How long does it take to catch a Ponzi scheme operator? Well, according to the report released yesterday titled “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme,” 16 years!!! And that’s 16years from from the date the first red flags were raised about Bernard Madoff. During those 16 years, the SEC opened five inquiries, and hundreds of red flags were raised.
Okay - I’m Mad!!! I just read the report. It is possibly the most troubling report I’ve ever read. In fact, it reads like a novel, but then, there’s a difference. Fiction has to make sense, the truth often doesn’t. Here are but a few of the SEC blunders captured from the report.
One of the few points that was made in a conference call between the offices was a comment by a senior-level Washington D.C. examiner reminding the junior NERO examiners that Madoff”was a very well-connected, powerful, person,” which one of the NERO examiners interpreted to raise a concern for them about pushing Madoff too hard without having substantial evidence.
In September 2005, NERO prepared a closing report for the examination that relied almost entirely on information verbally provided by Madoff to the examiners for resolution of numerous “red flags.” One of the two primary examiners on the NERO examination team was later promoted based on his work on the Madoff examination.
The OIG investigation also found the Enforcement staff was skeptical about Markopolos’ complaint because Madoff did not fit the “profile” of a Ponzi scheme operator, with the branch chief on the Madoff investigation noting that there was “an inherent bias towards [the] sort of people who are seen as reputable members of society.”
As the investigation progressed; in December 2005, Markopolos approached the Enforcement staff to provide them additional contacts and information. However, the branch chief assigned to the Madoff Enforcement investigation took an instant dislike to Markopolos and declined to even pick up the “several inch thick file folder on Madoff’ that Markopolos offered. One of the Enforcement staff described the relationship between Markopolos and the Branch Chief as “adversarial.”
During an interview with the OIG, Madoff stated that he had thought he was caught after his testimony about the DTC account, noting that when they asked for the DTC account number, “I thought it was the end game, over. Monday morning they’ll call DTC and this will be over … and it never happened.” Madoff further said that when Enforcement did not follow up with DTC, he “was astonished.”
When Madoffs Ponzi scheme finally collapsed in 2008, an SEC Enforcement attorney testified that it took only “a few days” and “a phone call … to DTC” to confirm that Madoff had not placed any trades with his investors’ funds.
Now here is the damning part, and excuse me for be self-serving on this part. In my book Without Warning I present a list of “7 Yellow Flag” symptoms that a silent problem might exist. For instance, here are two of the seven yellow flags.
- When the risk of making a decision for employees inside the organization is considered to be greater than the benefit of making one. Symptom: Slow and indecisive decision making.
- When information that should be readily available is difficult to access, appears incomplete or doesn’t make sense. Symptom: Information is delayed or incomplete, and parts often held in secrecy.
Actually when I examined the report and the list of seven symptoms, all seven yellow flag symptoms applied to the Madoff case. This is telling on several points. For instance, if silent problems aren’t caught and resolved early, they will morph and become more toxic over time - in this instance, $65+ Billion toxic. Secondly, it’s imperative that businesses and public agencies (like the SEC) become knowledgeable about silent problems, how to identify them, and how to act on them. Lastly, the book Without Warning should become required reading.
The Madoff Ponzi Scheme is a story about what can happen if the warning signs of silent problems aren’t heeded. If you don’t, it’s amazing how dim a light can be, to be blinded by it.
