Madoff Whistleblower and the SEC

Puppycow said:
Why didn't the SEC or somebody (FBI? Eliot Spitzer?) catch Madoff when there was a whistleblower who tipped them off?

I have to admit that the whistleblower does seem a little bit loopy,
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You've answered your own question. There are always whistles being blown, regardless of whether or not anything's actually wrong. Look at the Conspiracy Theory forum, and then look at some of the froot loops who haunt this section of the forum. In the past month alone, I've seen "whistleblowers" trying to tell me about the scam that is
  • fractional-reserve banking
  • fiat money
  • inflation
  • capital depreciation

and many more besides.

What do they have in common besides an industrial-sized lack of common sense? A total lack of enough credibility to convince a rabbit to eat a carrot.

Even a stopped clock, as they say, is right twice a day. But if the SEC paid attention to every person with a complaint who was "a bit loopy," they'd never get any of the actual day-to-day business of the office done, let alone doing any serious investigations.
 
But I think this should be a cautionary tale for all of us skeptics: for once the loopy paranoid guy who saw a conspiracy was right, and the people who thought that these were the ravings of a conspiracy theorist were wrong. Who would've thought that somebody (apparantly) respectable like Madoff would be running a Ponzi scheme?

Just goes to show that we are all bad at judging who is trustworthy and who is not. The best confidence men are those who can appear to be trustworthy.
 
I don't think any skeptic claims that there are no conspiracies or that even the governments of free Western nations sometimes engage in shady or downright criminal actions against their own people (see e.g. the Tuskegee Study). That doesn't mean that every conspiracy nut deserves to be taken seriously. The US Goverment didn't blow up the WTC towers, the Queen of England isn't a reptilian, and The Protocols of the Elders of Zion is still a fake.
 
Francesca R said:
The report to the SEC in 2005 by Harry Markopolos, who spent 9 years independently investigating Madoff is here. It is very detailed and has 29 "red-flag" warnings about how the fund's returns cannot be real. The SEC visited Madoff's place in 2006 armed with this information and gave Madoff a clean bill of health. Ostensibly, all of the investors who went through the FOF route did not know, and were not allowed to know, that they were invested in the Madoff "fund".

The "investment returns", collected by the biggest FOF investor and biggest loser (Fairfield Greenwich) are at the end of the memo.
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Puppycow said:
Why didn't the SEC or somebody (FBI? Eliot Spitzer?) catch Madoff when there was a whistleblower who tipped them off?

I have to admit that the whistleblower does seem a little bit loopy, but apparantly he was absolutely right.
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It isn't necessary for whitsleblowers to appear "loopy" for them to mostly fail. And because people generally understand that the expected returns of almost all whistleblowing activity are negative, many people won't do it, which might mean it requires a certain character to be persistent. Harry Markopolous apparently had a great deal more to lose than to gain, unless the probability of him being silenced (by those seeking to protect the scheme) was made very small and the probability of him being vindicated (and it is not clear what this brings other than recognition and personal satisfaction) was made very high. This is concentrated costs versus diffuse benefits.

There is a lot of research on whistleblowing (not that I have read much myself), much from William DeMaria and Brian Martin, both Australian scholars.
 
Puppycow said:
But I think this should be a cautionary tale for all of us skeptics: for once the loopy paranoid guy who saw a conspiracy was right, and the people who thought that these were the ravings of a conspiracy theorist were wrong.
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Well yes, Markopolous had a large amount of factual analysis which he submitted to the SEC, and actually he did that anonymously to begin with. Any investigation should rationally address the analysis, not who produced it.

The SEC has no defence other than human error or incompetence/corruption (well--this isn't "defence"). It is likely that their own investigation into their mistake shows up the first one.
 
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I'm a regulator so I have three items to note on this issue:

1) a regulatory organization that has overview over a lot of high-profile firms will usually be inundated with whistleblower tipoffs and there may not be the resources available to follow up on everything.

2) some tipoffs orginate from dissatisfied customers or disgruntled employees just trying to make life miserable for the company by getting the regulator on them, but the tipoffs turn out to be of little consequence.

3) some tipoffs are about things that are not really a concern for a financial regulator such as pay disputes, accusations of unfair dismissal, work harassment allegations etc.

I am not saying all tipoffs are like this of course but enough are that sometimes you have to be skeptical of the tipoff


As for Madoff their external auditors should have their license pulled. I cannot see how an audit firm could excuse itself for not figuring out it was a ponzi scheme after all of these years.
 
timhau said:
Do you think the auditors were just incompetent, or were they bought?
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I am hard-pressed to think about how they could not be complicit in this somehow. Apparently it was a tiny firm with only one CPA - and this is the auditor of the $50 billion fund?

Audit standards dictate that an auditor should not accept an audit engagement when the size of the company is clearly too big for your firm to audit appropriately, and you should not accept any clients whose potential revenues would be large enough to affect your objectivity. (i.e. you shouldn't audit the company if, say, the audit fees would make up 20% of your revenue because then your independence is compromised due to it being such a big client). A one-CPA audit firm had no business accepting a $50 billion fund as a client. Thus at the very least the audit firm violated auditing standards as far as I'm concerned.

But even then I have a hard time believing that even a one-CPA firm could not determine that the assets did not exist. I would love to hear this CPA's side of the story.
 
Wasn't it pretty much sticking out like a sore thumb? 10% returns every year without fail? That just doesn't happen.
 
Policenaut said:
Wasn't it pretty much sticking out like a sore thumb? 10% returns every year without fail? That just doesn't happen.
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Not really that unusual. Many funds delivered way more than 10%/yr. just from statistical variation. Historically, Ponzi's promised way more than Bernie who operated below the radar by promising consistent growth and eschewing exceptional gains during boom periods.

One overlooked factor is that the SEC generally focuses on public entities with rigid disclosure requirements which the public at large can invest in. Investments in Bernie's fund were limited to high income rich people* that are deemed capable of exercising their own due dilligence and are able to assume the associated risks. While the SEC has some power over these, they are not the focus of the SEC. It is similar to investing in private companies. The SEC spends little of it's limited resources regulating these since they are are illiquid investments and attract few neophytes.

* A few not so rich people were taken in by Bernie but they no doubt signed, perhaps fraudulently, documents that indicated they were accredited investors and hence allowed to invest in these sorts of funds.
 
I read an interesting article, which unfortunately I cannot find now, by some psychologist (I think). The point he made was that many of Madoff's clients probably realized that there was something fishy going on (because of the extremely barren reports, and the completely non-specific information on how the money was actually invested). But, these people would not believe themselves to be the victims, rather they would suspect some other shady activity, such as insider trading.
 
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