Today, the House Financial Services Committee's Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises held a hearing to continue assessing the alleged $50 billion investment fraud engineered by Bernard L. Madoff. This was the second in a series of hearings held by the House Subcommittee, and follows one week after the Senate Committee on Banking, Housing and Urban Affairs held a similar hearing to discuss how the “regulatory system failed to detect a fraud of this magnitude.”
Testifying before the Committee were the following witnesses:
- Harry Markopolos, an independent financial fraud investigator for institutional investors and others seeking forensic accounting expertise, as well as a Chartered Financial Analyst and Certified Fraud Examiner
- Linda Thomsen, Director, Division of Enforcement, U.S. Securities and Exchange Commission
- Andrew J. Donohue, Director, Division of Investment Management, U.S. Securities and Exchange Commission
- Erik Sirri, Director, Division of Trading and Markets, U.S. Securities and Exchange Commission
- Andy Vollmer, Acting General Counsel, U.S. Securities and Exchange Commission
- Lori A. Richards, Director, Office of Compliance Inspections and Examinations, U.S. Securities and Exchange Commission
- Stephen Luparello, Interim Chief Executive Officer, Financial Industry Regulatory Authority
During his opening remarks, Mr. Markopolos, who had undertaken an investigation of Mr. Madoff for the past several years at his own expenses and was praised repeatedly by the Subcommittee, focused his testimony by sharply criticizing securities regulators and provided a litany of reasons why he felt the SEC failed to detect Mr. Madoff's alleged Ponzi scheme, despite his team having "gift wrapped and delivered the largest Ponzi scheme in history to them." According to Mr. Markopolos, there was "[a]n abject failure by the regulatory agencies we entrust as our watchdog," and that the SEC was basically unwilling to bring a case against a "big fish" such as Mr. Madoff. Mr. Markopolos made several suggestions on regulatory reform, including, among other things, recommending that the incoming SEC Chairman Mary Shapiro "clean house," replace the existing senior SEC staff, hire new senior and highly trained financial experts from industry as opposed to young inexperienced staff, and attract them with increased compensation, including economic incentives to bring the "big" enforcement action cases. In addition, Mr. Markopolos suggested that Congress should create a "super" or central regulator for all financial instruments with centralized databases as opposed to the existing fragmented regulatory structure, and also create a centralized "Office of the Whistleblower."
During the initial testimony by the securities industry regulators, each witness provided a summary overview of his or her role as a regulator, and several stated they could not go into any details about the current investigation into Mr. Madoff or past investigations that involve him. This created a great deal of contention between certain members of the Subcommittee and those testifying, given that the Subcommittee wanted to know exactly how the regulators missed the alleged Ponzi scheme and wanted specifics as to the Madoff investigation. The Subcommittee was not shy about chastising the regulators for failing to acknowledge or further investigate the information Mr. Markopolos provided to them. Subcommittee Chairman Kanjorski (D-PA) stated that the Subcommittee did not want to hear a "travelers guide to the SEC," and that lack of cooperation by the SEC over the last several weeks is “unacceptable.” Other Subcommittee members also shared their displeasure. Throughout the remainder of the hearing, most of the questions were directed at Ms. Thomsen and her office's role in the Madoff matter, however she refused to go into any specifics underlying the investigation.
In an ironic twist, the hearing came on the same day as several sources reported that the trustee overseeing the liquidation of Bernard L. Madoff Investment Securities LLC recovered approximately $946 million, or two cents on the dollar for the reputed $50 billion amount lost in the alleged Ponzi scheme.