Thursday, February 5, 2009

29 Red Flags not enough

Most of us naturally don't like it when someone tells us, "I told you so." It makes us feel even worse if we made a judgement call or a decision that we had some concerns about, but went ahead with it any way. However, when your job is to protect investors from fraudulent schemes, that phrase "I told you so" involves more than just hurt feelings.

Bernard Madoff, a man who confessed to his sons that he was involved in the largest Ponzi scheme in American history, destroyed the dreams of relatives, celebrities, synagogues, charities and universities to tune of $50 billion. The sad thing is that is could have been prevented nine years ago.

First, for clarity, a Ponzi scheme, named after an Italian-American gentleman who defrauded investors of some $250,000 in the early 2oth century, is when the schemer asks people to invest in a fund or proposed project and then gives dividends to the earlier investors with the funds of later investors, instead of profits made by the fund. In most cases, the investment does not generate any profits, so basically money is rotated from new investors to old investors. Meanwhile, the funds that are in the bank are used for personal use by the schemer.

Madoff played on his credibility as being the head of NASDAQ to bilk thousands of people of life savings and institutions of endowment funds. However, one man had figured out in 2000 that Madoff was a fraud. His name was Harry Markopolos, a trained independent fraud investigator.

Madoff had approached some potential investors and those investors hired Markopolos to check it out. Markopolos found enough to not only advise his clients not to invest in the Ponzi scheme, but to alert the Securities and Exchange Commission (SEC). Needless to say, the SEC did absolutely nothing.

Over a period of nine years, Markopolos presented over 300 pages of documents and highlighted 29 red flags that showed Madoff was a fraud to several SEC local offices and the Wall Street Journal. The Journal's sister publication, Barron's, did a story about it in 2001, but it was not damning enough to detract investors. I am sure since the SEC did not act, the story was not considered as cautionary as it should have been.

If the SEC had aggressively pursued Markopolos' claims, it could have stopped the Ponzi scheme with only $7 billion in losses. Now with $50 billion in losses, it is virtually impossible to recoup. So far, only $985 million has been salvaged.

A Congressional subcommittee grilled the SEC executives yesterday, only to leave more frustrated than when they entered. Earlier, Markopolos spent the morning before the subcommittee basically crowing "I told you so." He was right, the SEC was wrong and negligent in their duty, and the list of victims, a Who's Who grouping of the rich and famous, is growing.

Heads at the SEC must roll and accountability measures must be put in place to make sure that nothing of this magnitude happens again. I just think about how the SEC forced the only Black-owned bank in Mississippi to sell its assets during that same time period, but they let a man in New York rob people of $50 billion, including the lawyer that is defending him.

It is enough to make one angry about the obvious hypocrisy that exists in corporate America, but all we can do now is fix it, and hope we never hear "I told you so" again.