Is the SEC Corrupt, Inept or Both?

I just finished up reading the 19-page document that Harry Markopolos submitted to the SEC in November of 2005 titled "The World's Largest Hedge Fund is a Fraud".

Now obviously I had heard about this document over the past couple of weeks, but today was my first chance to actually read it. I have included a link to the document at the end of this article.

I'm sure that you know who Bernard Madoff is by now. In case you don't, he apparently orchestrated the biggest Ponzi scheme in the history of the world. Estimates say that Madoff swindled as much as $50 billion dollars from other funds, high net-worth investors, unions, celebrities, banks, etc. In a "Ponzi scheme", the perpetrator of the fraud lies about the returns in the fund, and pays out old investors with new capital that is flowing into the fund.

Anyways, Harry Markopolos smelled a rat and started warning the SEC about Madoff in 1999. Markopolis is a very smart guy, as you can see from his resume. CFA, CFE, securities industry executive, specialist in forensic accounting - certainly a guy that you would want to listen to if you were the SEC.

As I said, Markopolos warned the SEC about Madoff in 1999. He then met with an SEC official in 2001. Markopolos refused to back down from his stance that Madoff was a fraud, sending a damning document to the SEC in 2005. Acting in part on information supplied by Markopolos, the SEC once again investigated Madoff in 2007 and didn't find any evidence that he was operating a "Ponzi scheme".

You really have to wonder what happened at the SEC. How could they not have realized that this was a "Ponzi scheme"? I mean - it WAS a Ponzi scheme! Surely the SEC would have realized this after turning over a few stones at Madoff's operation. Was this negligence at the SEC, or something more sinister?

After reading the document sent to the SEC by Markopolos, you REALLY have to wonder just what is going on. Markopolos laid out the case against Madoff perfectly, and was proven right over and over again. Considering that the SEC supposedly investigated Madoff and his firm after talking to Markopolos, you have to wonder (again) what was going on.

Markopolos points out no less than 29 red flags in his statement to the SEC. 29! Markopolos (correctly) points out that situations like REFCO and Wood River had far less red flags.

When you read this document titled "The World's Largest Hedge Fund is a Fraud", you'll really start to wonder about the SEC. If they aren't corrupt, then they are shockingly inept.

Source: WSJ - The World's Largest Hedge Fund is a Fraud

Filed under: Hedge Fund News | Stock Market Scandals