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Why didn’t the SEC catch Madoff?
By Lauren | December 18, 2008
Illinois Governor Rod Blagojevich is probably deeply grateful to disgraced investment guru Bernard Madoff, whose alleged multi-billion dollar Ponzi scheme has pushed Blagojevich’s name out of the front-page headlines. What’s really appalling about the Madoff situation is that the SEC apparently started receiving complaints about Madoff nine years ago, but failed to uncover the alleged fraud in time to prevent investors from losing billions. And it wasn’t just the rich and idle who got snookered - major investment firms, enormous pension plans and important charities suffered massive losses, too.
Perhaps the SEC dropped this particular ball because so many of the complaints came from one of Madoff’s former competitors, then-investment advisor Harry Markopolos. The Wall Street Journal reports today that Markopolos became suspicious about the legitimacy of Madoff’s operations when his bosses started pressing him to match Madoff’s spectacular returns. A careful study of Madoff’s claimed investment strategy demonstrated to Markopolos that Madoff couldn’t possibly be achieving those results through legitimate means.
In other words, folks, Madoff’s returns were too good to be true. It was that simple. And if Markopolos could figure that out, so could the SEC.
Reportedly, Madoff himself was a charismatic charmer whose reputation for financial wizardry preceded him into a room by a good fifteen feet. It’s no surprise that even sophisticated investors were lulled into a false sense of security by that mesmerizing combination. One would hope, however, that the folks at the SEC had seen enough investment fraud to recognize snake oil when they saw it. Securities and Exchange Commission head Christopher Cox rightly blasted his staff on Tuesday for how they handled the Madoff case - it’s disappointing that he’s softened his rhetoric since. Markopolos provided the SEC with reams of information, analysis and documentation. Someone at the SEC should have figured out sooner that, competitor or not, Markopolos had a point.
Topics: Business Ethics, ethics |