseCoopers name and assume it was PricewaterhouseCoopers U.S., a respected firm. And they’d see that name at least two years in a row, probably more. What many people don’t realize is that PricewaterhouseCoopers is actually a different corporation in different countries. The corporations have the same brand name, but basically they’re franchises. They operate independently under the same name. Very few people know the accounting system or the standards for licensing an accountant in those countries. While it’s the same brand, it may not be the same quality as in the United States. That’s an obvious red flag. And at least I have to wonder if anyone at these auditing fi rms ever questioned why a large American hedge fund had picked them out, above all the thousands of qualifi ed accounting fi rms in the United States, to conduct its year – end audit.

Even more surprising was what we found when we examined these audits. Supposedly Madoff had gone to all cash at the end of each of these three audited years, and was holding Treasury bills. While Madoff had boasted he was invested in the market only six to eight times a year, the fact that he had nothing to audit at the end of the year — no stocks, no options — was much too convenient, and especially because he was in T – bills. In more than two decades of looking at audits, none of us had ever seen this before. It made the audit useless because there was nothing for the auditors to inspect.

This is the problem with companies being able to choose their auditors.

This means that the company can easily switch auditors. This is in addition to simply pressuring the auditing firm to go along. The issue is that the auditing firms have no allegiance to any public good. They seek profit maximization. This means they have a conflict of interest before they even show up on site. A second issue is that auditors don’t report companies to authorities. None of the scandals such as Enron or the upcoming GE scandal have come from auditors coming forward. It was when the companies spiraled out of control that the truth was learned.

Quote #6: How Did the Wall Street Journal Miss the Bernie Madoff Story?

The only assumption I could make was that one of his editors — or perhaps the Dow Jones lawyers — had stopped him. In my mind, at least, I was convinced that someone high up at the Journal had decided it was too dangerous to go after Bernie Madoff. The question I wrestled with for a long time was: Why? When the newspaper that existed only to cover the financial world was handed a detailed explanation of the biggest fraud in Wall Street history, why wouldn’t someone at least conduct a cursory investigation? Three phone calls, two phone calls, that’s all it would have taken to verify that I wasn’t some kind of nut, that the accusations I was making were based on fact. A half hour, that ’s all. Instead, Wilke spent more than a year making commitments that he never fulfilled.

The Wall Street Journal has historically been in the business of promoting business rather than critiquing business. Therefore it is little surprise that the WSJ passed on investigating this story. This points to the failings of the financial media. The WSJ did, however, break the Theranos story. But one questions if the WSJ would have broken the Theranos story if Theranos had been connected on Wall Street.

Quote #7: How the SEC Let Bernie Madoff Go After Lying to Them

The SEC Division of Enforcement officially closed this investigation more than a year later, in November 2007. Their report acknowledged that Madoff had lied, or as they described it, “did not fully disclose” to the examiners “the nature of the trading conducted in the hedge fund accounts or the number of such accounts.” But even then they concluded, “The staff found no evidence of fraud. The staff did find, however, that BLM acted as an investment advisor to certain hedge funds, institutions and high net worth individuals in violation of the registration requirements of the Advisors Act. The staff also found that Fairfield Greenwich Group disclosures to its investors did not adequately describe BLM’s advisory role and described BLM as merely an executing broker to FFG ’s accounts. As a result of discussions with the staff, BLM registered with the Commission as an investment advisor and FFG revised its disclosures to investors to refl ect BLM ’s advisory role. “We recommend closing this investigation because both BLM and FFG voluntarily remedied the uncovered violations, and because those violations were not so serious as to warrant an enforcement action.”

This demonstrates how incompetent the SEC was. This is a fraud where the perpetrator did not actually make trades. This would have been very easy to verify. The assets of Bernie Madoff could also have been verified. None of this was done.

Quote #8: After 2 Years of Investigating Madoff the SEC Found No Fraud

“We’re not in the information systems business.”

Many companies use this line to explain why they should not build (or should not even run) their own systems. This line was used to justify a great deal of outsourcing of information systems. Even if you do not create software, you use it. The act of using software, especially software that mediates your key processes, puts you in the systems business. If you contemplate changing your business process, this necessitates changing your information system. If you don’t have the ability to change your own software, you are at the mercy of whoever does.

We understand why people say they are not in the information systems business. It’s mostly because they don’t want to be in the information system business. Additionally, it’s often because they were not very good at information system building and information system implementing. However, wishing to leave the systems business is not the same as leaving the systems business.

IDC has come to the same conclusion.

“”Enterprises are turning away from traditional vendors and toward cloud providers. They’re increasingly leveraging open source. In short they are becoming software companies.”””

The argument that “we are not in the software development business,” as pointed out by Dave McComb, implies that one can stay out of the software development business. The fact is packaged solutions, in most cases, will not cover all of the requirements of a company. This means the packaged applications have to be customized, and at some point, it is more cost-effective and sustainable to develop applications internally. This is not to say companies should not leverage packaged solutions where appropriate. But the advice on the part of major consulting companies and vendors is to the degree possible to eliminated internally developed applications.

Quote, #10: The SEC Thought Bernie Madoff Did not Look Like a Ponzi Schemer

Bachenheimer told the inspector general that she didn’t really think I was credible because I didn’t work for Madoff and hadn’t invested with him. As she said, Markopolos “ was not an employee and, as far as I knew, received no information from Madoff. ”In other words, Madoff didn’t tell me he was running a Ponzi scheme. As for all the red flags in my report, she thought they were only “ theories ”and that “ it wasn’t something we could take and bring a lawsuit with. . . .We had to test it and substantiate it. ”

The inspector general did confirm that at least part of Cheung’s reluctance to accept my offer to help may have come from the fact that she simply didn’t like me. Simona Suh told David Kotz that she didn’t know why Cheung disliked me. Asked why Meaghan Cheung refused to meet with me, she said, “ I don’t know what her reasons were. I knew her general impression of him was she was skeptical of him, but I don’t know what her reasons for not meeting with him were. ”Later she added, “ I remember hearing that she thought he was kind of condescending to the SEC. ”

Peter Lamoure, who agreed with Cheung. “ In short, ”he wrote in an e-mail, “ these are basically the same allegations we have heard before. The author’s motives are to make money by uncovering the alleged fraud. I think he is on a fishing expedition and doesn’t have the detailed understanding of Madoff’s operations that we do, which refutes most of his allegations.”

Simona Suh also admitted later that the staff had been skeptical of my claims because Madoff “didn’t fit the profile of a Ponzi schemer, at least as we — in the world that we knew then. ”The prime requisite for someone to successfully run a Ponzi scheme is to not look like they are running a Ponzi scheme. I can’t even imagine what a profi le of a Ponzi schemer would look like.

The real problem was that too many of the SEC’s investigators were lawyers, so they were expecting me to provide legal proof, which basically is the lowest standard beyond which you go to jail. Certainly a math proof is a much higher level of proof than a legal proof. In a legal case, two juries hearing precisely the same evidence can easily reach two different verdicts; but with a math problem there is only one correct answer.

The SEC’s inability to review Markopolos’ ample mathematical and statistical evidence, and instead to go off of their feel for what Bernie Madoff might be is amazing. First of all, the fact that Bernie Madoff’s returns only had a 6% correlation to the market should have tipped them off that something was not right. How can the returns of a fund have such a small correlative value — if that entity is investing the market?

Quote #11: How Could the SEC Have Not Known Bernie Madoff Had a 17th Floor?

Bachenheimer told the inspector general that she didn’t really think I was credible because I didn’t work for Madoff and hadn’t invested with him. As she said, Markopolos “ was not an employee and, as far as I knew, received no information from Madoff. ”In other words, Madoff didn’t tell me he was running a Ponzi scheme. As for all the red flags in my report, she thought they were only “ theories ”and that “ it wasn’t something we could take and bring a lawsuit with. . . .We had to test it and substantiate it. ”

The inspector general did confirm that at least part of Cheung’s reluctance to accept my offer to help may have come from the fact that she simply didn’t like me. Simona Suh told David Kotz that she didn’t know why Cheung disliked me. Asked why Meaghan Cheung refused to meet with me, she said, “ I don’t know what her reasons were. I knew her general impression of him was she was skeptical of him, but I don’t know what her reasons for not meeting with him were. ”Later she added, “ I remember hearing that she thought he was kind of condescending to the SEC. ”

Peter Lamoure, who agreed with Cheung. “ In short, ”he wrote in an e-mail, “ these are basically the same allegations we have heard before. The author’s motives are to make money by uncovering the alleged fraud. I think he is on a fishing expedition and doesn’t have the detailed understanding of Madoff’s operations that we do, which refutes most of his allegations.”

Simona Suh also admitted later that the staff had been skeptical of my claims because Madoff “didn’t fit the profile of a Ponzi schemer, at least as we — in the world that we knew then. ”The prime requisite for someone to successfully run a Ponzi scheme is to not look like they are running a Ponzi scheme. I can’t even imagine what a profi le of a Ponzi schemer would look like.

The real problem was that too many of the SEC ’s investigators were lawyers, so they were expecting me to provide legal proof, which basically is the lowest standard beyond which you go to jail. Certainly a math proof is a much higher level of proof than a legal proof. In a legal case, two juries hearing precisely the same evidence can easily reach two different verdicts; but with a math problem there is only one correct answer.

Quote #12: How Incompetent Was the SEC in Pursuing the Bernie Madoff Case?

This is Markopolos asking an SEC what they knew about derivatives.

I told her that a derivatives fraud required a much higher level of financial sophistication than an accounting fraud. It wasn’t necessary for her to understand derivatives, she said, telling me that the SEC s Office of Economic Analysis in Washington, D.C., was staffed with PhD ’s who were capable of understanding derivatives.

When this conversation began I was hoping we would have a collaborative relationship; instead it was turning confrontational. I explained to her that the formulas used by PhD’s in academia were completely different from those used in the industry. I wasn’t trying to be insulting; I was just trying to explain to her that the math was different and the way it was used in practice was very different than in academic institutions.

“ Your agency sucks! ”I told him. “ Your people are beyond incompetent. I don t think they’re capable of catching a cold in the winter. I can’t even believe some of these people get dressed by themselves in the morning. I mean, most of your staff barely respond to heat and light.

Ed felt as terrible about it as I did, but there was nothing he could do about it. He reminded me that Boston and New York had a competitive relationship. If a referral came to New York from Boston, the New Yorkers were more likely to think Boston was trying to dump a crap case on them rather than respecting policy. Probably the last thing they believed was that Boston had a career – making case and was handing it over because it was the right thing to do. It was like the Red Sox trading Babe Ruth to the Yankees.

The problem is that the SEC is funded by Congress, so its employees are particularly sensitive to congressional inquiries. So for a middle – level SEC employee with ambitions, any case in which an important politician is involved is a case he or she wants to stay far away from. It’s a lot safer to go after small potatoes.

The SEC was entirely out of its depth in managing the Bernie Madoff case. They also quite obviously feared doing anything to Bernie Madoff because he was so well respected on Wall Street. This shows a long term pattern of only bringing cases against small-time operators.

Quote #13: How New York SEC Office Buried the Bernie Madoff Evidence

As I learned later, the regional administrator of the Boston office, Walter Ricciardi, wanted to keep this case for himself. He knew what it was; he knew it was potentially a career maker. He wrestled with the decision to turn it over to New York. He felt it was the strongest case he’d seen in his entire career. But as he told the SEC’s inspector general, he had spent his career preaching cooperation between the different regions, and it was up to him to take a leadership role in making that happen. He knew that if he turned over to New York a case that would generate headlines and promotions, everyone would know how serious he was about regional cooperation. I knew that if Boston had kept the case they would have investigated thoroughly and I would have been right there to advise them.

The last thing any of us expected was that the New York office would take the evidence and basically bury it. In retrospect, I don’t know why I was surprised. Expecting the New York office to respond any differently than it had in the past was sort of like handing the Three Stooges a rubber mallet and expecting them not to hit each other over the head with it.

This is amazing in that Markopolos’ book unveils the rivalries within the SEC that interferes with the SEC from doing its job. This is only one of the many factors that prevented the SEC from being an effective regulatory organization.

Quote #14: Why the Cost of Running Bernie Madoff’s Fund was Suspicious

In fact, when we examined the financial structure of his operation, there seemed to be no logical reason for him to be in business. Running his fund actually was costing him a fortune, in addition to the immense time and effort it required to keep it going. Bernie needed money to invest. Assuming the profits he returned to his investors were his cost of getting that money, it would have been substantially less expensive for him simply to borrow the money from short – term credit markets.

The extensive network of feeder funds that Madoff employed and the large compensation or cut that he provided them made do sense. If Bernie Madoff’s success had been real, he could have simply published his returns and cut out the feeder funds, and had an unlimited number of clients line up to receive stable and roughly 12% returns per year.

Quote #15: How SEC Responded to the Madoff Case Brought by Markopolos

Essentially, the SEC turned down all of my cases the same day that I submitted them. I was appalled. I had handed over evidence proving that companies had stolen billions of dollars from investors, and the SEC had responded that it was okay — the companies were not going to do it again. In one instance, one of the nation’s five largest mutual fund companies had monthly turnover percentages in its international equity funds in the 1,100 to 1,300 percent range per month! Now, there is absolutely no way on earth that those were legitimate trades done by honest buy – and – hold long – term investors. But these SEC enforcement attorneys couldn’t have cared less. I was told by a high-ranking enforcement official at the SEC in Washington, D.C., in these words: “ We’re done with market timing. The industry has gotten the message.”

When I told one of the SEC’s top enforcement attorneys about that, he told me that in a few weeks this bank was going to be purchased by a much larger bank, and the Federal Reserve wouldn’t appreciate our starting this case now, because it could gum up the merger. “ It doesn’t serve any purpose to go after them now, ” he said.

While I would have loved to pursue these cases, there was nothing I could do. I had to drop them. Without the support of the SEC, it was simply too dangerous for my whistleblowers to blow any whistles. They might very well have lost their jobs and been placed on the industry’s blacklist.

It was then that I began to understand that the SEC is a government agency that had been captured by the private industry it was created to regulate. The mission of the agency supposedly was to protect investors from the financial predators in the industry; instead, it was protecting those financial predators in the industry from the investors. The people charged with regulating the industry were primarily concerned with their own paychecks. They didn’t care a rat’s ass about protecting investors. And it was then that I realized that I had two opponents, Bernie Madoff and this nonfunctioning agency that seemed to me to be doing everything possible to insulate him.

This story of Bernie Madoff illustrates the point that the SEC seems to care more about its preception than it does about protecting investors. The SEC serves as a place of employment for those seeking higher-paid work in Wall Street, and their interest in actually finding and having cases prosecuted, particularly if those entities are powerful is shockingly low.

Quote #16: How Could Feeder Funds Invest 100% of their Assets with Madoff?

We didn’t believe that any responsible asset manager would have 100 percent of its funds with one man with one strategy. Even investing 20 percent of a fund in one manager is extreme; 25 percent is insanely extreme, and anything beyond that is just plain crazy. The French, who loved him, would be slaughtered, while places like Turkey, which stayed away from him, would not be hurt as badly.

Not only did these funds invest 100% of their assets with Madoff, but in many cases, they performed no research into Madoff. They promised their investors that they would do research into Madoff, yet none of them did. Without these complicit feeder funds, Madoff could have never stolen money from so many.

Quote #17: Investors Who Knew Bernie Madoff Was Breaking the Law

But it became clear to me that the Europeans believed he was front – running — and they took great comfort in it. They thought it was phenomenal because it meant the returns were real and high and consistent and that they were the beneficiaries of it. They certainly didn’t object to it; there was a real sense of entitlement on this level. To them, the fact that he had a seemingly successful broker – dealer arm was tremendously reassuring, because it gave him plenty of opportunity to steal from his brokerage clients and pass the returns on to them. They never bothered to look a little deeper to see if he was cheating other clients — like them, for example.

This means that investors thought Madoff was stealing from other investors in order to give them enhanced returns. Markopolos proposes that this is something that gave these investors, who were quite wealthy and therefore they deserved the preferential treatment great comfort.

Quote #18: Was Madoff as Financial Cult?

Of the 20 meetings we had, the managers from 14 of those funds told me they believed in Bernie. Listening to them, I got the feeling it wasn’t so much an investment as it was some sort of financial cult. What was almost frightening was the fact that every one of those 14 funds thought that they had a special relationship with him and theirs was the only fund from which he was continuing to take new money. At first I thought the only reason they would admit to me, someone they didn’t know at all, that Madoff was managing their money was because they trusted Thierry, but then I began to understand that they were telling me this to impress me. The message was practically the same in every one of those 14 meetings: “ We have a special relationship with Mr. Madoff. He ’s closed to new investors and he takes money only from us.” When I heard that said the first time I accepted it. When I heard it the second time I began to get suspicious. And when I heard it 14 times in less than two weeks, I knew it was a Ponzi scheme. I didn’t say anything about the fact that I heard the same claim of exclusivity from several other funds. If I had, or if I had tried to warn anyone, they would have responded by dumping on me. Who was I to attack their god?

By pretending to be exclusive, Bernie switched the dynamic so that his prospects in some cases begged him to get into the fund, which was a Ponzi scheme.

Quote #19: The SEC Did Not Even Read Damaging Stories About Bernie Madoff

Hidden within the story was even more evidence of Madoff’s deception. He had admitted for the first time that he was running as much as $ 7 billion, which meant he had to have an established line of credit from some bank, and there wasn’t a bank in the world that was going to give a multibillion-dollar line of credit to a single broker-dealer without equity and without completely revealing the nuts and bolts of the entire operation. The silence from the SEC was particularly discouraging. It was difficult to believe that they could read this story and not open an investigation. As I later learned, the answer was that they didn’t read the story. Apparently the SEC does not have a publication budget, meaning staff members have to pay out of their own pockets for any industry material. They even have to pay for their own subscriptions to the Wall Street Journal, so obviously very few of them would be reading MARHedge, which cost more than a thousand dollars annually.

The SEC seems to be a holding tank for inexperienced resources that are not given the tools to do their job. How could the SEC not even have a budget for the people that worked at the SEC to read the Wall Street Journal without paying for it out of their own pocket. There are many financial publications that are expensive and that are necessary to monitor the financial area.

Quote #20: Was Bernie Madoff Too Big to be A Fraud?

This is an important point. Madoff’s operation was too big to be believed. Once I stated how many billions he purportedly was managing, people stopped listening. In a world in which a $2 billion hedge fund was considered huge, the fact that I was claiming Madoff was running between $ 12 and $20 billion made me about as believable as those people claiming NASA had staged the moon landing in a warehouse. Journalists, SEC staff, and others just didn’t have enough professional skepticism to at least conduct an initial investigation to see if any of my claims just might be valid.

Size and influence is a massive advantage. In 2019 Markopolos investigated GE, which has been putting out false books for decades. GE has been lying fire hydrant for decades, and the only thing that will stop GE is not regulators, and not critical thinking skills, but simply running out of cash. Madoff was never caught by regulators, or by critical thinking skills. He was caught because he ran out of cash. The global recession of 2008 meant investors needed money and pulled a sizeable portion out, and his fund could not meet the redemption requirements because it had been a 40 year Ponzi scheme. We have a serious problem in that things have to entirely run off of the tracks before we realize there is a problem.

Quote #21: Was Bernie Madoff Too Big to be A Fraud?

This is an important point. Madoff ’s operation was too big to be believed. Once I stated how many billions he purportedly was managing, people stopped listening. In a world in which a $2 billion hedge fund was considered huge, the fact that I was claiming Madoff was running between $ 12 and $20 billion made me about as believable as those people claiming NASA had staged the moon landing in a warehouse. Journalists, SEC staff, and others just didn’t have enough professional skepticism to at least conduct an initial investigation to see if any of my claims just might be valid.

Quote #22: How Did Forbes Miss the Bernie Madoff Story?

So in early March I sent a copy of my May 2000 SEC submission to a senior reporter at Forbes, a man I’d been casually introduced to by a friend who was my former finance professor at Boston College. I explained that I was enclosing evidence of what I believed to be the largest Ponzi scheme in history. I like to believe that if someone put a potentially Pulitzer Prize – winning story in my hands and said, take it, I’d be smart enough to at least investigate. But boy, the lack of serious interest was astonishing. I think the editors at Forbes, like so many others we were to encounter, were victims of their own hubris. These were people who took pride in knowing that they were the experts on the fi nancial industry. They knew that the largest hedge funds were running $2 billion, give or take a few hundred million. So when this editor received a several – page letter from some guy in Boston he’d never heard of claiming that he had discovered a hedge fund six to 10 times larger than anything the experts knew about and it’s a complete fraud, it was pretty doubtful that he was going to take it very seriously. In fact, I suspect that the only way he would have taken it less seriously was if it had been written in crayon. He was just too smart to recognize the truth.

Forbes has since been sold to a corrupt Chinese construction firm as we covered in the article Can You Trust IDC and Their Now China Based Owners?, however, Forbes has historically been in the business of promoting business rather than critiquing business.

This is what China does to booksellers who write information critical of the Chinese government. And this is who the US FCC through would be a good country to control Forbes.

The US is perfectly fine with any type of media censorship. The only problem brought up regarding press freedom is with Putin.

Currently, through paid placement, companies use Forbes to run their PR releases through. It is entirely unsurprising that Forbes did nothing with the Madoff lead they were provided by Markopolos.

Quote #23: Were Some Members of the SEC Looking for Jobs with Bernie Madoff?

The SEC employs low paid resources who use their job with the SEC to find employment in the companies they are meant to regulate.

He (Madoff) concluded, accurately and decisively, “ These guys, they work for five years at the Commission, then they become a compliance manager at a hedge fund. ”And, he added, he knew that was true because every time an SEC investigator came up to his office he or she would ask for an employment application.

How did the SEC spend two years investigating the SEC and come back with nothing? How can individuals regulate companies when they are using the SEC as a platform to find jobs in industry? Wall Street is so highly paid that in order to make the SEC a career option, the SEC would need to increase its pay. With more staff than it needs, this could be accomplished by reducing its 3,500 employees and using that funding for higher pay and other resources for the remaining staff.

Quote #24: How Many People Knew the Truth About Bernie Madoff?

Probably what surprised me most was how many people knew Madoff was a fraud. Years later, after his surrender, the question most often asked would be: How could so many smart people not have known? How could he have fooled the brightest people in the business for so long? The answer, as I found out rather quickly, was that he didn’t. The fact that there was something strange going on with Bernie Madoff’s operation was not a secret on Wall Street. As soon as I started asking questions, I discovered that people had been questioning Madoff’s claims for a long time; but even those people who had questioned his strategy had accepted his nonsensical explanations — as long as the returns kept rolling in.

Conversely, it was obvious, at least in my opinion, that the largest investment firms either knew or suspected that Madoff was a fraud. None of them — Merrill Lynch, Citigroup, Morgan Stanley — had invested with him. In fact, a managing director at Goldman Sachs’s brokerage operation admitted to me that they didn’t believe Madoff’s returns were legitimate, so they had decided not to do business with him.

The industry knew, there ’s no question about that. After Madoff collapsed, I was told so many stories about people who knew he was a fraud and warned others. For example, I’ve been told about an e-mail a manager at one of the largest investment houses sent to a Madoff client in 2005, warning him that “ everybody here knows Madoff is a fraud ” and urging him to get his funds out. Finally, Neil told him right to his face that Madoff was a fraud. When the man started to defend his fund’s investments, Neil challenged him: “ Check the trade tickets. There are no trades. Neil and I both believed very strongly that he knew. He was much too smart to believe in either the tooth fairy or Bernie Madoff. But his attitude was very typical of the attitude on Wall Street. Those people who knew something was wrong and had not invested with him went along with the unspoken industry code: If it’s not my business and it doesn’t affect my business, I’m not going to get involved. And those people who were invested with him and knew something was wrong kept silent because his returns were too good. Bernie Madoff could not possibly have gotten away with it for so long without the silence of so many people. Madoff wasn’t an aberration; he was a creation of the profit – at – all – costs culture of Wall Street. And maybe the scariest thing about Bernie Madoff?

The question is why. It appears that many individuals and entities (including many big investment banks) knew — and yet they did nothing to warn anyone, and did not report Bernie Madoff to the SEC. Markopolos proposed that “those who live in glass houses don’t throw stones.” Therefore these companies are also involved a (lesser degree) of fraud and did not want attention brought on themselves.

Quote #25: How Much Money Did Bernie Madoff’s Manage?

According to what we were able to piece together, Madoff was running at least $ 6 billion — or three times the size of the largest known hedge funds. He was the largest hedge fund in the world by far — and most market professionals didn’t even know he existed!

This was in early 2001, when we estimated he was running less than $ 20 billion. When he surrendered in 2008, it was estimated he was running roughly $ 65 billion. You do the sad math.

After he collapsed, investigators found evidence that he was taking money from well over 339 funds of funds in over 40 countries, and estimates of the total amounts investors thought they had invested with Madoff as of their November 2008 monthly statements were as high as $ 65 billion.

Bernie Madoff’s “funds under management” — which is not entirely accurate as he was paying investors with new investor’s money — reached an extremely high value. Yet, he never in 40 years placed a trade. How could Bernie Madoff have been providing a 12% return on such a (hypothetically) large portfolio without showing the signs of actual trading? This illustrates how inept the SEC was when looking at the Bernie Madoff operation.

Quote #26: Why Were Bernie Madoff’s Results Clearly Not Market Driven?

I was right, he agreed. Madoff ’ strategy description claimed his returns were market-driven, yet his correlation coefficient was only 6 percent to the market and his performance line certainly wasn’t coming from the stock market.

At that point, I still had no idea how much money Madoff was handling or for how many clients. Nobody did. As we rapidly discovered, that secrecy was key to his success. Because this operation was so secret, everybody thought they were among a select few whose money he had agreed to handle. Madoff had not registered with the SEC as an investment advisory firm or a hedge fund, so he wasn’t regulated. He was simply a guy you gave your money to, to do whatever he wanted to do with it, and in return he handed you a nice profit. He was the Wizard of Oz, and he made everybody so happy that they didn’t want to look behind the curtain.

The SEC, according to Markopolos could not run mathematical analysis that could have told them that Bernie Madoff’s fund was a scam. This analysis was provided by Markopolos to the SEC, and they could not ever interpret the results. This points to what Markopolos describes as far too many attorneys and not a sufficient number of people trained in the right type of math to catch fraud. Secondly, the SEC relied upon audits, for which fake documents can be created rather than mathematical and statistical analysis.

Quote #27: How Bernie Madoff, Even After Caught Thought Himself a Financial Expert

But it was about halfway through this interview, when Kotz asked him about me, that his attitude changed. “So let me ask you,” Kotz said, consulting his notepad, “How much do you know about Harry Markopolos?” Madoff immediately waved his arm dismissively. He bristled. I was noting, he told Kotz. “This guy is getting all this press, all this attention. He thinks he’s some kind of seer. But believe me, its all overblown. You know what? He’s really a joke in the industry.” Madoff continued, explaining that I was “a guy who was just jealous” of his business success. As Kotz listened to him, he began to realize that Madoff considered me a competitor and it appeared to be bothered by the fact that I was getting attention that rightfully belonged to him. Later in the interview he defended his investment strategy, which I had ripped apart, telling Kotz, “ All you have to do is look at the type of people I was doing this for to know it was a credible strategy. They knew the strategy was doable. They knew a lot more than this guy Harry.

What is odd about this is that Madoff certainly knew that he was running a Ponzi scheme. He never traded, so how can the customers he lied to be used as evidence that he was offering an excellent financial product?

Quote #28: Financial Individuals Who Carry Two Business Cards to Escape Regulation

It seems to me that the existence of so many fi nancial regulators leaves gaping holes for financial predators to engage in what I called regulatory arbitrage. They find those regulatory gaps where no agency is looking or there is some question about which agency has the oversight responsibility, and they exploit them. I’ve seen corporations in which employees have two very different business cards. One card identifi es them as a registered investment adviser, which falls under SEC regulation, while the other card has their bank title, which falls under the control of banking regulators. It s a very clever ploy: When the Federal Reserve comes in to question them, they claim to be under the SEC ’s jurisdiction, and when the SEC shows up, they explain they ’ re under the Fed ’ s jurisdiction. If both the Fed and the SEC were to show up to search for fraud in the company ’ s pension accounts under management, that company could claim, “ I’m sorry, but those are Employee Retirement Income Security Act (ERISA) accounts and they fall under the Department of Labor, so unfortunately you don’t have jurisdiction. ” Obviously this structure allows fi rms to play regulators against each other, and literally to choose to be regulated by that agency least likely to pose any problems.

Many people in finance are simply not regulated because first, the financial regulation entities barely do anything, and secondly, many people in finance lie to regulators (and get away with lying) to regulatory entities. Maybe instead of checking the business card, they should check their LinkedIn profiles.

Quote #29: The Logic of Getting Rid of the SEC

Twelfth, reform the SEC or create a new super – regulatory agency. There is, of course, another option. If the SEC does not reform itself, it should be disbanded. Just zero out its budget and put every one of those 3,500 staff members on the streets, because right now they do not offer us any real protection. This would be harsh, I know, but anything short of a bottom – to – top reorganization of the SEC will not be sufficient to fight the financial frauds that plague our system.

What is the point of paying to have an SEC if it is a useless organization? By removing the SEC, we can simply admit that there is no financial regulation. Wall Street wants to have an SEC, but they want it to be ineffective.

Quote #30: Why Does the SEC Have No Funding for Financial Publications?

If you walk into any substantial investment industry firm, you’ll find a library stocked with professional publications for its staff to use as an important resource. Among those publications would be the Journal of Accounting, Journal of Portfolio Management, Financial Analysts Journal, Journal of Investing, Journal of Indexing, Journal of Financial Economics, even the Wall Street Journal. But if you walk into an SEC office, you probably won’t see any of these publications — and you won’t find an investment library. So where do SEC staffers actually go to research an investment strategy, or find out which formulas to use to calculate investment performance, or even figure out what a CDO – squared is? Apparently, the SEC staff uses Google and Wikipedia — because both of them are free. Good luck to a man or woman attempting to figure out a complex financial instrument using free Web resources. The SEC makes sure its staff will remain uneducated — by not providing the educational tools they need.

The SEC has a problem with resource allocation. To have the payroll for 3,500 employees, but to not have Wall Street Journal access or various more expensive financial publications so that they can be informed.

Quote #31: Why Does The SEC Lack of a Fraud Risk Database?

The very first thing the SEC employees who received my submission should have done is gone directly to the SEC database on their computers to see if the red flags I raised were comparable to information learned about other Ponzi schemes. Unfortunately, that would have been impossible because there is no existing SEC database like that. The SEC should build a strong online knowledge center for its staff. In this case, when staffers keyed in “ Ponzi ” they would have been able to find diagnoses of past Ponzi schemes and several checklists teaching them what to look for, what questions to ask, and how to most efficiently solve such cases. A Ponzi scheme is actually one of the easiest fraud schemes to detect because there is no underlying investment product and no trading, while the assets are being diverted to pay off investors. Yet this case was assigned to SEC staffers who had absolutely no experience and little knowledge of Ponzi schemes, and they really had no place within the SEC to go to learn about them.

The SEC has a problem with resource allocation. To have the payroll for 3,500 employees, but to not have a risk profile database to input its 800,000 yearly tips entirely disables the SEC from doing its stated role as a financial regulator.

Quote #32: How Does the SEC Measure its Own Performance?

Currently, the SEC measures the performance of a regional office by the number of exams it conducts annually, a totally worthless statistic. The SEC ’s stated mission is to protect investors and to find or prevent fraud. As David Kotz’s report has shown, conducting poorly planned and executed exams and then promoting staff based on the completion of those exams is not a deterrent to fraud. Incredibly, people involved in the Madoff examination were promoted. The goal should never be how many pieces of paper were inspected, but rather how much fraud was caught or prevented.

This is a bureaucratic approach that is not focused on protecting investors but is based upon internal metrics that have nothing to do with organizational effectiveness.

Quote #33: Are There Too Many Lawyers in Financial Regulation?

Commissioners were lawyers. Now, I have nothing against lawyers. I’m sure they are good to their children, and many of them contribute to charities. But putting them in charge of supervising our capital markets has been an unmitigated disaster. It would be like putting a political appointee in charge of the Federal Emergency Management Agency and expecting him to handle a flood. Very few SEC lawyers understand the complex financial instruments of the twenty – first century, and almost none have ever sat on a trading desk or worked in the industry other than doing legal work. A primary reason the SEC has reached this point is that historically the SEC Commissioners have been lawyers who may know where to find the best power lunches in Washington, D.C., but don’t have a clue as to how the financial industry actually operates on a day – to – day basis.

Lawyers tend to lack domain expertise outside of law. In the technology area, I have personally worked with lawyers, and even those lawyers that work in technology tend to know very little about it. Lawyers are needed to engage in lawsuits, but they have been overapplied not only at the SEC, but in many areas of society.

Quote #34: How Many Tips Does SEC Receive Per Year?

The difficulty, she explained, was that the SEC received as many as 800,000 tips a year. Although the majority of them were along the lines of “ I think my broker is stealing from me because my account was down 20 percent last month ”while the entire market was down 20 percent, there was no standard for separating the frivolous from the Madoffs. There were just too many tips and not enough people to follow up.

The SEC has an additional problem in that they lack the computer systems to even profile the tips they receive. Most tips simply go into a circular file.

Quote #35: The Corruption of the National Association of Securities Dealers

National Association of Securities Dealers (NASD), which had become FINRA, might have investigated Madoff, I replied that I would never have taken this case to those industry – created organizations. “ I had a lot of bad experiences as an over – the – counter trader in the late 1980s with the NASD, ”I said. “ What I found them to be was a very corrupt self – regulatory organization, that if you took a fraud to them they would ignore it as soon as they received it. They were there to assist industry in avoiding stricter regulation from the SEC. ”

Representative Sherman got it. “ You have basically said that our two main securities regulatory agencies see their role as protecting the major institutions on Wall Street rather than protecting investors. ”

“ If this is what our regulators are like, we don’t need them. It’s better the public knows they aren ’ t protected than to think they have protection from these clowns. ”

Two days after this hearing, the SEC’s acting general counsel, Andrew Vollmer, was replaced. Five days later Linda Thomsen resigned; according to an SEC press release, she was leaving to “ pursue opportunities in the private sector. ”Five months later, Lori Richards, the SEC ’ s director of the Offi ce of Compliance, Inspections and Examinations, resigned to pursue other growth opportunities. Eventually all but one of the SEC directors on that panel was replaced: The acting general counsel was replaced by David Becker, the head of enforcement by Rob Khuzami, and the director of compliance by John Walsh. It was nearly a clean sweep.

Like the SEC, the NASD simply pretends to be regulating industry. They are captured by the entities they propose that they regulated.

Quote #36: Would the SEC Have Issued Court Orders to Stop Evidence of their Incompetence

By the summer of 2007 I had been working full – time on my fraud investigations for almost three years — without settling a single case. I was working with 20, 30, 40 whistleblowers on more than a dozen cases. What depressed me was how easy it was to find my cases. Fraud in the United States was a growth industry. Maybe I should figure out a good fraud and franchise it, I thought. There really wasn’t much risk of getting caught. I’d discovered that among government regulatory agencies the SEC wasn’t unusually inept. It was simply as bad as all the rest of them. It required an unusual level of stupidity or tremendous bad luck to get caught by any government agencies other than the IRS, the FBI, and the Department of Justice, which are highly competent but vastly underresourced.

And unfortunately, other financial frauds will be uncovered. Soon after the story of our investigation became public, each member of the team began receiving letters and tips offering evidence of other financial frauds, including several Ponzi schemes. I’ve gotten a large pile of them that allege frauds in a variety of industries. Unfortunately, I m so busy with active cases that I don’t have time to even look at the mail that comes my way.

The SEC is a useless regulatory body that focuses on defending its reputation rather than actually finding cases of fraud and protecting investors. If the SEC were empowered through legislation, this would be immediately killed by senators like Chuck Schumer who serves to protect the financial industry.

Quote #37: How Bad is the US Regulation of Financial Crime?

By the summer of 2007 I had been working full – time on my fraud investigations for almost three years — without settling a single case. I was working with 20, 30, 40 whistleblowers on more than a dozen cases. What depressed me was how easy it was to find my cases. Fraud in the United States was a growth industry. Maybe I should figure out a good fraud and franchise it, I thought. There really wasn’t much risk of getting caught. I’d discovered that among government regulatory agencies the SEC wasn’t unusually inept. It was simply as bad as all the rest of them. It required an unusual level of stupidity or tremendous bad luck to get caught by any government agencies other than the IRS, the FBI, and the Department of Justice, which are highly competent but vastly underresourced.

And unfortunately, other financial frauds will be uncovered. Soon after the story of our investigation became public, each member of the team began receiving letters and tips offering evidence of other financial frauds, including several Ponzi schemes. I ’ ve gotten a large pile of them that allege frauds in a variety of industries. Unfortunately, I ’ m so busy with active cases that I don’t have time to even look at the mail that comes my way.

It is difficult to see how there is financial regulation in the US. There is little financial regulation, in fact, most of the entities like the SEC function as a facia regulation. This is in addition to there being a conflicted and entirely ineffective public auditing industry that can’t seem to find fraud even when it is right in front of their face.

Quote #38: What is a Noisy Exit by an Auditing Firm?

There is one other noninnocent explanation for why Fairfield Greenwich Sentry Fund had three different auditors in three different countries for three consecutive year – ends. Accountants have something called accountant – client privilege, and some states recognize it but usually in a much more limited sense than attorney – client privilege. Shockingly, especially in a profession like accounting where you would at least hope that they held fast to some sort of code of conduct, you’d think that once external auditors discovered accounting fraud they’d immediately go to law enforcement and report it. But you’d be wrong. Instead what most accounting firms do in these situations is “make a noisy withdrawal” by resigning the account but telling nobody why they resigned and, in effect, firing their client. Board members, law enforcement, and investors are supposed to be able to immediately know that whenever accountants resign, the reasons for it are serious and should be delved into.

If an auditing firm does not notify investors or law enforcement after they find fraud, if they have no public good function, what is the public reason for auditing firms to exist?

Quote #39: What is the Point of the Big Four Audit Firms Existing?

My guess is that the party’s answer would have been “ No, ”because I doubt that those T – bills ever existed, except on Bernie’s fantasy audits. This raises the question: What good are Big Four accounting firm audits if these accounting firms aren’t checking for fraud? Why pay for an audit if the auditors are not also trained as fraud examiners? What good is a clean audit opinion on a crooked company, anyway? Enron, WorldCom, Global Crossing, Adelphia, HealthSouth, and all the other corporate felons all had clean audit opinions from the most respected accounting firms. (emphasis added) Believe me, a lot of the hedge funds of funds had clean audit opinions, and these audits didn’t detect that Madoff was a fraud.

What is amusing is that sometimes one thinks that Deloitte and KPMG and PwC started becoming fraudulent when they got into IT consulting. However, these firms were frauds all the way back to their origins as auditing firms.

The auditing scam is that the auditing firm pretends to audit, and they are paid by the client. The client then shows the annual report to the stock buyer and says “Look KPMG says we aren’t cooking the books.” However, there is no real guarantee. It is just the investors taking KPMG’s word for it. If it all goes to hell in a handbasket, KPMG just says “we were mislead.” This is money for (nearly) nothing business.

Quote #40: Which is Bigger Fraud in Pharmaceuticals or on Wall Street?

I’ve been working on several cases that remain under investigation or under seal, meaning in both cases I can’t discuss them. Truthfully, my career aspiration is to prove that a drug with more than a billion dollars in annual sales is actually killing Americans and citizens across the globe, that in the clinical trials the dangers of this drug were revealed, and that the executives knew about the dangers and went ahead and marketed it anyway. I ve been working on this case for a few years now without much success, but I hope someday I’ll be able to find a key witness and get this case filed with the Department of Justice.

The fraud in finance is overwhelming. So the idea that the person who warned people about Bernie Madoff would investigate pharmaceuticals and find an even larger amount of fraud is overwhelming.

Quote #41: How Harry Markopolos Became a Fraud Investigator

The SEC ’s Boston office was publicly humiliated and set out to rectify that by fi nding and prosecuting market – timing cases. And the SEC was willing to pay a reward for information. Ed Manion called me to ask if I knew about people market – timing in Boston, telling me, “ If you have any cases for us, we do have this bounty program. We can pay you up to 10 percent and triple damages. ”

I began making phone calls at night, just dipping my toes in the investigative waters. I told those people that the SEC was desperate for market – timing cases and had a bounty program that would pay up to 30 percent of the ill-gotten gains or losses avoided. “ It’s a ticket out of the industry, ”I said flatly, offering, “ If we do a case together I ’ll split it with you.”

Over months I began building an investigative organization. I found a legal team that would handle the cases on a contingency basis and I learned how to protect the identity of anyone working with me. Investigating market – timing cases became my second job. I’d come home at night and practically rush up to my attic office to go to work. I began making phone calls at night, just dipping my toes in the investigative waters. I told those people that the SEC was desperate for market – timing cases and had a bounty program that would pay up to 30 percent of the ill – gotten gains or losses avoided. “ It’s a ticket out of the industry, ”I said flatly, offering, “ If we do a case together I ’ll split it with you. ”Over months I began building an investigative organization. I found a legal team that would handle the cases on a contingency basis and I learned how to protect the identity of anyone working with me. Investigating market – timing cases became my second job. I ’d come home at night and practically rush up to my attic office to go to work.

This is a fascinating story. It is clear from Markopolos’ book that the SEC is not interested in investigating fraud and that the patchwork of government financial regulators are also ineffective. Markopolos demonstrated that he is capable of doing the work, and is not afraid to bring forward his report. Markopolos 2019 report on the fraud in GE is a perfect example of his ongoing work.

Quote #42: The People That Did Not Want to Know Bernie Was a Fraud

“Thierry wouldn’t listen to me, I called Access’s director of research, who was a bright guy and understood derivative math, and told him that I had compiled a substantial amount of evidence proving Madoff was a fraud. If you’ll come over half an hour early before tomorrow’s scheduled meeting, I can prove to you mathematically that Madoff is a fraud. ” He never showed up. And then I got it. He didn’t want to know. Thierry didn’t want to know. They were committed to Madoff; without him they didn’t exist. It was their access to Bernie Madoff that allowed Access International to prosper. So when Thierry heard each of these funds claim an exclusive relationship, there was nothing he could do about it. It changed nothing. I also felt absolutely no obligation to tell any of the 14 asset managers that Madoff was a fraud.

A major reason for this was that they relied on the fraud to add value to their customers, as the following quotation explains.

I did appreciate the fact that they were trapped. They had to have Madoff to compete. No one had a risk-return ratio like Bernie. If you didn’t have him in your portfolio, your returns paled in comparison to those competitors who did. If you were a private banker and a client told you someone he knew had invested with Madoff and was getting 12 percent annually with ultralow volatility, what choice do you have?

Investors were asking for something unreasonable, which is why Bernie Madoff was so successful. He offered them something (which turned to be fake) that they could not get elsewhere. Madoff told customers not to put so much money with him.

Quote #43: Why Were the SEC’s Skills Such a Mismatch for Finding Fraud?

What should have been obvious to me was that there is a tremendous mismatch in skills between the SEC regulators and the people they are supposed to be regulating. The quants who create these financial products understand differential equations and nonnormal statistics; they program in languages the SEC doesn’t speak; they run statistical packages the SEC doesn’t even know exist. The quants are busy data mining with supercomputers while the SEC is still panning by hand.

It is amazing to find that the SEC lacked the mathematical skills to even find fraud. Secondly, the SEC lacks the ability not only to model the math used by the Wall Street firms, but to even run statistical analysis that could find fraud. Instead, the SEC was filled with attorneys that both lacked math understanding, but also lacked any experience working on Wall Street or any real-world finance training.

Quote #44: What is the Real Power of the SEC?

Actually, the SEC has a lot less power than most people assume. While it can take civil action against corporations or individuals in district courts for crimes such as insider trading, accounting fraud, and the failure to divulge information, it has extremely limited investigative authority. The most SEC investigators can do is refer suspected criminal activities to state or federal prosecutors.

The SEC has little power and is run as ineffectively as it is because the SEC is not designed to be a strong agency. Like the FDA, it is controlled by industry and is designed to give “the impression” of being and effective agency. In reality, the SEC is not only poorly funded, but it also managed inefficiently. It seems to make little sense to have 3,500 people at the agency, but then not have enough funds to hire experienced resources or to have budgets for things like subscriptions to the Wall Street Journal or far more expensive subscription services or to Bloomberg terminals or similar. The SEC could be far more effective with fewer people and with more resources applied per person.