A whistleblower is slated to testify Wednesday about an "abject failure" at the SEC that prevented investigators from uncovering Bernard Madoff's alleged $50 billion Ponzi scheme, claiming the arrogance and ignorance of the head of its New York office helped derail any probe.
Harry Markopolos, a Boston-based investor turned fraud investigator, is slated to tell House Financial Services Committee members of his eight-year quest to get the SEC to investigate Madoff.
Prosecutors allege the former NASDAQ chairman set up a phony set of records to cover up billions in fraud perpetrated on his investors, ranging from European royalty to actor Kevin Bacon.
In 24 pages of prepared testimony obtained by CongressDaily, Markopolos spells out his frustration of trying to alert SEC officials that Madoff's returns were not mathematically possible and that his investment strategies would have trouble even breaking even -- once fees and expenses were included.
He initially contacted SEC's Boston office. But Markopolos got little traction, noting "that financial illiteracy among the SEC's securities lawyers was pretty much universal, with few exceptions."
He persevered over the next few years and will testify he finally found a receptive audience in 2005 with Mike Garrity, branch chief of the SEC's Boston office.
Garrity sent the case to the SEC's New York office, where he put Markopolos in contact with its chief, Meaghan Cheung.
Markopolos slams Cheung in his testimony, indicating that she "never grasped any concepts in my report, nor was she ambitious enough or courteous enough to ask questions of me."
He will testify that Cheung dismissed him by noting she handled the criminal case against Adelphia Communications and convictions of its top executives.
"Ms. Cheung never expressed even the slightest interest in asking me questions; she told me that she had my report and that if they needed more information they would call me," he writes.
Markopolos then reached out to Wall Street Journal reporter John Wilke. He notes that while Wilke was eager to investigate, the Journal's editors apparently never gave him their approval to start reporting. Markopolos thought he had his biggest breakthrough in 2006 after talking to a Chicago Board Options Exchange official and learning its traders suspected Madoff was a fraud.
He noted the official, Matt Moran, received permission to talk to the SEC and the Journal, but neither organization followed any leads he provided.
Markopolos adds that he and some members of his informal investigative team felt threatened and thought Madoff could stifle them if their efforts would be discovered.
He said they did not go to the FBI because they felt they would not be taken seriously because of the SEC's lack of interest and their decision not to contact the Financial Industry Regulatory Authority, an independent watchdog group, because Madoff had been chairman of its predecessor organization.