Whistleblower Told SEC That Madoff Resisted Outside Audits

A witness told the House Financial Services Committee yesterday that accused Ponzi Schemer Bernard Madoff would only allow his brother to audit his funds.

According to a report on Bloomberg.com, Harry Markopolos, a fraud investigator who spent nearly 10 years trying to warn the Securities and Exchange Commission (SEC) about Madoff, told lawmakers that the former investment advisor insisted his brother be the only one to perform a performance audit due to “reasons of secrecy.”   What’s even more amazing is that the managers of a  London-based fund that had sunk millions of dollars of client money into Madoff’s funds apparently went along with this outrageous demand.

In December, Madoff was arrested on one charge of securities fraud.  According to the FBI complaint against Madoff, his investment-advisory business was largely a Ponzi scheme.  The FBI said Madoff  “deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars.”

As we reported yesterday, Markopolos told lawmakers that in 2000, he had spotted Madoff’s fraud in “about five minutes” by looking at his promotional material.  Markopolos brought his allegations to the SEC about improprieties in Madoff’s business starting in 2000 after determining there was no way Madoff could have been making the consistent returns he claimed using the trading strategy he touted to prospective investors.

Markopolos said that he and a team of investigators brought 29 specific red flags regarding Madoff’s operations to SEC offices in New York, Boston and Washington, DC,  but no one at the commission ever acted on his tips.

Markopolos also said that he and investigators had at times feared for their lives because of the SEC’s inaction.  “Mr. Madoff was already facing life in prison if he were caught, so faced little to no downside to removing whatever threat he felt we posed,” Markopolos told the committee.

According to the Bloomberg report on Markopolos’ testimony, at least one fund actually allowed Madoff to dictate the terms of a performance audit.  Markopolos told the committee that in the course of his investigation he discovered that  a London-based fund once demanded that an international firm be allowed to audit Madoff’s  performance.  But Madoff balked, and insisted his brother, Peter – chief compliance officer of the Bernard L. Madoff Investment Securities LLC brokerage – was the only one who could perform the audit.

Markopolos said he passed this information along to the SEC in 2000.   “Amazingly, this London-based fund of funds invested over $200 million of their Arab client’s money anyway because the low volatility of returns was so attractive,”  Markopolos wrote to the SEC.

As with all of the tips Markopolos sent along to the SEC, this one was ignored.

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