Image: Harry Markopolos
Molly Riley  /  Reuters
Harry Markopolos, a former financial executive, told a House Financial Services Subcommittee that the SEC “roars like a lion and bites like a flea."
updated 2/4/2009 2:22:19 PM ET 2009-02-04T19:22:19

House lawmakers on Wednesday accused the Securities and Exchange Commission of impeding their probe into how the agency failed to uncover the alleged $50 billion fraud perpetrated by Bernard Madoff.

The clash between lawmakers and high-ranking SEC officials came at a hearing after the whistleblower in the case, Harry Markopolos, said he had feared for his physical safety and would turn over new evidence to the agency showing the alleged Ponzi scheme mastermind had not acted alone.

Markopolos said he had discovered a dozen additional funds that funneled money to Madoff, "hiding in the weeds" in Europe. Managers of investment "feeder" funds that relayed money to Madoff willfully turned a blind eye to his improprieties because they were paid generous fees, Markopolos said.

He plans to present his findings to the SEC's inspector general on Thursday. If proven, they would substantiate the assertions of many analysts that the alleged fraud was far too large for Madoff to have conducted alone.

Madoff, a prominent Wall Street figure who had been chairman of the Nasdaq Stock Market, was arrested in December after allegedly confessing to his sons that he had bilked investors in what the authorities say may be the largest Ponzi scheme ever.

Markopolos also planned to provide information on what he called a "mini-Madoff," another Ponzi scheme he said he's uncovered that may have defrauded investors of as much as $1 billion.

In loud, angry exchanges, lawmakers threatened to issue subpoenas to SEC officials to compel their testimony.

Rep. Paul Kanjorski, D-Pa., the House Financial Services subcommittee's chairman, vented frustration after the SEC's acting general counsel said the five officials appearing before the panel couldn't answer lawmakers' questions about the Madoff case because it's under investigation. The five SEC commissioners voted earlier to assert a privilege in not having officials answer questions from Congress.

Kanjorski accused the agency of impeding the panel's investigation, calling it an "abuse of authority."

It was a blistering escalation of criticism of the SEC, which has been blasted by lawmakers and investor advocates over its failure to discover Madoff's alleged $50 billion Ponzi scheme, despite the credible allegations brought to it over years. Against the backdrop of the worst financial crisis since the 1930s, lawmakers of both parties are calling for a shake-up of the agency.

Linda Thomsen, the agency's enforcement director, said the SEC takes the Madoff case very seriously, but asserted there were confidential areas related to the ongoing investigation that couldn't be publicly discussed.

The SEC officials said the agency is looking at possible changes in the wake of the scandal, including more frequent examinations of investment advisers and improving its process for assessing risk. President Barack Obama's new SEC chief, Mary Schapiro, has pledged to revitalize the agency's enforcement efforts.

But any changes will come too late for Markopolos, who said that because of the SEC's inaction, "I became fearful for the safety of my family."

"The SEC is ... captive to the industry it regulates and is afraid" to bring big cases against prominent individuals, he said. The SEC's inspector general is investigating how the agency missed the Madoff scheme despite Markopolos' credible allegations and several agency examinations of his operations, and whether his prestige led regulators to look away.

While the SEC is incompetent, the securities industry's self-policing organization, the Financial Industry Regulatory Authority, is "very corrupt," Markopolos charged. That organization was headed until December by Schapiro, who has said Madoff carried out the scheme through his investment business and FINRA was empowered to inspect only the brokerage operation.

In New York Wednesday, a trustee liquidating Madoff's investment firm told a federal judge that nearly $950 million in cash and securities has been recovered for investors. JPMorgan Chase & Co. and Bank of New York Mellon Corp. last week said they would transfer a combined $534.9 million from Madoff's investment firm accounts to the trustee. Investors have until July 2 to place their claims.

European investors who feared they lost millions investing with Madoff have a chance to recoup some or all of their money from the banks that marketed the stricken funds, according to lawyers in Europe who are preparing a possible U.S.-style class-action lawsuit.

Markopolos, a former securities industry executive and fraud investigator, 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.

Markopolos and his investigators raised 29 specific red flags regarding Madoff's operations to SEC staff in Boston, New York and Washington.

Now thousands of victims — from Hollywood celebrities to international charities — who lost money investing in Madoff's fund, have been identified.

Markopolos also said that he anonymously conveyed a package of documents on Madoff to former New York attorney general Eliot Spitzer, who also took no action. Spitzer's family trust was among the victims that lost money investing with Madoff.

Telephone calls to Spitzer representatives and to his New York office seeking comment Wednesday weren't immediately returned.

Markopolos also suggested that senior editors at The Wall Street Journal may have prevented a reporter from pursuing leads he provided in 2005 because the newspaper "respected and feared" Madoff.

That was disputed by a vice president at Dow Jones & Co., the Journal's publisher. "Any suggestion that we feared to report on Madoff is completely absurd," Robert Christie said, citing news stories on Madoff in the Journal and a critical article that appeared in Barron's, Dow Jones' financial weekly, in May 2001.

More on  Madoff   |  Ponzi scheme

The Associated Press and Reuters contributed to this report.


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