An independent investigator who led a multi-year probe into the financial fraud allegedly directed by Bernard Madoff has blasted the Securities and Exchange Commission (SEC) for multiple failures.
There was riveting testimony by Harry Markopolos before the House Financial Services Committee and angry responses by lawmakers to testimony from federal regulators.
Harry Markopolos described a nearly nine-year investigation into Madoff's activities, and multiple attempts to alert the SEC to what could be the largest financial fraud in U.S. history, possibly reaching $50 billion.
Markopolos said the SEC is an agency intimidated by Wall Street fund managers and in need of a thorough house cleaning if it is to competently fight securities and capital markets fraud.
Describing an operation that involved numerous feeder funds, a dozen of which he says have yet to be publicly identified, he said the SEC ignored numerous red flags or warnings about Madoff between 2000 and 2008.
"Unfortunately the SEC staff lacks the financial expertise and is incapable of understanding the complex financial instruments being traded in the 21st century," Markopolos said.
In testimony often sounding like a spy novel, Markopolos said he and his team feared for their lives at various points as they dug deeper into Madoff's fund activities. Markopolos described wearing gloves to avoid leaving fingerprints on documents he provided to officials at one point.
He praised two officials in the Boston branch of the SEC who supported his probe, one of which he quoted as describing the SEC as having dropped the ball and calling the Madoff matter a clear and present danger to U.S. capital markets.
Markopolos says Madoff could easily have built his operation into a $100 billion fraud without being stopped by the SEC, which he says is responsible for broad failures contributing to the U.S. financial crisis.
"When an entire industry that you were supposed to be regulating, disappears due to unregulated, unchecked greed, then you are both a captive regulator and a failed regulator," he said. "You have no excuses, but you darn well have a lot of explaining to do to American taxpayers and you darn well better be apologizing to the Madoff victims."
Citing ongoing investigations and the SEC lawsuit against Madoff for securities and investment advisor fraud, SEC Division of Enforcement Director Linda Thomsen declined to go into specifics.
"We are not authorized to provide specific information about matters under investigation or past regulatory activities in this matter. We simply cannot jeopardize the process of holding the perpetrators responsible," she said.
Thomsen and SEC officials said the agency is considering changes and improvements in its ability to detect fraud.
But New York Democrat Gary Ackerman exploded in anger at SEC witnesses.
"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," he said.
Subcommittee chairman Paul Kanjorski said the Madoff matter underscores the need for Congress to strengthen securities regulation.
"The world has now changed, and the motor is now broken beyond repair. We therefore need to invent a new engine to ensure that the securities regulatory system reflects today's realities and can respond effectively to tomorrow's innovations," Kanjorski said.
Republican Scott Garrett said the alleged Madoff fraud resulted more from a lack of coordination and information sharing among regulators, he pointed to SEC failure to implement long-planned operational changes.
"At least some of the things [SEC changes] had they been implemented earlier, at least in this case, it appears that the improprieties would have been discovered much earlier," he said.
The House hearing was the second on the Madoff matter, and was held as majority Democrats plan legislative steps aimed at tightening financial market and securities regulation.