If you weren't watching “60 Minutes” last night, you missed a fascinating recap of the tale of Harry Markopolos, the market analyst and fraud investigator who tried to blow the whistle on Bernard Madoff.
Starting as early as May 2000, Markopolos sent five letters to the Securities and Exchange Commission in which he expressed concern that Madoff's wildly successful hedge fund was fraudulent. Once he started looking at Madoff's numbers, Markopolos said, “(it) took me five minutes to know that it was a fraud. It took me almost another four hours of mathematical modeling to prove it was a fraud.”
What tipped him off?
“It was the performance line,” Markopolos explained in a memorable exchange with reporter Steve Kroft. “As we know, the market goes up and down, and his only went up. He had very few down months; only 4 percent of his months were down months, and that would be the equivalent of a baseball player in the major leagues batting .960 for a year — clearly impossible. You would suspect cheating immediately.”
Still, it took until January 2006 before the SEC opened a case file on Madoff. Even then, the agency found no evidence of fraud and closed the case 11 months later. As Kroft notes, Madoff was done in not by whistleblowers or regulators, but by the fact that his “lies simply collapsed under their own weight.”
Markopolos offered another nugget that caught my ear. He claims that most of the people who worked on the SEC's brief investigation of Madoff had little or no training in financial matters. “They're unschooled; they're un-credentialed,” he told Kroft. “Most of them are just merely lawyers without any financial industry experience.”
That sounds like a strong case for getting more auditors and other CPAs involved in the oversight game.
Watch the “60 Minutes” report in its entirety:
Today, of course, we have new leadership at the SEC and a new president who has pledged to increase the agency's budget by 13 percent. That money, says SEC Chair Mary Schapiro, will “enable us to increase our staff and use new technology to pursue risk-based approaches that would better detect fraud and ensure stronger oversight of the nation's securities markets.”
Let's hope so. If Markopolos is right, the evidence for shutting down Madoff's scheme was there years ago. The oversight was missing, and thousands of people have paid a price.