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February 05, 2009

"Worst Day in the SEC's History:" Whistleblower Testfies He Tried to Repeatedly Warn Agency of Madoff's $cam, But They Were "Too Young and Undereducated" to Understand His Warnings

He tried to warn the SEC about Madoff since 2005. They ignored him.

Correction: Warned since 2000 (Clinton's term, thankfully).

Too many lawyers, he says, who don't understand the industry or even basic math.

Harry Markopolos, a former investment manager who tried to warn U.S. regulators about Bernard Madoff, joined lawmakers in blasting the Securities and Exchange Commission but said he was forwarding more tips to the agency.

Markopolos told a congressional hearing on Wednesday that SEC staff were neither willing nor able to uncover what Madoff, arrested in December and charged with a record-shattering $50-billion fraud, was really doing.

Calling SEC staff "too slow, too young and too undereducated," Markopolos said the regulator was hindered by lawyers, did not understand red flags, could not do the math and was captive to the financial industry.

"They looked at the size of Madoff and said he's a big firm and we don't attack big firms," said Markopolos, who became aware of Madoff when the firm he worked for tried to pursue the same kind of strategy Madoff did but never got the same steady, strong returns.


Markopolos became suspicious of Madoff's ways in 1996 after he and a friend pored over mathematical models that might recreate Madoff's returns only to determine that there was no way Madoff could consistently outperform the markets.

Harsh words were lobbed at former SEC employees including Meaghan Cheung, the agency's New York branch chief whom Markopolos contacted in 2005. Cheung, Markopolos said, was arrogant, never grasped the concepts in his report or asked him any questions. Cheung left the SEC in fall of 2008.

Here's two videos from CNBC -- Kudlow's show -- about Markopolos' "spellbinding" testimony, plus commentary. First vid, and second vid.

Thanks to GG and LR.

Two Problems with the Young SEC Lawyers: One, arrogance. I just got out of a top ten law school, ergo, if I can't understand what's being said to me, it's obviously nonsense.

But more importantly, I think -- the paradigm of thinking lawyers have. Everything they're taught -- everything security law is about, mostly -- is disclosure. Paperwork, in other words. If you file the proper disclosures, and they're all consistent with each other, well, then you're okay. Because that's the primary way lawyers look at this. They make sure the proper filings are made. To the extent they check the math, it's really just looking for inconsistencies in reporting. This number doesn't agree with this other number in an earlier filing. That sort of thing.

But what happens when the filings are all professional, prompt, and consistent, but also 100% fraudulent? A lawyer, lacking technical and math skills, can't scrutinize the underlying data for validity. And his paradigm of thinking doesn't even really go there. When all you have is a hammer every problem looks like a nail and all that.

A lawyer should seek out someone with technical/industry expertise to ask about that sort of thing -- especially when an investment banker is claiming "scam" -- but I guess laziness and arrogance kept them from doing that.

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posted by Ace at 01:09 PM

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