Madoff Joke: Whistleblower Travails

Chidem Kurdas

Financial fraud typically comes to light because someone complains. But as Harry Markopolos found out when he went to the US Securities and Exchange Commission with evidence against Bernard Madoff, complaining may not put an end to a scheme.  And then people say you’re a joke! (See below.)

Indeed, the whistleblower’s lot is typically not a happy one, in the experience of Sherron Watkins, the accountant who detected that little accounting issue at Enron. 

Mr. Markopolos, who was on to the game nine years before Madoff confessed, describes his experience in a new book titled No One Would Listen. In a foreword to the book the hedge fund manager David Einhorn says Markopolos  is a hero—-he could not stop Madoff, but he exposed the SEC! He documented his multiple warnings over the years so that the regulator could not hide when the end came.

We learn from the book that after it was all over and Madoff sat in prison wearing an orange jumpsuit, he bristled when asked about Markopolos. “He’s really a joke in the industry,” Madoff told  the SEC inspector general, defending his investment strategy at that late date.  Did he think the SEC inspector general might give him money to invest? He had a great relationship with regulators for decades, after all.

But maybe I’m confused.  Somehow I thought Madoff himself was a joke, though a very dark one.

Recently Ms. Watkins discussed the whistleblower’s dilemma at a panel organized by the New York State Society of Certified Public Accountants. The SEC treated Markopolos as a nut case, she says. For her own efforts at Enron, she lost all chance of getting another corporate job—whistleblowers tend to be thought of as trouble-makers. And she had a $300,000 legal bill, fortunately paid by the Enron estate.

The 2010 Dodd-Frank financial regulation law contains provisions for whistleblowers to get 10% to 30% of the money perpetrators have to pay. But this is subject to various restrictions. The whistleblower has to provide original information that leads to successful action by the government. Also, the total payment has to be more than $1 million.

If regulators find the same information from another source after they get the tip or if they simply mess up the case, the whistleblower is out of luck.

Thus Mr. Markopolos would not receive any money under Dodd-Frank for the simple reason that the SEC chose not to pursue the leads he provided and did not really catch Madoff—he in effect turned himself in, presumably because his Ponzi structure collapsed in the late 2008 financial crisis.

Ms. Watkins has done alright as a speaker and consultant. But she says she’s the only whistleblower she knows who has a great life after blowing the whistle! Others, with their careers over, can face horrendous hardship.

Telling individuals that it is their professional duty to report problems is asking far too much of them, while a huge organization – the SEC – puts up impediments, she argues.

Anonymous posts at a Yahoo chat room, probably by company employees, were an early warning sign to Enron shareholders. If she were at Enron today, she says she would go to WikiLeaks with the story. So, people concerned about fraud at hedge funds or corporations should troll chat rooms and blogs.  And hire Mr. Markopolos or Ms. Watkins to investigate.

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2 Responses to “Madoff Joke: Whistleblower Travails”

  1. Madoff Hindsight: What They Knew « HedgeFundSmarts Says:

    […] Anyway, all the information available to the advisers – and much more – was also available to the Secur…, which did not detect the scheme after repeatedly examining Madoff and receiving detailed analysis from whistleblower Harry Markopolos showing that the reported returns could not be. […]

  2. ducessa, ducesa, rochii de seara Says:

    ducessa, ducesa, rochii de seara…

    […]Madoff Joke: Whistleblower Travails « HedgeFundSmarts[…]…

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