No One Would Listen: A True Financial Thriller (42 page)

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Authors: Harry Markopolos

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“And as I have heard the testimony, I mean, you know, I like oatmeal, and that is about how I classify the testimony I heard today.... We did not call you up here for us to hear a traveler’s guide of the Securities and Exchange Commission.”
 
It got progressively worse and worse for the SEC. Linda Thomsen, the director of enforcement, claimed she could not respond to many questions because it might jeopardize prosecutions. When Chairman Kanjorski asked her how long those prosecutions might take, she replied, “I honestly don’t know the answer.”
 
Chairman Kanjorski erupted. “Well, if it is years, and you do not intend to say anything, if I listen to your statement and how your counsel structured the statement, there are three things. You cannot help if it is a pending criminal investigation; you cannot help if the inspector general is doing something; you cannot help if it is an ongoing violation. I mean, if there is a snowstorm in Washington, the SEC cannot help. That must be one of their conditions.”
 
It only got more difficult for the SEC when the committee members finally got to ask their questions. Obviously these politicians knew there were a lot of angry and frustrated constituents watching them. And I don’t think anyone was more angry than New York’s Gary Ackerman. “I am frustrated beyond belief,” he began. “We are talking to ourselves and you are pretending to be here. I really don’t understand what is going on. The previous witness said that you guys as an agency act like you are deaf, dumb, and blind. I figured you were coming here and you were going to testify before Congress. Don’t you dare tell anybody you testified before Congress. You are going to be subjected to violation of false advertising lawsuits.
 
“You have told us nothing and I believe that is your intention. I figured you would leave your blindfolds and your duct tape and your earplugs behind, but you seem to be wearing them today. And instead of telling us anything, you read from the preamble of your mission statement and broke it up into five segments. What the heck went on? You said your mission was to protect investors and detect fraud quickly. How did that work out? What went wrong? It seems to me a private—With all your investigators and all of your agency and everything that you all described, one guy with a few friends and helpers discovered this thing nearly a decade ago, led you to this pile of dung that is Bernie Madoff, and stuck your nose in it, and you couldn’t figure it out.”
 
I don’t remember, but I’m pretty sure I smiled when I heard that. At times the questioning got so heated that Gaytri would walk out into the hearing room because she wanted to feel the tension. I just sat on a couch, eating a sandwich, savoring every single moment. There wasn’t a moment, a second, I felt sorry for these people. I just hoped that the investors they had failed to protect were watching. It wasn’t much compared to what Madoff’s victims had lost, but at least they would know that someone cared about them and that the SEC leaders were not going to walk away unscathed. Maybe it would never be payment in full, but it was a down payment.
 
Ackerman continued attacking. “You couldn’t find your backside with two hands if the lights were on. Could you explain yourselves? You have single-handedly defused the American people of any sense of confidence in our financial markets if you are the watchdogs. You have totally and thoroughly failed in your mission.”
 
When Linda Thomsen mumbled some response to his question, he interrupted her, asking, “Were you suspicious when the guy had a one man accounting firm investigating a $50 billion empire? And you keep saying alleged, alleged. This guy confessed on national television, you might have noticed....”
 
Linda Thomsen tried to explain, saying, “We have an action pending in the Southern District of New York.”
 
Ackerman pointed out, “You took action after the guy confessed. He turned himself in. Don’t give yourself any pat on the back for that.”
 
After Linda Thomsen again explained that “We cannot answer as to the specifics ... ” Ackerman said flatly, “You know, if anybody made the case better than Mr. Markopolos, and I didn’t think anybody could, about you people being inept, you have made the case better than him.” I just sat there, thinking silently,
Thank you, Congressman.
 
It was a wonderful afternoon, just great. Obviously, members of Congress don’t swear inside the hearing room, but while we were sitting in the anteroom they would come inside and let loose. They were livid; they were rip-roaring mad. I remember one member fuming, “If this is what our regulators are like, we don’t need them. It’s better the public knows they aren’t protected than to think they have protection from these clowns.”
 
New York’s Carolyn Maloney was as angry as Ackerman. “Mr. Markopolos in his testimony earlier testified that he brought complaints five times in writing to the SEC, and these were detailed complaints. It wasn‘t, ‘I think something’s wrong.’ These were detailed complaints that this is wrong. ‘They are not trading. They are not doing this. Here are examples.’ And it was a very specific complaint, not once, not twice, not three times, but five times to the SEC.... And how many more times would a whistleblower have to bring complaints to the SEC for them to have investigated the Madoff case? ... Now, if you went in and just asked for the trade slips or proved that they were doing trades when whistleblowers were saying they weren’t doing trades, then you could have shut him down in one-half hour. You could have shut Madoff down in one-half hour by just following up on one of the allegations.”
 
“As to the specifics of the investigation,” Thomsen replied, “I can’t answer.”
 
Eventually I started writing down questions they might ask, questions I knew these people couldn’t answer. The hearing continued through the afternoon, and when it was over, the SEC had been exposed and embarrassed in front of the entire nation.
 
Two days after this hearing, the SEC’s acting general counsel, Andrew Vollmer, was replaced. Five days later Linda Thomsen resigned; according to an SEC press release, she was leaving to “pursue opportunities in the private sector.” Five months later, Lori Richards, the SEC’s director of the Office of Compliance, Inspections and Examinations, resigned to pursue other growth opportunities. Eventually all but one of the SEC directors on that panel was replaced: The acting general counsel was replaced by David Becker, the head of enforcement by Rob Khuzami, and the director of compliance by John Walsh. It was nearly a clean sweep.
 
Gary Ackerman escorted us out of the building. He was still angry. We stood outside the Capitol in the freezing cold for more than a half hour as he explained what he intended to do next to make certain the SEC was reformed, and if it couldn’t be reformed, it would be closed down.
 
I didn’t even feel the cold.
 
Chapter 9
 
Soaring Like an Eagle Surrounded by Turkeys
 
The greatest irony was that by failing to pay attention to my submissions the Securities and Exchange Commission had succeeded in giving me a national platform—which I intended to use to either help create a new and functioning agency or put it out of America’s misery. The SEC officials had created their own worst nightmare. They’d picked a fight with the wrong Greek.
 
After the agency had insulted a congressional committee by failing to prepare for its hearings and then refusing to answer questions because telling the truth might adversely affect an ongoing investigation, I had no doubts Barney Frank was going to do whatever was necessary to change the culture of the SEC.
 
But there were also a lot of dedicated people inside the SEC who wanted it to be better. Ed Manion and Mike Garrity weren’t alone. After many phone conversations, both Gaytri and I felt that the SEC’s inspector general, David Kotz, might be one of those people. Pat Burns had vouched for him, telling me he was the real deal. “Every time he does a report he kicks them in the balls multiple times,” he said. Kotz emphasized that his report was going to be thorough and honest. But to accomplish that, he needed my cooperation. He just wanted to know what happened. So I had volunteered to meet with him in his office the day after my House testimony—inside the SEC building.
 
It had seemed like a good idea at the time.
 
I realized, perhaps too late, that I was going to be as welcome at the SEC as a wolf on a chicken farm. After I had shredded this agency on nationwide TV, I expected its employees to despise me. As I mentioned to Gaytri, it always makes me a little uneasy when the welcoming committee either is armed or has access to a rope. Actually, I really had no idea how we would be greeted, but for protection I asked my
60 Minutes
producer, Andy Court, if he’d allow Reuben Heyman-Kantor, his junior reporter, to stay another day in Washington and accompany us to the SEC with a handheld minicam. I was hoping to use the incredible power of a TV camera to help us balance the odds.
 
Gaytri and Phil Michael went with me to this meeting. As we approached the front of the building, I saw the SEC’s general counsel lying in wait, standing next to another man, whom I didn’t recognize. Maybe it was just a coincidence that they happened to be standing there when I arrived, and an equal coincidence that when they saw the camera they turned around and scurried to an elevator bank.
 
David Kotz was waiting for us on the far side of security. The
60 Minutes
reporter was permitted to film Kotz greeting us and escorting us into the building. As we were to learn, David is not shy. But after filming the introductions, our junior
60 Minutes
journalist was asked politely to leave.
 
The meeting was held in a large conference room. David Kotz was joined by four other people, among them his deputy inspector general, Noelle Frangipane; Senior Counsel Heidi Steiber; Senior Counsel Chris Wilson—and a transcriber. I’d assumed this was going to be an informal meeting in which I basically described my interactions with their agency over the intervening eight and a half years, but before we began I was asked if I minded testifying under oath.
 
It turned out that it was not going to be an informal chat, but rather a transcribed deposition under oath. Gaytri challenged them immediately: “What do you mean? You didn’t say anything about that.”
 
They explained, “Well, all of the SEC staff is testifying under oath, and they may say it’s unfair if you don’t, and we don’t want to give them an out.”
 
That made sense to me. I didn’t mind taking an oath; I was going to tell the truth. And Phil pointed out that in this situation an oath was not even necessary. Whether or not I took it, making a false statement to the federal government is a crime punishable by up to five years in prison and a fine of $250,000. I raised my right hand and swore to tell the truth.
 
I had spent more than two decades dealing with the SEC, both while working in the financial industry and as a potential whistleblower, so I had seen up close how abysmally it was run. And I had the documentation to prove it. In addition, because I had been working with other, far more competent government agencies the past several years as a fraud investigator, I was in the advantageous position of being able to do the type of comparative analysis that nobody had done before. I wanted the SEC to be effective, and I believed I could help make that happen.
 
It became clear almost at the beginning that the purpose of this investigation was much deeper than simply solving problems inside the agency. David Kotz began by telling me right off the bat that he was conducting a criminal investigation. Now, that was odd, because I knew that the SEC has no criminal investigative power. By law, it handles only the civil portion of securities cases; criminal matters have to be referred to the Department of Justice. I remember wondering if the Department of Justice had appointed David Kotz as a special assistant U.S. attorney with criminal investigative authority. Phil Michael nudged me with his elbow to make sure we were on the same wavelength.
 
So, this was a criminal investigation. Well, I knew for sure I wasn’t a criminal, and I was pretty sure Gaytri and Phil weren’t suspects; so the only people he could have been investigating for illegal activities were members of the SEC’s own staff. I had no objection to that. That certainly raised the stakes, and it was obvious that the rest of the day was going to be chock-full of surprises.
 
As the meeting progressed, I felt more and more comfortable. David explained that he had watched the congressional hearing, and he was stunned and ashamed that his people could perform so badly. The fact that he would criticize his own agency broke the ice. In fact, very early in the meeting I mentioned that after Madoff had surrendered I had been afraid that the SEC might come into my house and confiscate my computers and my documents to prevent me from making my case against the agency. I knew the SEC didn’t have subpoena power, I said, but with careers at stake I was afraid people might dummy up a subpoena to get them into my house.
 
One of the SEC attorneys in the room couldn’t resist laughing. “You were afraid of our agency?” she asked with incredulity. “After you saw how incompetent and slow moving we are? You saw how long it takes us to make a decision, and you actually believe we were capable of organizing a plan that quickly?” She glanced at her colleagues, who were also laughing and slapping their knees while doing so. “Wow!” As a trained Certified Fraud Examiner I knew this was not on the approved list of interviewing techniques. We’re trained to never show weakness during witness interviews. But I have to admit that the SEC inspector general’s unorthodox questioning techniques were effective. They knew how to make a friendly witness feel comfortable and gain total cooperation.

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