How bad is the SEC?

If you don’t have time to read the book by Harry Markopolos, No One Would Listen (highly recommended), just do a search on “Harry Markopolos interview”.

  • 60 Minutes (Text and video)
  • YouTube Part 1 and Part 2 (60 Minutes interview)
  • Fraud Magazine (Recommended)
  • SEC Inspector General Report (WSJ – Report, public version, in PDF)

It took Harry Markopolos, the Greek Geek (his term), five minutes to know Madoff was a fraud. It took him four hours of mathematical modeling to prove it was fraud. SEC? Clueless after many years – even after he handed them proof beyond doubt. From the Fraud Magazine interview:

When and why did you eventually abandon your investigation?

The top three offices at the SEC are in New York, Boston, and Washington. If the three best SEC offices weren’t bright enough to figure out such an easy scheme then it was clear to me that the case had no future.

Of the 29 red flags you identified, which ones were the strongest indicators that a fraud was being perpetrated? Which ones should have made the SEC sit up and take notice?

All of them. But if I had to pick the most important red flag it would be that Madoff’s purported options trading size was seven to 65 times the size of the actual market for those derivative instruments at various points in time.

How many of those 2300+ pages of the current bill address the failure of the SEC to see the fraud? A good wager would be few if any. The only thing that keeps us safe is not the SEC; While many people on Wall Street skirt more than a few ethical issues, they are not complete frauds.

Lesson for the young – Math rocks! And if you are a lawyer, make sure you have geeks and nerds in your social network. It helps to have a few good lawyer jokes because most nerds and geeks find lawyers to be pompous elitists. In their world, you don’t know jack. But if you can get past that, and share knowledge, they will tell you everything you need to know in terms you can understand. Odds are they know a lot more about the law, at least in terms of strategy and tactics, than you might think.

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