Debra J. Saunders

Back in May 2000, Harry Markopolos, a Massachusetts fraud investigator, provided detailed evidence to the Securities and Exchange Commission that financier Bernard Madoff was a fraud. Eight years later, the SEC figured that out -- albeit after Madoff told federal authorities he had defrauded investors of up to $50 billion.

Last week, Markopolos testified before the House Subcommittee on Capital Markets about how he and three associates -- "four unpaid volunteers" -- figured out what a $906 million bureaucracy failed to uncover.

Asked to replicate Madoff's investment strategy in 2000, Markopolos had begun to look at various Madoff funds. Within five minutes of examining one fund, he suspected fraud, as the returns seemed impossible for the investment strategy. Oddly, another document showed that Madoff "was not a sophisticated enough fraudster to get his portfolio construction math correct" or to mirror market performance.

Markopolos concluded, "You had to have no brains whatsoever to invest into such an unbelievable performance record that bears no resemblance to any other investment managers' track record throughout recorded human history." And: "In less than four hours, I knew I had proved mathematically that (Madoff) was a fraud."

Markopolos went to the SEC in 2000, but the SEC failed to act. Madoff's operation could have been shut down when it had less than $7 billion under management, Markopolos testified.

Markopolos tried the SEC again in 2001. Again, no dice. In October 2005, he met with SEC Boston branch chief Mike Garrity, who referred him to the New York office, which failed to act. He kept prodding investigators through 2006 -- offering names and leads -- but the SEC failed to act. "If the SEC had bothered to pick up the phone and spend even one hour contacting the leads, then (Madoff) could have been stopped in early 2006," Markopolos said.

But, he lamented, the "financial illiteracy among the SEC's securities lawyers was pretty much universal." While many on the political left have blamed the 2008 financial meltdown on a lack of regulation, the Madoff story shows that regulation, too, can fail -- big time.

As Rep. Ed Royce, R-Fullerton, who is on the subcommittee, told me over the phone Monday, even though Markopolos spelled out Madoff's problems in painful detail, SEC staff "were incapable of unraveling" the Madoff mess. And the SEC and other regulators investigated Madoff at least eight times over 16 years -- without matching the findings of Markopolos and friends.

Debra J. Saunders

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