Fraud Files: As the SEC 'Gets Tough' on Goldman, Remember Madoff

Fraud Files: As SEC 'Gets Tough' on Goldman, Remember Madoff There has never been such a masterful description of Securities and Exchange Commission incompetence as is given in No One Would Listen: A True Financial Thriller, the new book by the Bernie Madoff whistle-blower Harry Markopolos (pictured). You can debate about how thrilling the book itself is, but I suspect bean-counters like myself will get a thrill out of reading it. Even if the details of the Madoff Ponzi scheme and the way Markopolos and his team poked holes in it don't excite you, you should at least be able to revel in the blatant display of ineptitude by the financial industry's so-called regulators.

Last week's news of the SEC charges against Goldman Sachs (GS) got people buzzing about new "tough" enforcement by the SEC. An article published Wednesday on DailyFinance posed the question "Does a Revitalized SEC Have the Right Stuff to Tackle Goldman Sachs?" and answered with a tentative yes. I'm more skeptical. Maybe it's because I have read Markopolos's book, which plumbs the true depths of incompetence at the SEC. Maybe it's because I'm not the only one who suspects the SEC is pursuing Goldman just to look tough. I'm more than willing to take a "wait and see" approach as this enforcement action unfolds, but I'll be pleasantly surprised if the SEC follows through and brings the hammer down.

The reason I have so little faith in the SEC's ability to really get tough on corporate fraud is because it has such a bad track record. Granted, the agency has limited resources, so it can't investigate every complaint or tip it receives. But often, the SEC's decisions regarding whom to investigate (and more commonly, whomnot to investigate) are made with no apparent rhyme or reason.

Reasons Why Markopolos Wasn't Viewed As 'Credible' Are Incredible

Markopolos couldn't have made it any easier for the agency to catch Bernie Madoff, and frankly, it has no excuse for not going after Madoff years before his scheme was exposed. The SEC received an easy-to-understand report that outlined the red flags pointing to the obvious conclusion that Madoff was running a scam.

As Markopolos put it in his book, "... Meaghan Cheung's team was incapable of winning a game of Clue if they were given all the answers." Of all the red flags Markopolos pointed out to the SEC, the only one that gave Doria Bachenheimer (the assistant director of enforcement) any heartburn was the fact that Madoff's "returns" were so consistent. Sadly, she publicly displayed her complete incompetence when she testified, "I was trying to come up with a theory of what he was doing, so I was thinking was this like an accounting case, is this like cookie cutter reserves, does he have some money somewhere else?"

First of all, it's not "cookie cutter reserves, " it's cookie jar reserves. And no, this is not "like an accounting case." This is an investment fraud case. Duh.

But it gets even better. The inspector general found that Bachenheimer didn't think Markopolos was credible because he had neither worked for Madoff nor invested with him. Really? That's the measure of credibility at the SEC -- whether a whistle-blower has been employed by the person committing the fraud or has given money to the person committing the fraud?

She further explained that the red flags were simply "theories" and the SEC couldn't bring a lawsuit against Madoff for them. They'd have to "... test it and substantiate it." Isn't that what "enforcement" means, Ms. Assistant Director of Enforcement? You couldn't make up excuses this ludicrous if you tried!

Madoff "Didn't Fit the Profile of a Ponzi Schemer"

And the madness continued. Markopolos was deemed unreliable because the SEC thought he was trying to collect a reward for turning Madoff in. It's certainly important to consider motive when looking at a whistle-blower report like this, but it's completely inappropriate to ignore the blatant red flags Markopolos pointed out simply because the SEC employees didn't like his perceived motive. (The SEC apparently didn't consider the fact that Markopolos wasn't even eligible for a reward for reporting this type of fraud.)

Employee after employee at the SEC dismissed the Markopolos allegations quickly, not even bothering to get a true understanding of the claims he made. SEC enforcement attorney Simona Suh even came to the brilliant conclusion that Madoff "didn't fit the profile of a Ponzi schemer." Well then. That settles it, doesn't it? I wonder if Suh could have even told anyone what the "profile" of a Ponzi schemer looked like. I seriously doubt it.

Markopolos wasn't suggesting that the SEC charge Madoff with anything without doing an investigation of their own. But he gave them all the evidence they needed to justify starting a real investigation. They had at least six serious red flags presented to them, but all they needed to justify an investigation was one of them: Madoff's claimed strategy of using options to hedge his investments couldn't possibly be true because there weren't enough options in existence to allow him to do that. How much more blatant did it need to get?

But there was more than just Markopolos to signal that the SEC should do more work on Madoff. There were other whistle-blowers who sent information to them. The SEC also caught Bernie Madoff lying to them several times. Any reasonably competent investigator knows that when you catch someone lying, you need to look even harder because, apparently, they have something to hide.

On Goldman Sachs Charges, The Timing Is Too Convenient

Forgive me for having no faith in the SEC's ability to get tough on corporate crimes. Their track record is dismal. And it's not like they just botched one part of a case. They botched huge cases, displaying their incompetence over and over in those cases. Employee after employee failed to understand the basics of investing or even simple math: These are the people who are supposed to enforce the financial laws?

It hasn't gone unnoticed that the SEC charges against Goldman Sachs had curious timing: The President had just publicly threatened to veto financial reform legislation if it failed to regulate of derivatives, and the Inspector General was ready to release a report criticizing the SEC's failure to to go after Allen Stanford four separate times after it had credible, serious information that he was running a Ponzi scheme.

I do not criticize the SEC for occasional incompetence. I criticize the agency for repeated incompetence in the face of serious allegations and evidence involving massive frauds. The agency needs to restore its own credibility, but how can we expect the SEC to do that when its history of massive failures is so clear?
Read Full Story