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48–673 PDF 2009

ASSESSING THE MADOFF PONZI SCHEME 

AND REGULATORY FAILURES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT 

SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

FEBRUARY 4, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–2 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

CAROLYN B. MALONEY, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

CHARLES A. WILSON, Ohio 

BILL FOSTER, Illinois 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

SCOTT GARRETT, New Jersey 

TOM PRICE, Georgia 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

JUDY BIGGERT, Illinois 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

RANDY NEUGEBAUER, Texas 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

February 4, 2009 .............................................................................................. 1 

Appendix: 

February 4, 2009 .............................................................................................. 89 

WITNESSES 

WEDNESDAY, FEBRUARY 4, 2009 

Donohue, Andrew J., Director, Division of Investor Management, U.S. Securities and Exchange Commission .......................................................................... 49 

Luparello, Stephen, Interim Chief Executive Officer, Financial Industry Regulatory Authority .................................................................................................... 56 

Markopolos, Harry, CFA, CFE, Chartered Financial Analyst and Certified 

Fraud Examiner; accompanied by Gaytri Kachroo and Philip Michael, 

Counsel .................................................................................................................. 5 

Richards, Lori A., Director, Office of Compliance Inspections and Examinations, U.S. Securities and Exchange Commission ............................................. 54 

Sirri, Erik, Director, Division of Trading and Markets, U.S. Securities and 

Exchange Commission ......................................................................................... 51 

Thomsen, Linda, Director, Division of Enforcement, U.S. Securities and Exchange Commission .............................................................................................. 48 

Vollmer, Andrew, Acting General Counsel, U.S. Securities and Exchange 

Commission ........................................................................................................... 53 

APPENDIX 

Prepared statements: 

Baca, Hon. Joe .................................................................................................. 90 

Bachmann, Hon. Michele ................................................................................. 91 

Garrett, Hon. Scott ........................................................................................... 93 

Luparello, Stephen ........................................................................................... 94 

Markopolos, Harry ............................................................................................ 101 

U.S. Securities and Exchange Commission joint written statement ............ 174 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bachus, Hon. Spencer: 

Letter to Hon. Christopher Cox, then-Chairman of the SEC, dated January 23, 2007 ................................................................................................... 189 

Letter to Hon. Arthur Levitt, then-Chairman of the SEC, from the Jefferson County Commission, dated November 17, 1997 .................................. 190 

(1) 

ASSESSING THE MADOFF PONZI SCHEME 

AND REGULATORY FAILURES 

Wednesday, February 4, 2009 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:38 a.m., in room 

2128, Rayburn House Office Building, Hon. Paul E. Kanjorski 

[chairman of the subcommittee] presiding. 

Members present: Representatives Kanjorski, Ackerman, Sherman, Capuano, Hinojosa, McCarthy of New York, Baca, Lynch, Miller of North Carolina, Scott, Maloney, Bean, Klein, Perlmutter, 

Donnelly, Speier, Wilson, Foster, Kosmas, Grayson, Himes, Peters; 

Garrett, Castle, Manzullo, Royce, Biggert, Capito, Neugebauer, 

Posey, and Jenkins. 

Ex officio present: Representatives Frank and Bachus. 

Also present: Representatives Green, Maffei, and Arcuri. 

Chairman KANJORSKI. This hearing of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises 

will come to order. 

I ask unanimous consent that Mr. Arcuri has permission to participate in today’s hearing. Without objection, it is so ordered. 

Pursuant to the agreement with the ranking member and to 

allow as much time as possible for testimony and members’ questions, opening statements today will be limited to 5 minutes on 

each side. Without objection, all members may submit opening 

statements in writing that will be made a part of the record. Without objection, it is so ordered. 

Good morning, everyone. We meet today to continue our review of the $50 billion Ponzi scheme allegedly perpetrated by Mr. Bernard Madoff. This is the second in our series of hearings on this 

topic. As my colleagues know, we are using the largest known instance of securities fraud as a case study to guide the work of the 

Financial Services Committee in reshaping and reforming our Nation’s financial services regulatory system. 

We preside at a crucial moment in our history, and our work on 

these matters in the 111th Congress will influence the securities 

industry for generations to come. After all, the Congress last undertook a wholesale rewrite of these laws in the wake of the Great 

Depression. We have only periodically tinkered with that regulatory engine over the last 75 years. The world, however, has now 

2 

changed, and the motor is broken beyond repair. We therefore need 

to invent a new engine to ensure that the securities regulatory system reflects today’s realities and can respond effectively to tomorrow’s innovations. 

The low tide in our financial markets has exposed many individual frauds and many problems in our regulatory system. Since 

the Madoff scandal came to light in December, we have learned of 

other sizable schemes and frauds. Some of these cases which are 

now under investigation include the flight and capture of Arthur 

Nadel, a wayward hedge fund advisor in Florida, the $50 million 

con organized by Joseph Forte in Philadelphia, and the $370 million scam of Nicholas Cosmo in Long Island, who promised 48 percent annual returns. 

During the last month, I have also heard from numerous victims 

not only of Mr. Madoff’s swindle but many of these other cases. 

They want the help of their government. I have great sympathy for 

these individuals, including Mr. Goldstein, who joined us at our 

last meeting. They expected regulators to perform their jobs effectively. The Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Securities Investor Protection 

Corporation, the Internal Revenue Service, the Justice Department, 

State securities regulators, and other appropriate authorities therefore must move quickly and do all they can to provide restitution, 

especially for retirees, charities, and pension funds. 

Today, we will begin our proceeding by hearing from Mr. Harry 

Markopolos, an external whistleblower and conscientious citizen. 

We are pleased to welcome him to the subcommittee. I also greatly 

appreciate the effort he has put into preparing his testimony. 

Unlike many others who suspected that something was wrong 

and amiss in Mr. Madoff’s operations, Mr. Markopolos took the 

extra step of alerting authorities at the Securities and Exchange 

Commission about his concerns. As we will learn from his testimony, Mr. Markopolos was justifiably relentless in ringing alarm 

bells. Unfortunately, our regulators failed to follow his roadmap 

and heed his warnings. As a result, thousands of investors were 

hurt. 

With today’s second panel, we will hear from the frontline regulators at the Securities and Exchange Commission and the current 

leader of the Financial Industry Regulatory Authority. These individuals will help us to identify the loopholes that allowed the 

Madoff Ponzi scheme and other securities frauds to take place and 

offer recommendations for reform. These experts will additionally 

respond to the concerns raised by the victims of the Ponzi scheme 

and the observations of Mr. Markopolos. 

Going forward, the committee has an enormous task ahead of 

itself. We need to pursue large-scale reforms by creating an effective method for monitoring systemic risk. While we have already 

begun work to craft wholesale regulatory reforms, I will also introduce legislation in the coming days that responds to one of the 

unique problems identified in the Madoff case. Specifically, my bill 

will close a legal loophole and permit the Public Company Accounting Oversight Board to conduct inspections and examinations of the 

auditors of broker-dealers. 

3 

In closing, I would like to welcome Scott Garrett as the Capital 

Markets Subcommittee’s most senior Republican for the 111th Congress. I look forward to working with him to reach a bipartisan 

consensus and develop good public policy on the many matters 

under our jurisdiction. 

And now, I would like to recognize the ranking member for his 

opening statement. Mr. Garrett. 

Mr. GARRETT. Thank you. And before I begin, I just thank you 

and I look forward to working with you on this very important 

issue and, noting your comments on the air this morning, that I 

think I concurred on a number of the positions that we will be taking on this going forward. I am looking forward to it. 

So thank you. I will yield myself 3 minutes for my comments. 

Thank you, Mr. Chairman, for holding this hearing and also for 

the witnesses who are here today. I believe that there are three 

main points that need to be addressed. 

First, there will be some talk that there are gaps in the current 

regulations that need to be filled. I don’t know if that is actually 

the case. Each and every one of Mr. Madoff’s relevant businesses 

were actually regulated by someone. There was not a gap in the 

sense that one sector was not covered by a regulator that needs a 

new regulator or more regulation. 

Second, the failure at best, as we can see it today, came in part 

from a lack of coordination or basic information sharing between 

the agencies, specifically between the divisions within the SEC as 

well as FINRA. You know in 2006, Mr. Madoff was required to finally register his investment advisory business with the SEC. Traditionally firms such as Mr. Madoff’s that had both an advisory 

business as well as a broker-dealer business had the broker-dealer 

arm process the trades made by the investment advisory arm. The 

SEC is well aware of this relationship between an investment advisory business and a broker-dealer business and how they work together when they are part of the same company. But over the last 

10 years, FINRA has not conducted audits of his broker-dealer arm 

with the knowledge that Madoff’s investment advisory unit even 

existed. So in light of the multiple infractions on his broker-dealer 

arm, it seemed incumbent upon the SEC that they should have ordered an internal audit when the investment advisory business 

registered in 2006. Unfortunately, I don’t think we will learn today 

why that was not done. At the very least, they should have informed FINRA of the newly registered business advisory business 

and recommended to them to look back over their audits of the 

broker-dealer business with this new information and going forward to examine any other inconsistency. 

Third, while I appreciate that the SEC cannot follow up on every 

single complaint—they say they get literally tens of thousands of 

them—with the specificity that we would like, I do not see that the 

failures were from a lack of funding or authority but in performing 

and executing the responsibility under the powers that they already had. 

For example, we understand that there were recommendations 

for changes in the examination procedure and data collection in the 

various divisions. And for reasons not entirely clear, they were 

never implemented for over more than a 10-year period. 

4 

So in conclusion, we really cannot end all fraud nor guarantee 

that changes that we will be recommended or that the chairman 

will recommend to make sure that this never possibly happens in 

the future. But at least some of the things, had they been implemented earlier, at least in this case, it appears that the improprieties would have been discovered much earlier. It is sad when you 

think about but for the fact that Mr. Madoff came out and confessed this scandal, this scam would still be going on today. 

And with that, I yield back. 

Chairman KANJORSKI. Thank you very much, Mr. Garrett. I now 

recognize Mr. Royce for 2 minutes. 

Mr. ROYCE. Well, thank you, Mr. Chairman. And I really want 

to thank Mr. Markopolos for testifying here today. I can only imagine the degree of angst and frustration over the years that he felt 

going forward to the SEC with his analysis, repeatedly preparing 

that, preparing reports, showing the magnitude of the fraud. We 

are not discussing here how we stop all fraud. We are discussing 

the greatest fraud on record. We are talking about a systemic fraud 

here that has done untold damage really in terms of confidence of 

the system. And we are also talking about a fraud in which a few 

things surfaced. We will hear about some of it in your testimony 

later. 

But I think that the concept of overlawyering, the fact that—and 

with we saw this in Britain, too, with the FSA. You have bureaucrats. You have people, you know, who are attorneys who don’t understand the complexities of the market. And when somebody 

brings them and lays out for them that complexity—this was a discovery that was made in Britain actually after they missed Northern Rock. After they missed a number of things, they said, well, we 

have to reach out and bring into our FSA people who have experience in the markets to unravel some of the intricacies. And this 

was what I think was partly missing here. 

But also what was missing was the type of discipline which 

would cause someone to sit down and try to walk through and understand. There was not the capacity on the part of many of these 

attorneys, I take it, to really follow what you were laying out for 

them. And what I guess hits all of us the most is that you didn’t 

give up on these efforts. You tried repeatedly, and you tried to encourage others to look into this in order to protect investors not 

only here but around the world. And for that, we want to express 

our appreciation, our appreciation for you being here today. 

I have read your testimony and look forward to the questions 

that we can ask you because we have to re-engineer the SEC in 

going forward so that these kind of systemic risks are presented, 

especially when a citizen like you comes forward and does their 

best in order to lay out the case. 

Thank you very much, Mr. Chairman. 

Chairman KANJORSKI. Thank you, Mr. Royce. And now I am 

pleased to introduce our first panel, our first witness. Without objection, your written statements will be made a part of the record. 

You will be recognized for a 5-minute summary of your written testimony. 

We are pleased to have Mr. Harry Markopolos, an independent 

financial fraud investigator and a chartered financial analyst and 

5 

certified fraud examiner. Mr. Markopolos is joined at the witness 

table by his attorneys, Ms. Gaytri Kachroo and Mr. Philip Michael. 

His attorneys are here for advice only and will not be testifying 

themselves. Mr. Markopolos, it is all yours. 

STATEMENT OF HARRY MARKOPOLOS, CFA, CFE, CHARTERED 

FINANCIAL ANALYST AND CERTIFIED FRAUD EXAMINER; ACCOMPANIED BY GAYTRI KACHROO AND PHILIP MICHAEL, 

COUNSEL 

Mr. MARKOPOLOS. Thank you, Mr. Chairman. Good morning. 

Thank you for inviting me here to testify before your committee 

today regarding my 9-year long investigation into the Madoff Ponzi 

scheme. I would also like to recognize my Congressman, Stephen 

Lynch, who is a member of the committee. I look forward to explaining to Congress today and the SEC’s Inspector General tomorrow what I saw, when I saw it, and what my dealings with the 

SEC were that led to this case being repeatedly ignored over an 

81⁄2 year period between May 2000 and December 2008. 

First, I would like to extend my deepest sympathy to the many 

thousands of victims of this scheme. We know that many victims 

have lost their retirement savings and are too old to start over. We 

also know that others have lost medical services, community services, and scholarships provided by charities that were wiped out by 

the Madoff fraud. This pains me greatly and I will do my best to 

inform you, the victims, about my repeated and detailed warnings 

to the SEC. You, above all others, deserve to know the truth about 

this Agency’s failings, and I will do my best to explain them to you 

today. 

You will hear me talk a great deal about overlawyering at the 

SEC very soon. Let me say I have nothing against lawyers. In fact, 

I brought two of my own here today. As today’s testimony will reveal, my team and I tried our best to get the SEC to investigate 

and shut down the Madoff Ponzi scheme with repeated and credible warnings to the SEC that started in May 2000 when the 

Madoff Ponzi scheme was only a $3- to $7 billion fraud. We knew 

then that we had provided enough red flags and mathematical 

proofs to the SEC for them where they should have been able to 

shut him down right then and there at under $7 billion. But unfortunately, the SEC staff lacks the financial expertise and is incapable of understanding the complex financial instruments being traded in the 21st Century. 

In October 2001, when Madoff was still in a $12- to $20 billion 

range, again we felt confident that we had provided even more evidence to the SEC such that he should have been stopped at well 

under $20 billion. And again in November 2005, when Mr. Madoff 

was at $30 billion, 29 red flags were handed to the SEC. And yet 

again, they failed to properly investigate and shut down Mr. 

Madoff’s operation. 

Unfortunately, as they didn’t respond to my written submissions 

in 2000, 2001, 2005, 2007, and 2008, here we are today. A fraud 

that should have been stopped at under $7 billion in 2000 has now 

grown to $50 billion. I know that you want to know why there was 

over $40 billion in additional damages, and I hope to be able to provide some of those answers to you today. 

6 

Just as there is no ‘‘I’’ in TEAM, I had a brave, highly-trained 

team that assisted me throughout the 9-year Madoff investigation. 

Let me briefly introduce the key team members to you. Neil Chelo, 

director of research for Benchmark Plus, a $1 billion-plus fund of 

funds, checked every formula, every math calculation, and every 

modeling technique, while also obtaining key financial statements 

and marketing documents from Madoff feeder funds. Mr. Chelo also 

interviewed senior level marketing staff and risk managers at 

these Madoff feeder funds. 

Frank Casey, North American president for London-based For- tune Asset Management, a $5 billion hedge fund solutions advisory 

firm, closely tracked the Madoff feeder funds here and abroad, collected their marketing documents, and figured out Madoff’s assets 

under management and his current cash situation. 

The final member of this four-person team was Michael Ocrant, 

recruited into the team by Mr. Casey. Mr. Ocrant was then an investigative reporter at institutional investor who made key contributions to the investigation. Mr. Ocrant was the only member of 

my team who ever met Mr. Madoff or stepped inside the Madoff operation. He conducted a key interview in April 2001. On May 1, 

2001, his publication, MAR Hedge, printed, ‘‘Madoff tops charts: 

Skeptics asked how.’’ It was an expose. It contained several red 

flags that the SEC ignored. 

These three gentlemen were my eyes and ears out into the hedge 

fund world, closely tracking who Madoff was dealing with and 

questioning the staff of the Madoff feeder funds to collect additional 

pieces of the puzzle. My Army Special Operations background 

trained me to build intelligence networks, collect reports from field 

operatives, devise lists of additional questions to fill in the blanks, 

analyze the data and send draft reports for review and error correction to my team before submitting them to the SEC. In order to 

minimize the risk of discovery of our activities and the potential 

threat of harm to me, my team, and to our families, I submitted 

these reports to the SEC without signing them. Only a few key 

trusted people at the SEC knew my name and my name only, not 

those of my team, in order to compartmentalize the damage if Mr. 

Madoff found out that we were tracking him. Mr. Madoff was already facing life in prison if he were caught, so he would face little 

to no downside to removing whatever threat he felt we posed. At 

various points in time throughout these past 9 years, each of us 

feared for our lives. Each time any of us collected information, we 

took risks, and fortunately for us we were not discovered. 

I would also like to recognize Ed Manion of the Boston regional 

office of the SEC. He was my constant confidant throughout the 

past 9 years. If not for his encouragement and bravery, I would 

have quit the investigation after my second submission, which was 

in October 2001. Mr. Manion told me that his Agency had dropped 

the ball, but that I had a public duty to keep investigating because 

the Madoff Ponzi scheme was such a clear and present danger to 

the Nation’s capital markets that if the SEC wasn’t going to investigate, well, someone had to, and he didn’t think there was anybody 

better qualified than me to lead the investigation. Mr. Manion kept 

taking the case to his superiors at the SEC and he kept getting ignored because he was not a securities lawyer, only a chartered fiVerDate Nov 24 2008 18:30 Jun 16, 2009 Jkt 048673 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\48673.TXT TERRIE
7 

nancial analyst with 25 years of trading and portfolio management 

experience in the industry. Sadly, the SEC distrusts anyone with 

industry experience. I am very surprised that the SEC did not fire 

Mr. Manion for his constant pestering about Mr. Madoff. The SEC 

to this day holds against him the fact that he kept bringing this 

case to their attention, and I believe he would be fired if he ever 

went public and told investors how strong an advocate he was on 

their behalf. 

Boston Branch Chief Mike Garrity was the other SEC official 

who distinguished himself during the case. In October-November 

2005 he examined my evidence, investigated and found irregularities, vouched for my credentials, and put me in touch with the appropriate SEC staff at the New York regional office. Since Mr. 

Madoff’s operation was located in New York City, the New York regional office had jurisdiction. 

In 2000, Mr. Manion warned me that relations between the New 

York and Boston regional offices were about as warm and friendly 

as the Yankees-Red Sox rivalry, and that New York does not like 

to receive tips from Boston. Truer words were never spoken. There 

was no centralized office of the whistleblower in Washington, 

staffed with industry professionals who knew how to determine if 

whistleblower complaints being submitted were credible and of sufficient quality to merit immediate investigation. Instead, I had to 

go through the Boston SEC regional office which had to forward me 

to the New York regional office. Unfortunately, these two offices 

did not get along, and I wasn’t able to go directly to the SEC’s 

headquarters in Washington and have them referee and lead this 

entire process. Regional turf battles definitely played a part, a determining factor in fact, in how disastrously this case was handled 

by the SEC. 

In April 2008, I went to the SEC’s Director of Risk Assessment 

with this case and got no response. I told the SEC exactly where 

to look, providing them with a long series of clear warnings that 

any trained investment professional would have immediately understood. Inexplicably, the SEC never acted upon those repeated 

multiple warnings on a 9-year time span. And as my formal written testimony makes clear, the SEC is overlawyered and has too 

few staff with relative industry experience and professional credentials to find fraud, even when a multi-billion dollar case is handed 

to them on a silver platter. Worse, my team and I kept collecting 

additional information and I kept sending it to the SEC and they 

kept ignoring it. 

The SEC is also captive to the industry it regulates, and it is 

afraid of bringing big cases against the largest, most powerful 

firms. Mr. Madoff was one of the most powerful men on Wall 

Street. He owned a prestigious brokerage firm. He and his brother 

held numerous top-level positions on the most influential industry 

association boards. Clearly, the SEC was afraid of Mr. Madoff. 

The SEC says it lives for the big cases, but the evidence shows 

that the only financial regulators bringing the big cases in the 21st 

Century are the New York Attorney General’s Office and the Massachusetts Security Division. New York and Massachusetts brought 

the big cases against the market timing scandals and the auction 

rates securities scandals, while the SEC watched quietly from the 

8 

sidelines. Even today after Merrill Lynch paid out $6 billion in bonuses after losing untold tens of billions of dollars and is being 

propped up by government bailout money, only the New York Attorney General is investigating. The SEC continues to roar like a 

mouse and bite like a flea. 

But what I find the most disturbing about the Madoff case is 

that no one from the SEC has stepped forward to admit personal 

responsibility. Instead, all we have heard is one senior official after 

another saying that they cannot comment about the Madoff investigation because it is ongoing. We have also heard senior SEC officials bemoan the lack of both staff and resources while telling us 

that they receive thousands of tips each year and that they have 

to conduct triage and can only respond to the highest priority matters. I gift-wrapped and delivered the largest Ponzi scheme in history to them, and somehow they couldn’t be bothered to conduct a 

thorough and proper investigation because they were too busy on 

matters of higher priority. If a $50 billion Ponzi scheme doesn’t 

make the SEC’s priority list, then I want to know who sets their 

priorities. 

The Troubled Asset Relief Program was funded to the tune of $700 billion by the previous Congress. Therefore, I can think of 

$700 billion reasons why the American public deserves answers 

from the SEC about its refusal to tackle the big cases and why all 

five major Wall Street investment banks under SEC supervision either failed, were forced by the government to merge with commercial banks, or became bankholding companies propped up by the 

Federal Reserve and the U.S. Treasury. When an entire industry 

that you were supposed to be regulating disappears due to unregulated unchecked greed, then you are both a captive regulator and 

a failed regulator. You have no excuses. But you darn well have a 

lot of explaining to do to the American taxpayers and you darn well 

better be apologizing to the Madoff victims. 

The incoming SEC Chairwoman needs to come in and clean 

house with a wide broom. The SEC needs new senior staff because 

the current staff has led our Nation’s financial system to the brink 

of collapse. They ignored the rating agency scandals. They allowed 

the investment banks to engage and package and sell toxic 

subprime securities to investors. They ignored auction-rate securities and allowed these toxic securities to be sold to investors. They 

ignored mutual fund market timing until embarrassed by State 

regulators into acting, and they ignored the Madoff Ponzi scheme. 

They haven’t earned their paychecks and they need to be replaced. 

This concludes my oral testimony. Thank you very much, Mr. 

Chairman. 

[The prepared statement of Mr. Markopolos can be found on page 

101 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Markopolos. 

Now we will open for questioning, and I will take the first section. 

Those are pretty tough charges you make against the SEC. At 

any time, do you feel that the Securities and Exchange Commission 

did perform its mission in the past and there was a weakening, or 

has this been a structural weakening since its very inception? 

Mr. MARKOPOLOS. Mr. Chairman, I think leadership starts at the 

top. The tone at the top is very important. I think we have had 

9 

good SEC staff in the past. It all depends on who the Chairman 

is. I thought that William Donaldson was great. He was a fox who 

came to guard the hen house. He came from industry. He knew 

where the skeletons were buried, and he had his staff dig them up 

one at a time. And I think that is what led to his dismissal in 2006. 

Chairman KANJORSKI. If you had to look at the need for reform 

and how it should be done, do you feel there is anything in the existing regulatory scheme that should just be corrected or do we 

have to start over from the bottom and reconstruct the regulatory 

scheme? 

Mr. MARKOPOLOS. I think we need to start over at the top. I 

think you need an overarching department perhaps called the Financial Supervisory Authority, and I think it needs to have all of 

the security and capital markets and financial regulators underneath it. And I think you need to combine a lot of the existing regulators, just to simplify command and control to make sure that 

there is unity of effort and to eliminate expensive duplication of effort. And you also want to make clear the reporting lines to industry. They deserve to have better regulation, fewer regulators, and 

fewer different conflicting sets of laws to respond to. 

I also think you need to start at the bottom, and you need to replace the staff that you currently have and replace them with industry professionals. If you have too many lawyers without industry experience, they really don’t comprehend the frauds of the 21st 

Century. You need people who can take apart and put back together again the complex instruments of the 21st Century. 

Chairman KANJORSKI. Do you think it is time to shoot the lawyers? 

Mr. MARKOPOLOS. No. I actually think you need to spin them out 

of the regulatory agencies and have a separate enforcement unit 

where the lawyers can do both the civil and the criminal prosecutions that are dedicated just to securities and capital markets 

frauds. But you need to keep them separate because if you have 

them in the mix, it becomes toxic. 

Chairman KANJORSKI. The revolving door problem that we all 

hear about; that is, people who work at the Agency and then end 

up on Wall Street and vice versa, is there something that can be 

done to prevent that? And is there any infection that is being carried from one entity to the other? 

Mr. MARKOPOLOS. That is a great point, Mr. Chairman. There is 

an infection if the people coming to the SEC are too young and 

looking to make their bones and look at it as a steppingstone. And 

that is why I have a recommendation that you hire senior people 

from industry who have been there for a long time, who have gray 

hair or no hair. You would be perfect. You want them coming in, 

and this is the capstone to an already spectacular career. They 

have made lots of money in industry. They don’t need any more 

money. They are not going to go back to industry. So I guess you 

want to have reverse age discrimination where you are looking to 

hire the old foxes to come in and police up the hen house. And that 

is what we really need. 

Chairman KANJORSKI. Well, there have been now recently complaints about not having the staff and not having the funds available. But not too many years ago you may recall that the Agency 

10 

recommended to the Congress that certain fees be reduced or no 

charges made on those fees because there was an overabundance 

of revenue coming in to the SEC. And the Congress and this committee actually in the early 2000 period took that action to get rid 

of that fee schedule. I think it was as much as $1.5 billion a year 

that was anticipated was not necessary. Do you think that was a 

misjudgment, a misstatement? Or was that a purposeful act on the 

part of the Agency to follow in the ideology of deregulation? 

Mr. MARKOPOLOS. I think it was ideological and idiotic because 

the industry only gets the message by the size of the fines. They 

know what a kick in the pants looks like, and they know what a 

slap on the wrist looks like. When you only slap them on the wrist, 

that sends a message that fraud is green lighted here. We don’t do 

the big cases and we don’t punish the big firms. 

Chairman KANJORSKI. If you had your way, what would be your 

highest recommended action by this Congress to take in regard to 

the regulatory scheme in the country right now? 

Mr. MARKOPOLOS. Combine regulators into one super financial 

organization with the departments underneath, like the SEC, some 

national insurance regulator, some bank regulator, probably the 

Fed, to handle all these market functions and have one super regulator above them so that there is no drop in coordination. I would 

centralize the databases so that an enforcement action by one 

agency gets noticed and picked up by the others. Mr. Madoff got 

caught in 1992, and no one apparently knew that in the New Millennium. 

Chairman KANJORSKI. Very good. Thank you very much for coming forward. And now we will hear from our ranking member, Mr. 

Garrett. 

Mr. GARRETT. Thank you. And again thank you for your work in 

this area. I will begin with what my last comment on my opening 

statement was, that but for the statement by Mr. Madoff to his two 

sons about what he had done, we may very well not be having this 

hearing today, that it would not have been uncovered officially at 

least. Do you concur with that assessment? 

Mr. MARKOPOLOS. Yes. The SEC was never capable of catching Mr. Madoff. He could have easily gone to $100 billion if we hadn’t 

had the financial crisis last year and run out of money to pay off 

existing investors. 

Mr. GARRETT. So that is basically the end game, I guess, for any 

Ponzi scheme, right, is that you can keep on running until you 

have run out of investors. And had the market actually been continuing on the uptick bubbles that we had, we might be seeing him 

being able to continue for some time to come. 

Mr. MARKOPOLOS. Correct. The SEC would never have caught 

him. He basically had to run out of money first. 

Mr. GARRETT. You have indicated on the second or third page of 

your testimony in the statement that you have here how you were 

able to collect various different pieces of information along the line. 

You indicated three or four other people who worked alongside of 

you in doing this. Was there anything that you were doing—I actually know the answer to this but I will ask you—is there anything 

that you were doing that really was outside the purview of parameters or the authority of the SEC that had they committed the 

11 

time, attention, and resources, if you will, to it could have picked 

up on those things as well? 

Mr. MARKOPOLOS. Everything that my team and I investigated 

was a matter of public record. It was basically marketing materials 

from the Madoff feeder funds and there were interviews collected 

of those feeder funds. We never had the access that the SEC had. 

We couldn’t walk into his office, collect his documents. We never 

saw his smoking gun e-mails. We never talked to any of his staff. 

We did not have the inside smoking gun evidence available to us, 

but the SEC certainly did. 

Mr. GARRETT. Is part of the problem, from your testimony, that 

the euphemism that we use here is, stovepipe conduct by an agency 

as far as the sharing of information? I referenced it in part as far 

as whether—just every aspect here, every part of Madoff’s business 

was regulated by someone. The investment advisory arm, they are 

being regulated over here. FINRA is taking care of the broker-dealer section over here. And to use the euphemism, Washington stovepipe aspect, is that the crux of the issue here? And if the answer 

is yes, is that necessarily resolved by combining them under an 

umbrella organization? Because sometimes, as you already have indicated within the SEC, in the SEC you have one organization but 

different regions that are all within it. You have the Boston region, 

I believe it was, that was not sharing information. So would that 

be counterfactual, as the other chairman would say, some time to 

show that even when you are in one organization the information 

is not always being shared? 

Mr. MARKOPOLOS. I agree. I think you need a super regulator to 

supervise all the different—and I would minimize the number of 

subregulators I had underneath there. But I want one centralized 

database of all enforcement actions so that the banking regulators 

know what the capital regulators are doing and also know what the 

insurance regulators are doing because right now you have these 

conglomerate firms that deal with all aspects of finance. They have 

insurance. They do banking. They do securities. And you need to 

combine the regulation database so that people are aware of all the 

infractions. You can’t afford to be split into an army of ants. You 

need to be as giant as the conglomerates that you are regulating. 

Mr. GARRETT. And part of the argument goes is that while until 

Madoff registered as an investment advisor, he really didn’t appear 

on anybody’s screen. Can you just comment on that? 

Mr. MARKOPOLOS. He was operating and acting as an asset manager, as a hedge fund operator. But he was registered as a brokerdealer. He exploited the regulatory gaps and he fell through the 

cracks. And no one knew what he really was doing. Even though 

the regulators went in there multiple times, they never figured it 

out because they went in piecemeal. And you really need to have 

a combined task force of regulators to go after the big frauds. You 

need to have people from each agency in there at the same time. 

Mr. GARRETT. I only have 10 seconds left. How did you know— 

you actually laid out the dollar figure in your testimony. It was this 

much here, this much here, this much here. How did you get that 

piecemeal information as to the size of it? Because we are still trying to get that question. Is it really $50 billion today? You seem 

to know that it was $7 billion here, $20 billion here, and so on. 

12 

Mr. MARKOPOLOS. My team was out there in the field, out talking to the Madoff feeder funds and identifying who they were. And 

we were tracking them very closely through Europe. We identified 

14 feeder funds, only 2 of which have come public. There are 12 

more out there hiding low in the weeds in Europe that you have 

not heard about yet. My team and I plan to meet with Mr. Kotz, 

the SEC’s Inspector General, tomorrow and turn over this very critical list so that the French and Swiss authorities can attack 

these—can inspect these organizations. Because right now if they 

don’t inspect them, if they don’t know about them, that looks very 

bad for the United States of America. 

Mr. GARRETT. I appreciate it. Thank you. 

Chairman KANJORSKI. The gentleman from New York, Mr. Ackerman. 

Mr. ACKERMAN. Thank you very much. Congratulations on your 

good work. What was the key tip-off that made you think that Bernie Madoff was a fraud? 

Mr. MARKOPOLOS. The key tip-off—and it took me about 5 minutes to figure out that he was a fraud. So it took extensive time 

and research. I basically read his strategy description. And I knew 

that wasn’t the source of his returns. I knew right away by looking 

at his performance chart. I wish I had a white board and an easel 

here, but I don’t, so I will give you a hand signal. I am going to 

show you what his performance return line looked like. It was a 

45 degree angle without any variation. It only went in one direction, up. It never had variation like the market does, like this. And 

that was the key tip-off because there is no such performance line 

as Bernie Madoff’s that has existed— 

Mr. ACKERMAN. Let the record show the witness said this— 

Let me ask you this, were you commissioned to do this? Did 

somebody hire you to do this investigation? 

Mr. MARKOPOLOS. No. I did it on my own. 

Mr. ACKERMAN. How were you compensated? How much time has 

this taken out of your week, your year? 

Mr. MARKOPOLOS. There was no compensation. We did it for the 

flag, the flag of the United States of America. We saw him as a 

clear and present danger to the capital market system and to our 

Nation’s reputation. We were from the industry. I actually was in 

a competing firm. And when you have a bad player on the field, 

a dirty player, you want him removed from the playing field. I tried 

to remove him from the playing field, but the referee wasn’t listening. 

Mr. ACKERMAN. So how much time—I am trying to figure out 

how much time the SEC should have or could have invested to figure this out. How much time did you and your group put in this? 

Mr. MARKOPOLOS. We never kept track. We are not lawyers. We 

don’t do the billable hours thing. But I can tell you, this stack of 

evidence, you see over 311 pages of documents and exhibits that we 

provided to the Congress. We were missing the e-mails from 1999 

through the third quarter of 2005. But I assure you that if we had 

access to those e-mails, which we do not, then the stack of evidence 

would have been this high. So it is however many hundreds of 

hours it took to do that. I am not sure. 

Mr. ACKERMAN. Several hundred hours. 

13 

Mr. MARKOPOLOS. Yes. 

Mr. ACKERMAN. So in several hundred hours, the SEC could have 

investigated this and come up with what you have come up with? 

Mr. MARKOPOLOS. It took me 5 minutes, but I did about 4 hours 

of modeling just to prove the math and come out with the math 

proof. So in total, it took me 4 hours of work. 

Mr. ACKERMAN. This is just because of the straight-up graphic of 

his success that led you to suspect—that is not evidence or proof 

of anything. That could be, you know—that could be just good luck 

for a long time, one would suppose. But it is not evidence. Did you 

have any hard evidence that this was a corrupt scheme, besides 

that it smelled bad? 

Mr. MARKOPOLOS. Oh, definitely. I think the hardest evidence 

that we had right at the beginning was just opening up the Wall 

Street Journal to the options section, in the C section, the money 

and investing section, and just looking at how many options contracts were in existence. And you can clearly tell that Mr. Madoff 

was several times the size of the entire marketplace for those index 

options. And so clearly he was a fraud. That took about 20 minutes 

though. 

Mr. ACKERMAN. The few statements that I have seen of victims 

of Mr. Madoff indicate that at the end of the reporting period he 

swept everything out of the account and put them in Treasuries. 

Was that his modus operandi? 

Mr. MARKOPOLOS. It was. 

Mr. ACKERMAN. Is that because then he had no need to report 

to the SEC because he had nothing at the end of the reporting period except Treasuries and they don’t do Treasuries? Is that how 

I understand the deal? 

Mr. MARKOPOLOS. You hit the nail on the head, Congressman. 

There was another reason why you do that. We did obtain the yearend financial statements for 2004, 2005, and 2006 of Greenwich 

Sentry, which is also known as Fairfield Sentry. That was the largest Madoff feeder fund. It was about $7.5 billion toward the end 

that they lost with Mr. Madoff. 

Mr. ACKERMAN. I have only seen a couple of these statements 

and came to that conclusion pretty quickly that something—but 

that is not hard evidence. But it is indicative to me if that was the 

case across-the-board with everybody with whom he dealt, should 

there not be a regulation in place that allows the SEC or whatever 

entity that going forward is going to be investigating to look into 

accounts of people who sweep things into securities and then think 

they don’t have to report to the SEC? Would that be an appropriate 

thing for us to tackle as a committee? 

Mr. MARKOPOLOS. It would. If you are not holding any financial 

instruments that are reportable at year-end marking periods or 

quarter-end marking periods, especially if you are in Treasury bills, 

which are book entry form only, there are no physical securities 

there, there was nothing for the auditors ever to inspect. And what 

Greenwich Sentry was doing, they used 3 different year-end auditors in 2004, 2005, and 2006. That made me very suspicious that 

there was auditor shopping going on because why would you have 

three different auditors in three different countries? 

14 

Mr. ACKERMAN. Understood. Might I impose on the Chair for one 

final question? Could Mr. Madoff have done this himself with thousands of clients? 

Mr. MARKOPOLOS. No. He had a lot of help. He had a robust information technology department that made sure the financial 

statements he sent out to clients each month footed because a lot 

of these retirees, they check those things and they make sure they 

match to the penny. He also had people taking in money, wire 

transfers from new victims, and sending out money to the existing 

clients, the old victims if you will. So he had a lot of help. 

Mr. ACKERMAN. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Ackerman. Mr. 

Royce from California. 

Mr. ROYCE. Yes, thank you. You pointed out that pretty early by 

analyzing this 45-degree return on investment, the absurdity of 

consistency of it and the unfailing nature of it that it was clear to 

you. I was wondering if there were some other flags there to the 

SEC beside what you brought them in the single entity custodial 

arrangement that existed, the one-person accounting firm that 

might have been a red flag, the lack of electronic account access, 

certainly the firm secrecy. I saw a piece in Investors Business 

Daily which early on, you know, that raised this issue that has 

been passed around. So there was some reporting in the financial 

press, too, that the SEC didn’t pick up, the critical managerial compliance positions held by Madoff and people in his family who were 

in that position. Any number of these probably could have triggered an investigation. 

What is your reflection on the totality of all of this on top of your 

analysis that you provided some 9 years ago to the SEC and maybe 

your thoughts on why this wasn’t undertaken in a more deliberative manner by the SEC in terms of the investigation? 

Mr. MARKOPOLOS. I think the overarching answer to your question is, they don’t have financial professionals on the staff and they 

certainly don’t have financial professionals on the staff who understand complex derivative instruments of the 21st Century. If you 

send out a team of lawyers to look at derivative transactions, you 

are not going to be able to find them. You need to have an experienced finance team in there that is highly compensated, highly 

trained, highly incentivized to find fraud. There are no incentives 

at the SEC to find fraud. That is why they shy away from the big 

cases. 

Mr. ROYCE. As you speak of the overlawyering at the SEC and 

you reflect back on the years of dealing with the various officials 

at the Securities and Exchange Commission, do you believe that 

the reason for the inaction was a lack of understanding of the models that you presented to them? Or was it just a lack of desire to 

pursue this case? As you think about the personalities involved, 

how would you analyze that? 

Mr. MARKOPOLOS. I think it was a mix of the two that you just 

described. I think they didn’t understand the red flags, the 29 red 

flags that I handed them. They had no idea how to do the math. 

They were totally incapable of doing that math. They have no one 

on their staff probably systemwide who could do that math. And 

the other part was, they are a captive regulator. Mr. Madoff was 

15 

certainly one of the most powerful individuals on Wall Street. He 

had a respected broker-dealer arm. He traded a substantial percentage of over-the-counter and New York Stock Exchange listed 

stock volume every day. And they just looked at his size and said, 

he is a big firm and we don’t attack big firms. 

Mr. ROYCE. As we look at your original analysis as to what really 

struck you in terms of the magnitude of the fraud involved in this 

case, and looking at the macro level at the SEC, from your experiences over this last 9 years, what do you think needs to be changed 

to go after the systemic risk problem here, to make certain that in 

the future, if there are entities or frauds as deep as these, that the 

SEC would be at least guaranteed to look at them? What specific 

changes would you give us or policy prescriptions right now? And 

I imagine that within the SEC there would be people pushing for 

these types of changes for some time. Let’s discuss what those 

would be. 

Mr. MARKOPOLOS. I would attack it from three different areas. 

First, I would replace the senior staff at the SEC because they 

have the wrong senior staff right now. And then, I would go to the 

bottom of the organization. You need to change who the people on 

those teams are; they can’t be young 20-somethings without industry experience. You need to get higher, senior, seasoned professionals. And the third thing you need to do, you need an Office of 

the Whistleblower to centralize these thousands of complaints that 

they get so they are not handled ad hoc by 11 regional offices. You 

need one centralized location, the Office of the Whistleblower. And 

you also need to compensate those whistleblowers for the risks that 

they are taking because once you turn a case in, you are blacklisted 

from industry and you had better make it worth their while. If you 

do those three things, I think we can solve this problem. 

Mr. ROYCE. I hope we can revisit. After this case is closed on 

Madoff, I hope we can revisit here and look at the recommendations you have given, and at that point a lot more will have surfaced as this case goes forward. I thank you again for your efforts 

on behalf of so many investors and on behalf of honesty and transparency in the system. Thank you. 

Chairman KANJORSKI. Thank you, Mr. Royce. The gentleman 

from Massachusetts, Mr. Capuano. 

Mr. CAPUANO. Thank you, Mr. Chairman. Mr. Markopolos, first 

of all, thank you for being a good citizen. It is not often that we 

get too many people at that table whom I would consider necessarily good citizens. Second of all, more importantly, before my 

time runs out, I only have 5 minutes here. If you were offered a 

job at the SEC in charge of this whistleblower bureau, would you 

take it? 

Mr. MARKOPOLOS. No. I have pressing family obligations at home 

that would prevent me from taking any SEC job for 2 years. 

Mr. CAPUANO. So in 2 years, if you were offered the job, would 

you take it? We will talk. 

Mr. Markopolos, my concern is a couple of things. The Madoff situation is one thing and it is one item. But I am just curious, I 

know how I feel. I want your opinion. Do you think that the problems you have encountered with this particular case are isolated in 

16 

this case or are they endemic throughout all of the regulatory 

structure, particularly the SEC but not just the SEC? 

Mr. MARKOPOLOS. The SEC is overmatched. They are too slow. 

They are too young. They are too undereducated. 

Mr. CAPUANO. So it is not just this case? 

Mr. MARKOPOLOS. No. It is with all the regulators in the financial system. The Fed did an even worse job of regulating the banks 

than the SEC did of regulating the capital markets. 

Mr. CAPUANO. I agree with you. And I like your concept about 

an overlawyered type of regulator with some substance below it. 

But I just want to make sure, are you just talking about fraud regulators? Because there are also regulators or an aspect of regulation that does not just deal with fraud, also deals with regular, ordinary, everyday capitalization requirements, etc., etc. We are all 

thinking about doing something about systemic risk as well in addition to fraud. And I would argue that some of those things may 

require us to have a little bit more complicated regulatory scheme. 

Is that something you have considered or not? 

Mr. MARKOPOLOS. I wouldn’t say more complicated. I would say 

more simplified, more streamlined because remember, American 

business wants as few regulators as possible. They are paying for 

the regulation. They want a value-added proposition. For every dollar they spend toward regulation, they want to receive that value 

back because right now without proper regulation, there is no trust 

in our capital markets, which raises the cost of capital or makes 

it unavailable to American businesses. 

Mr. CAPUANO. That is the other thing we want to talk about. The 

one thing, for years I have never thought that ‘‘regulation’’ is a 

swear word. I don’t think you would feel that way either. However, 

this country over the last 20 years has considered the word ‘‘regulation’’ as some sort of swear word. 

I particularly want to talk about this case. My understanding is 

that most of this money was not lost by mom and pops. Most of 

this money comes from relatively sophisticated investors. Is that 

accurate? 

Mr. MARKOPOLOS. It is. They were high net worth individuals 

who received no protection from the SEC. They are considered sophisticated investors, and I would argue that they deserve protection as well. 

Mr. CAPUANO. I would agree with you. Thus far all I have heard 

from the SEC and others is that sophisticated investors somehow 

don’t need anything. It doesn’t cause—it doesn’t run a systemic 

risk. And if some multi-billionaire wants to lose a billion dollars, 

why should we worry about it? I think this particular case, even 

what this case indicates beyond it, would argue just the opposite. 

I am hoping that is something you would agree with. 

Mr. MARKOPOLOS. Because of the people who were involved and 

their wealth, a lot of charities were wiped out. Medical services are 

not being provided today to people in the communities, community 

services, scholarships, people have no retirement income left. They 

are wiped out. So I would—I think those wealthy people deserve 

protection as well. 

Mr. CAPUANO. I agree with you. Again, and I just want to make 

sure that this is not—I have had my problems with the SEC in the 

17 

last couple of years because I think they have been asleep at the 

switch. Again, not just at the Madoff case. I didn’t see this, but I 

think the entire problem we have right now is probably—you can’t 

pick one item. But if you had to pick one item I think the lack of 

regulation is it. And I just want to hear from you, too. It is my understanding that if we had had aggressive or at least adequate regulation across the board, that first of all the Madoff situation might 

have been if not avoided—you always have criminals—at least 

minimized and maybe we wouldn’t be in some of the economic 

problems we are having today. Would you find that statement 

agreeable or not? 

Mr. MARKOPOLOS. To police up the capital markets, you have to 

increase the risk of detection of the frauds. Right now it is such a 

high reward, low risk equation to commit fraud, the markets feel 

a green light to do anything they want because they have gotten 

away with it for so long. And until you restore trust, the American 

investor isn’t coming back into our markets and, worse, foreign investors won’t either. 

Mr. CAPUANO. Do you think that absent the structure of it and 

absent the adequacy of the individuals or the pay of the individuals, the laws relative to what is legal and what is not legal, if they 

were fairly interpreted do you think the laws we have now are currently adequate or are they totally inadequate? I am not talking 

about fine-tuning. I am talking about major adequacy. 

Mr. MARKOPOLOS. You need a lot more laws because you are always going to be outdated as soon as you pass a new set of laws 

because of new financial instruments created to avoid whatever existing regulatory scheme there is. So you are always going to be behind the 8-ball. So you really have to look at the securities laws 

as the absolute bare minimum standard that you follow. And then 

you have to have regulators that enforce a much higher standard, 

which is good ethics, full transparency, fair dealing for all, and full 

disclosure. And if you do that, if you set ethics as a higher standard than the law, which it always is, then I think—and you have 

a regulator that is willing to attack bad ethics, you will get somewhere. 

Mr. CAPUANO. Thank you, Mr. Markopolos. And think about that 

job, will you? 

Chairman KANJORSKI. Thank you very much, Mr. Capuano. The 

gentleman from Alabama. 

Mr. BACHUS. Thank you. Mr. Markopolos, thank you. Reading 

your testimony and having talked to you last month and to the 

staff, you called the SEC, you wrote the SEC, you pleaded with 

them, you badgered them. There are four pages of contacts with 

them; I mean, probably over 100 attempts on your behalf to lay out 

a case. You had extended telephone conversations, extended meetings with them, and you laid out chapter and verse, you know, 

handed them a case on a silver platter. 

Was it incompetence? I am amazed that they could have ignored 

what you gave them. Was it incompetence? Was it a conflict of interest? Was it just a lack of willingness to take on Madoff? 

Mr. MARKOPOLOS. I think it was a combination of incompetence 

and an unwillingness to take on a major player like Mr. Madoff. 

They fear the big cases. 

18 

Mr. BACHUS. The chairman has talked about more funding, more 

investigators. But you know that doesn’t seem to be the case here. 

I mean it seems like they are not using the resources they have. 

Do you get any ideas on that? And there were all kinds of regulations. You laid out regulations, laws, there were all sorts of violations. 

Mr. MARKOPOLOS. There were turf battles. You had regional rivalries between New York and Boston. And by the way, neither 

New York nor Boston likes Washington very much. 

Mr. BACHUS. So dumping more money on it doesn’t solve those 

problems, does it? 

Mr. MARKOPOLOS. It doesn’t solve the problems. They do need 

some more funding though. They need a lot more funding in certain areas. They need to increase the compensation levels so they 

can attract industry-experienced veterans on the team level because— 

Mr. BACHUS. They have already been authorized to do that, I believe. 

Mr. MARKOPOLOS. They need to have incentive compensation. 

Just like Wall Street, it is base salary plus incentive for what you 

bring in. So you are incentivized to bring— 

Mr. BACHUS. In other words, if you catch people, if your job is 

to catch people, you catch them— 

Mr. MARKOPOLOS. Yes. 

Mr. BACHUS. —you are rewarded. If you don’t, you are not? 

Mr. MARKOPOLOS. Right. And what I like about that is, if someone tries to stop you from bringing a big case and you are 

incentivized to bring a big case, you will run over them with a bulldozer if you have to to get that big case in the door. And right now 

there is no incentive, no reward, for bringing those big cases in the 

door. 

Mr. BACHUS. So it is not just throwing more money at it, it is 

doing it the right, smart way; and incentives are the way to do 

that. 

How do you address those turf fights? How do you address sort 

of the sacred cows out there that they just sort won’t take on? 

Mr. MARKOPOLOS. I think that if you are in Boston and referring 

a case to New York, you get incentive credit for that as part of the 

bonus scheme for turning in a case to another region. You need to 

increase cooperation that way. 

Mr. BACHUS. Thank you. 

What would you ask us to do? What could we do differently? 

Mr. MARKOPOLOS. As a Congress? 

Mr. BACHUS. Yes. 

And I will tell you this: You have heard the so-called ‘‘pay to 

play’’ in municipal bonds? 

Mr. MARKOPOLOS. Yes. 

Mr. BACHUS. Well, actually, 10 years ago we laid out a case to 

the SEC on what was going on. Again, 2 years ago, we laid out a 

case exactly what was going on in Jefferson County. They did nothing for a year. Finally, someone, a whistleblower, someone came, 

followed on something else and was caught. So, I mean your experience, you know, is very similar experience to one some of us on the 

Hill have had. 

19 

Mr. MARKOPOLOS. Congressman, I know what happened in Birmingham, Alabama, and it happened in my hometown of Erie, 

Pennsylvania, the same thing with municipal securities fraud. 

It happened in Massachusetts as well. The Massachusetts Turn- pike Authority lost $450 million on some over-the-counter 

swaptions that they never understood, that they were deceived into 

entering into a transaction with several Wall Street investment 

banks. And the SEC has been nowhere to be found regulating 

there, enforcing action for the crimes that occurred. As a result, 

Massachusetts plans on doubling our tolls. We are going to pay for 

that out of our own pockets. 

Mr. BACHUS. Right. And that happened under the Clinton Administration, it happened under the Bush Administration. My letter was actually to the Clinton Administration. 

But I would like, with permission of the committee, with unanimous consent, to introduce my letter to the SEC detailing a similar 

experience. 

Now, the difference is, I was relying on other people. I actually 

had trusted them or relied on them to look at the information and 

tell me whether it was true or false. And they told me there wasn’t 

anything to it, basically. 

Mr. MARKOPOLOS. I think what you will see is that the SEC is 

busy protecting the big financial predators from investors. And that 

is their modus operandi right now. 

Mr. BACHUS. I appreciate that. And I want to again just tell you 

how truly grateful we are to you. Unfortunately, if your warnings 

had been taken and if the warnings of other people had been taken 

10 and 12 years ago, there would be literally millions of Americans 

who wouldn’t be suffering today from losing their entire retirement. 

So, thank you. 

Chairman KANJORSKI. Thank you very much. And without objection, the letter of the gentleman from Alabama will be entered into 

the record. 

The Chair hearing none, it is so ordered. 

Mr. Sherman of California for 5 minutes. 

Mr. SHERMAN. Thank you. 

I build on the comments of Mr. Capuano. We need you in government service. And maybe that whistleblower office needs to be established in Boston for the next 2 years. I look forward to working 

with my colleagues to make the changes necessary in law so that 

we don’t have a circumstance where today Madoff is on the streets 

and his accountant has not even been arrested or indicted. 

You point out how you were able to use your professional skills 

in roughly 4 hours, if not 4 minutes, to convince yourself that there 

was probably fraud going on here. I am a CPA by training, and I 

would think it would take someone who is a CPA about the same 

amount of time—maybe even a little less. Because as I understand 

it, the financial statements filed by Madoff showed numbers as 

high as like $10- to $17 billion; is that right? 

Mr. MARKOPOLOS. Yes. Let me explain. 

I think there are going to be two numbers that the press will start reporting—$50 billion is what Madoff himself reported. And 

that was the notional amount of loss from all the investor statements combined of what they thought they had earned over many 

20 

decades of investment returns with Mr. Madoff. And it is a different number—probably a truer number is much lower—and that 

number is probably between $15- and $25 billion, which was actually cash received by Mr. Madoff. 

Mr. SHERMAN. I am focusing on a different number. And that is, 

if you just looked at the financial statements filed by Mr. Madoff, 

they would show numbers well over $10 billion. And then they 

would be attested to by the Friehling accounting firm, which had 

one active CPA. So the first thing anybody looking at those financial statements would have done is say, well, this is a pretty big 

operation, $10-, $20-, $17 billion and the accounting firm isn’t registered with the PCAOB. And what accounting firm is this? Oh, 

they have only one CPA. 

Now, it is physically impossible for one CPA to audit a $17 billion firm. But even if it was possible, you are supposed to be an 

independent auditor. Independence includes not getting more than, 

say, about a fifth of your revenue from any one client. So unless 

you think that one CPA can audit a $17 billion operation and be 

done in a couple of months, you have a fraudulent financial statement in your hand. Not to mention your professional expertise focused on the fact that you cannot earn those kinds of continuously 

positive, even returns. 

I think either of our two professions could have spotted this rather quickly. Did you have a chance to bring your accusations to 

FINRA or the NASD? 

Mr. MARKOPOLOS. I would have never taken them to the NASD 

or FINRA. I had a lot of bad experiences as an over-the-counter 

trader in the late 1980’s with the NASD. What I found them to be 

was a very corrupt, self-regulatory organization, that if you took a 

fraud to them, they would ignore it as soon as they received it. 

They were there to assist industry by avoiding stricter regulation 

from the SEC. 

Mr. SHERMAN. Sir, you are using some strong terms. And from 

anybody else, you know, we would say, oh, that is the wild-eyed 

populist. But you have basically said that our two main securities 

regulatory agencies see their role as protecting the major institutions on Wall Street rather than protecting investors. 

You have talked about some circumstances where the whistleblower is compensated. Have you suggested some private right of 

action? In a number of other statutes we have what we call private 

attorneys general, where the whistleblower doesn’t just blow the 

whistle and hope that somebody takes action, but rather is able to 

bring an enforcement or civil case themselves, and if they win, do 

quite well. 

What would you think of a proposal like that? 

Mr. MARKOPOLOS. I would be wholly in favor of it. As you know, 

the False Claims Act already gives the right of private action on 

behalf of the government. The SEC has section 21A(e), of the 1934 

Act, which does provide for a whistleblower bounty, but it is only 

for insider trading theory cases. I would like to see that expanded 

to include all financial fraud cases so that you incentivize the foxes 

out there in the field to come forward and bring cases against their 

firm with specific and credible allegations with inside books and 

21 

records, transaction reports, with smoking gun e-mails, and basically give the government a case on a silver platter like I did. 

And if the government refuses it, give them a right of private action to take it forward. 

Mr. SHERMAN. And finally, I don’t think there is another $50 billion Madoff out there, but in your estimation, are there some miniMadoffs and medium-sized Madoffs; could somebody do what he did 

and not be as powerful as he was? 

Mr. MARKOPOLOS. There is. I plan on turning in at least a $1 billion, if not bigger, mini-Madoff to the SEC’s Inspector General tomorrow. I hope this time they will actually listen to me. 

Mr. SHERMAN. Oh, I think they will. 

Chairman KANJORSKI. Thank you very much, Mr. Sherman. 

The gentleman from Delaware, Mr. Castle. 

Mr. CASTLE. Thank you, Mr. Chairman. 

I also thank you, Mr. Markopolos, for your testimony here today, 

and I have a couple of questions. One I wasn’t going to ask, but 

something you answered before calls me to. 

Do you put FINRA and the NASD in the same camp of being ineffective because they are basically part of the entity that Madoff 

and others have come from? Or do you separate the two of them? 

Mr. MARKOPOLOS. I would separate them. I would say that the 

FINRA is even less competent than the SEC. And I never thought 

that the SEC was corrupt. In fact, I am living proof here today that 

they are not. But FINRA definitely is in bed with industry. 

Mr. CASTLE. And the NASD you sort of condemned in your previous answer. I assume that hasn’t changed. 

Mr. MARKOPOLOS. They are more like RICO. 

Mr. CASTLE. Okay. 

I may have this wrong, but I believe that the rules, as far as officials at the SEC, are that senior officials there can go to work for 

a firm, but for 1 year, they can’t deal with the SEC, at least in the 

area in which they have previously worked. 

Would we be wise to pass legislation expanding the limits on 

SEC employment transferring over to the firms which they have 

regulated—just a surmise—3 years or something of that nature? 

And following up on your concept of trying to get people at adequate compensation with senior experience, my concern is, we have 

a lot of people at the SEC who are thinking, gee, at some point I 

am going to be going to work for these firms. I need to be a little 

bit careful about what I am doing. 

If we had a greater prohibition about their ability to do that, perhaps we would limit that happening. I would just be interested in 

your thoughts about that. 

Mr. MARKOPOLOS. That is why I would like to see incentive compensation for when you bring a big case you get a big bonus. Because that way they can make their bones, punch their ticket, and 

go to industry. If you prevent them from going to industry, you will 

never get them in the first place. That is why I like— 

Mr. CASTLE. I was thinking in terms of those who have been in 

industry, as you indicated, with the gray hair—no hair, whatever 

it may be—coming to work for the SEC in their 50’s perhaps or 

whatever with the experience. I mean, they may not be going back 

to Wall Street, is my point. 

22 

Mr. MARKOPOLOS. Yes, I would like to see a lot of gray hair in 

those senior positions tackle the big cases, because they have already made all the money on Wall Street that they will ever need. 

They are not going to be able to spend what they have already 

made. 

But you want them on your team, and you want them as your 

best public servants; you want them leading the charge. 

Mr. CASTLE. Mr. Capuano, who is here, and I introduced legislation called the Hedge Fund Adviser Registration Act to require all 

the hedge fund managers to register with the SEC, all of them, 

which I believe may be a good start in overseeing that particular 

industry. 

Do you have other ideas about either registration or other things 

to make all this more transparent? Even though you made it very 

transparent to the SEC and they didn’t respond, are there ways 

systemically that we can make all of this more transparent to the 

SEC, so there are no excuses as far as future activities are concerned? 

Mr. MARKOPOLOS. Yes. One thing that Congress definitely needs 

to pass legislation regarding is the regulation of over-the-counter 

derivatives, because where there is no light and only darkness, that 

is where the financial criminals will tend to congregate. You see 

that in the over-the-counter markets. And that goes to Congressman Bachus’s remarks about lack of regulation in the municipal securities area. You can’t leave those dark corners. 

Mr. CASTLE. The accounting firm that has been brought up 

here—and I don’t know much about this, but I remember reading 

about it at the time—and that is, this accounting firm was apparently not of national note, was apparently doing just about this, 

and seemed to have disappeared when all the trouble began. 

Is there something we should be doing with respect to accounting 

firms for large hedge funds and large security brokers? 

Mr. MARKOPOLOS. I would like to think that there is, but when 

I looked at the Greenwich Sentry financial statements, they had a 

Big Four accounting firm, PricewaterhouseCoopers in the Netherlands, and PricewaterhouseCoopers in Toronto, Canada, as their 

auditor, and they didn’t spot it either. All they saw were Treasury 

bills with those year-end financial statements, which are in book 

entry form. There were no securities positions in the inventory for 

the auditors to actually inspect. And as we all know, Mr. Madoff 

self-custodied. 

So one thing you could do is make sure there are independent 

custodians, and I think that would go a long way toward solving 

this problem. 

Mr. CASTLE. Thank you very much. And thanks for all your work 

in the area. 

I yield back, Mr. Chairman. I yield back, sir. 

Chairman KANJORSKI. Thank you very much. 

We now have Mr. Hinojosa from Texas. 

Mr. HINOJOSA. Thank you, Mr. Chairman. 

Mr. Markopolos, I am very impressed with the evidence and the 

presentation that you have brought before our committee. And I 

want to say that here in Congress—and you probably know this— 

we have divided jurisdiction over our markets. 

23 

Considering all that has transpired, would you support transferring the jurisdiction over derivatives to this full Committee on Financial Services as one centralized location? And I might add to 

that question that I have no problem with leaving the commodities 

for the Agriculture Committee. 

Mr. MARKOPOLOS. I would actually be against leaving the commodities and futures for the Agriculture Committee. I think all financial instruments—and even commodities are financial instruments—need to be under one central regulator and that the 

CFTC’s function should be folded into the SEC. 

American taxpayers deserve to have the lowest cost for the regulation, and they deserve not to have regulatory gaps between enforcement agencies. 

Mr. HINOJOSA. Okay. 

What changes, if any, would you recommend to FINRA, the Financial Industry Regulatory Authority, based upon your research 

into the Madoff Ponzi scheme? 

Mr. MARKOPOLOS. I don’t have any recommendations for FINRA. 

I never really considered them in my written testimony to you. I 

was just asked to diagram what the SEC needed. 

I think what they could do is read my report and take the best 

ideas from there that would apply to FINRA and implement them. 

Mr. HINOJOSA. I am very concerned, as you are, and my colleagues here, on the money lost by the investors. Is there any way 

to ensure that they will be made whole? 

Mr. MARKOPOLOS. That is not my decision to make. 

Mr. HINOJOSA. Mr. Chairman, I yield back. 

Chairman KANJORSKI. Thank you very much. 

The gentlelady from West Virginia, Mrs. Capito. 

Mrs. CAPITO. Thank you, Mr. Chairman. 

Thank you, Mr. Markopolos, for your contribution and your insight in today’s hearing. I noticed over the course of 10 years you 

have conducted this investigation and reported, and with much 

frustration as well. 

I am wondering—and obviously a lot of the folks who invested 

with Mr. Madoff were sophisticated fund managers and sophisticated investors, and certainly they—or let me ask you this: 

Did you make your hue and cry—did you make them aware, the 

fund managers and other folks who were investing with Madoff, of 

your suspicions; and what was their reaction to you at the time? 

You know—and did you become sort of an I-don’t-know-what on 

Wall Street where you were questioned, or did people look into this 

more deeply with you? 

Mr. MARKOPOLOS. If you look at who the victims were not, that 

you would have expected to see but did not see as victims in New 

York, and certainly in Boston’s financial district, I was warning the 

firms where I had close relationships, where the people were competent and understood financial mathematics and derivative securities; and those people all stayed away. 

They were big investment banks here in the United States. They 

were big consulting firms. They were big private client offices. They 

were big funds of funds. And they all avoided Mr. Madoff because 

they knew me, and I warned them. 

And there were people at the feeder funds that I— 

24 

Mrs. CAPITO. Could you explain to me what the theater funds, 

what that entails? 

Mr. MARKOPOLOS. A feeder fund— 

Mrs. CAPITO. Oh, feeder fund. I thought you were saying ‘‘theater 

fund.’’ 

Mr. MARKOPOLOS. A feeder fund. 

Mrs. CAPITO. I understand a feeder fund. Thank you. 

You know, in our notes it has that—and I might be pronouncing 

this incorrectly—Acacia LLC put out a statement the day that Mr. 

Madoff was arrested that they would no longer recommend the 

Madoff feeder funds. So obviously, this net had been cast pretty 

wide. People were becoming very suspicious. 

What was the precipitating event to cause them to—was it people calling in their money and not finding satisfaction? Evasion by 

Mr. Madoff? What, in your book, happened that caused them to 

change their minds and others’ right at the time that it became 

public—right before? 

Mr. MARKOPOLOS. When this became public, anybody who had 

anything to do with Mr. Madoff went into hiding. You could ask 

people who were at the feeder fund staffs what their dealings with 

Mr. Madoff were, and they would run for the hills. No one wants 

to answer to the victims from the feeder funds. 

I think they feel they will be answering in court very soon. 

Mrs. CAPITO. All right. Well, I want to thank you too for your 

very in-depth analysis of the SEC and the regulatory environment. 

I think—in my view, I think some of the problem is the complex 

instruments that develop so quickly over time and the lack of the 

ability of the regulatory agencies to move with flexibility and speed 

to be able to follow and track the instruments that they are tasked 

with overseeing. Would you agree with that statement? 

Mr. MARKOPOLOS. Most definitely. I don’t think the SEC had 

anyone who understood a split strike conversion except Mr. Manion 

in the Boston SEC regional office. I don’t know how many people 

they have with 25 years of industry experience; I would say rather 

few. 

Mrs. CAPITO. All right. Thank you. 

I yield back. 

Chairman KANJORSKI. Thank you very much. 

The next member is Ms. McCarthy of New York. 

Mrs. MCCARTHY. Thank you, Mr. Chairman. 

And thank you, Mr. Markopolos. One of the things I want to 

touch on is the Ponzi schemes. When we had a hearing a couple 

of weeks ago, I asked the witnesses, you know, how many more of 

these schemes possibly could be out there? And obviously, we did 

have one on Long Island, where I come from. 

Is there anything that we can do to go forward on basically trying to prevent these things? I know we can educate the public, but 

unfortunately the old adage, ‘‘If it sounds too good, it is probably 

not good,’’ we keep saying that, but unfortunately people keep 

going through it. 

And the other thing that I would like to ask you, because a lot 

of the questions that I was thinking of asking you have already 

been asked and answered: 

25 

One of the problems we are obviously going to be facing for probably a very long future is the confidence of the American public, 

whether it is in banking, whether it is in the financial institutions, 

obviously even in government, mainly because everything has 

failed. So, with that, if you have any ideas on how we build that 

trust up? I know you have offered some suggestions. 

But one other thing, too: 

With the SEC not responding to you—and you had mentioned 

the attorney general of New York, and then Massachusetts, obviously bringing charges forward, did the New York attorney general, 

did you think about going to them, or even the FBI, being that it 

was, you know, a criminal offense? 

Mr. MARKOPOLOS. Yes. I didn’t think I could go to the FBI after 

being rejected multiple times by the SEC, because with the FBI, 

I would have to make full disclosure. And if I told them I gave this 

to the SEC multiple times and the SEC did nothing to investigate, 

then I would have zero credibility with the FBI. They would automatically assume, and be wrong, but they would assume that the 

SEC was competent, when it was not. 

As far as the New York attorney general, I actually did make an 

attempt to contact him. Mr. Eliot Spitzer was at the JFK Library 

a number of years ago. I went there with a package, with my submission to the SEC. I knew through the grapevine that he was a 

big hedge fund investor through his family trusts. And I figured 

the odds were high that he was a Madoff investor, which turned 

out to be the case. And to the staff of the JFK Library, I handed 

a packet. I made copies such that my fingerprints were never on 

that package. I handled it only with gloves, because I thought that 

he was an investor, and it turned out to be. I think the New York 

Times reported that he was. 

So I did go there. And I don’t know that he saw the envelope. 

I never saw him receive it. So I don’t know what happened. 

Mrs. MCCARTHY. When you were working with the SEC—and 

you had mentioned earlier in your testimony that only a few knew 

your name, obviously because you didn’t want your name out 

there—do you think that might have hurt, with the SEC not responding to you? 

Mr. MARKOPOLOS. No. Boston knew who I was. You know, I was 

the past president of the 5,000-member Boston Security Analysts 

Society. They knew my qualifications in derivatives. I managed billions of these as a chief investment officer at a very well-regarded 

firm in Boston. 

So that definitely wasn’t it. Boston vouched for me every step of 

the way. 

Mrs. MCCARTHY. Well, with that being said, couldn’t they have 

taken your case and pushed it a little bit more, even if they didn’t 

have a good relationship with the New York or the Washington offices? 

Mr. MARKOPOLOS. Not really. In fact, I made an offer to the SEC 

in my October 2001 submission. If you read it closely, you will see 

I offered to go undercover for the SEC under their command and 

control and have no one know where I was except my wife. And I 

would have no contact with my family during this time; I would 

have assumed a disguise, as I was trained to in the Army, and 

26 

gone undercover and led that team to a successful result very 

quickly. 

I don’t know what more I could do to put it on the line and bring 

this man to justice than I attempted to do in my October 2001 submission. 

Mrs. MCCARTHY. I think what makes me nervous is obviously 

you never gave up on this, and there are probably many other people out there that are watching this testimony and saying, well, I 

know something, but what is the sense of me going forward if no 

one is going to pay any attention to me? Especially when you tried 

so many different avenues. 

I thank you for your service. I am sorry that the government 

failed you and everybody else failed you. 

With that, I yield back the balance of my time. 

Chairman KANJORSKI. The gentleman from Texas, Mr. Neugebauer. 

Mrs. Biggert. Not the gentleman from Texas, but the gentlelady 

from Illinois. 

Mrs. BIGGERT. Thank you. Thank you, Mr. Chairman. 

Thank you, Mr. Markopolos. Everybody seems to be pronouncing 

it differently, but I am not sure of the correct pronunciation. And 

thank you for all that you have accomplished. It is almost like 

reading a good book, I think all that you have gone through. I hope 

at some time this is all put down in your words, because it is fascinating. 

You know, what we need now is for you to help us to restore confidence in the capital markets industry and the financial institutions and the economy. I mean, this is such a story that I think 

it has taken its toll on everyone. And I think what we are seeking 

really are what measures should Congress take to reform the regulations or the laws related to the case. What loopholes are left open 

that somebody is going to discover, and how can we close those to 

prevent something like this happening again? 

But on the other hand, this market has always been innovative, 

creative; and we have brought—there have been a lot of ways that 

people use to make money legally and to advance different systems. 

So that—how could we maneuver through that without really stifling the creativity and innovation? And should we be looking at 

the regulations and the laws on the books and trying to decide 

whether they are adequate enough to address this issue, or is this 

more a failure, really, of enforcement? 

Go ahead. 

Mr. MARKOPOLOS. It is both, Congresswoman. It is, we need a 

few more regulations; we can leave no more dark spots unregulated 

and unguarded for financial predators to congregate in. There 

needs to be sunshine everywhere in our capital markets. Everybody 

deserves full transparency and a square deal when they are dealing 

with investments, to restore trust. 

And the second part is, we need better people in the enforcement 

agencies. They really need to replace a lot of their staffs, especially 

at the senior levels. 

Mrs. BIGGERT. Being a lawyer, I can understand that you need 

somebody who really is in the industry. And yet, this is difficult, 

27 

isn’t it, as you said? And that concerns me. You talked about being 

a whistleblower; then you are blacklisted by the industry. 

What is your position now? 

Mr. MARKOPOLOS. I actually work full-time on fraud investigations, mainly involving cases where there is fraud against the government—Medicaid, Medicare, Department of Defense fraud, and 

IRS tax fraud. 

Mrs. BIGGERT. That is great. Is this as an independent or with 

a regulator? 

Mr. MARKOPOLOS. I am independent. I do work with attorneys, 

most of whom are former assistant U.S. Attorneys, Federal prosecutors who prosecute high-level white collar cases. Those are the 

people with whom I tend to work with most closely. 

Mrs. BIGGERT. Thank you. I am sure that as this moves along 

we will be in touch with you for more specifics; and I think that 

you have given some of those in your testimony and to the members about what we should be doing. 

But I think this is a very great hearing for us to have, you know, 

from somebody that has really delved into this so much. And I 

thank you. 

With that, I yield back. 

Chairman KANJORSKI. Thank you very much, Mrs. Biggert. 

The gentleman from Massachusetts, Mr. Lynch. 

Mr. LYNCH. Thank you, Mr. Chairman. I want to thank the ranking member as well. 

Harry, thank you very much for coming forward and for your 

great work on that. And above all, for your persistence, having 

been rejected so many times. I am sure it must have been frustrating. 

I also want to thank you for the power of your example. I know 

in my office we have received contacts from a number of former 

SEC employees and current SEC employees to raise a number of 

concerns similar in respect to what you have said here this morning. 

I think, first of all, the former SEC Chairman Harvey Pitt had 

written an article, an editorial, I believe, entitled, ‘‘Overlawyered at 

the SEC.’’ So I am not giving up his confidence in saying that he 

early on pointed to the same deficiency, and not having enough 

economists and accountants in play to be able just to analyze a lot 

of the data that was coming in and recognizing the problems. So 

that is a structural need. 

Another structural need that you mentioned in passing with respect to the gentleman from Delaware’s questions, a number of 

people that I have questioned at the SEC about the inability to discover this early on, they said that the way that Mr. Madoff had 

this structured was somewhat unusual in that he was executing 

the trade, but that he was also his own custodian bank. He didn’t 

use State Street or another third-party custodial bank, as many of 

the legitimate firms do. 

Do you see a need there? Is there a way that we can put a trip 

wire in if we separate that custodial responsibility versus the trading responsibility? Would that allow us to at least compare, or to 

have the SEC go in there and compare the books of both entities? 

28 

Mr. MARKOPOLOS. Yes. You need separate custodians. They can’t 

be—one and the same organization was one of the big ways that 

he hid this fraud for so long. 

But the SEC had enough. Even with Mr. Madoff being self-custody, all they had to do was go into his operation, take the road 

map I gave them, take those 29 red flags, and say, let me talk to 

your derivatives trading staff; and they would not have found one 

single derivatives trader there. Because the key mark of a Ponzi 

scheme is, there is no underlying product or service. It is all a 

fraud. There is nothing underneath it. The emperor wears no 

clothes. 

The other thing they could have done was go to the Chicago 

Board Options Exchange, where these OEX Standard & Poor’s 100 

index options actually traded, and talk to the people trading them: 

‘‘Have you ever received an order from Mr. Madoff?’’ And they 

would have told you he was a fraud. 

Mr. LYNCH. All right. But you still think the separate custodial 

bank idea is a good idea? 

Mr. MARKOPOLOS. It is a must-have. You really need to do this. 

Mr. LYNCH. All right. That is what I wanted to get out of you. 

The other thing that I keep hearing from some current SEC— 

and former—is that, well, there is a whistle—let me rephrase that. 

There is a hotline. I was told that senior SEC management had actually gone to an industry—a financial services industry conference 

and basically said to the firms out there, if you feel that you are 

being too aggressively investigated, then I want you to call this office. And that was a senior person, two senior people at the SEC. 

I know that these employees took that message as meaning, you 

know, we have to back off a little bit, in that the senior management at the SEC was actually captured by the industry and that 

it wasn’t doing the intense investigating that we would expect from 

them. 

Have you run into that sort of dynamic with the people of the 

SEC that you have been dealing with? 

Mr. MARKOPOLOS. Yes, I did. In fact, I brought with me the Association of Certified Fraud Examiners 2008 Report to the Nation, 

and it lists in here that the best way to find fraud; 54 percent of 

the frauds get discovered by tips, whistleblower tips; only 4 percent 

by external auditors which—the SEC is an external auditor. Therefore, whistleblower tips are 13 times more effective than external 

auditing. So why wouldn’t we want the SEC to be 13 times more 

effective? Lord knows, this Agency needs to be more effective. 

Mr. LYNCH. Right. It just struck me, there was a hotline to stop 

an investigation or to slow it down at the SEC, but there wasn’t 

one to speed it up or initiate it. It just seemed counterintuitive to 

me, given the mission of the Agency itself. 

Again, I want to—my time is short, and I have run out, actually. 

I want to thank you again for your willingness to come here and 

help this committee with its work. Thank you. 

I yield back. 

Mr. MARKOPOLOS. Thank you. 

Chairman KANJORSKI. Thank you very much. 

Now the gentleman from Illinois, Mr. Manzullo. 

Mr. MANZULLO. Thank you, Mr. Chairman. 

29 

Mr. Markopolos, could you draw any parallels between what happened in Madoff’s case and those with the hedge fund operator, Arthur Nadel? And also whether or not you are familiar with any 

rules of distribution as to—in the event that money is recovered, 

whether or not those investors who had received distributions 

would be preferred over those—those investors who had not received distributions would be preferred over those who had received distributions, i.e., a clawback? 

Mr. MARKOPOLOS. It is a God awful mess with the clawback. I 

know only what I have read. I am not a lawyer to make legal interpretations, so I prefer not to. 

Mr. MANZULLO. The first part: the parallels between Nadel and 

Madoff? 

Mr. MARKOPOLOS. There are parallels with every Ponzi scheme. 

And the SEC, you would have thought, would know these, but apparently they do not. They do not have the experienced staff at the 

junior levels, and they are even worse off at the senior levels. One 

of the things about a Ponzi scheme is, it is a cash-eating monster. 

It has a voracious appetite for cash. You need new cash to pay off 

the existing old investors. So that is always—that is there for every 

Ponzi scheme. 

The other thing is, the numbers are always too good to be true. 

And the SEC has so little investment management experience that 

they don’t know what the industry standards for good performance 

are and what the industry standards for unbelievable fraudulent 

performance are? 

And there were other red flags. But those are the two main ones 

for the Ponzi scheme. 

But they are so easy to recognize on the surface. If someone is 

advertising returns that are too good to be true and too smooth, 

you don’t have enough down months, it is always up, up, up and 

away, how can you not see these if you are the SEC? And those 

are the questions you are probably going to be asking the next 

panel. 

Mr. MANZULLO. Are you familiar with the hedge fund registration law that is being proposed by Mr. Castle and Mr. Capuano, 

and if that had been in effect, whether or not that could have saved 

investors at Nadel? 

Mr. MARKOPOLOS. Registration always helps. But if the SEC 

doesn’t send trained teams in to do the inspections and examinations, it is not going to really lead to a better result. Because the 

SEC already has jurisdiction over Ponzi schemes. If there is fraud 

out there, it doesn’t matter if you are registered or unregistered, 

the SEC has the authority to attack it. They just don’t have the 

ability or the willingness. 

Mr. MANZULLO. In the Nadel case, he was disbarred as an attorney from the New York Bar. And there is some thought that if the 

investor into his hedge funds had had some knowledge of that, that 

obviously that could have been a deterrent. 

In the registration that takes place presently, would that type of 

character flaw or legal issue come up in the registration that a person had been disbarred? 

Mr. MARKOPOLOS. Oh, certainly in the SEC Form ADV, if you 

are a registered investment adviser, you would make disclosure 

30 

there. But I don’t know how you are going to get these people to 

register if they are running a hidden Ponzi scheme. I don’t know 

that investors know enough to go to the SEC’s Web site and check 

for the ADV registration forms. 

So I think these people aren’t going to go on the map. I think 

they are going to remain hidden below the surface or underneath 

the rocks. So I don’t know that registration is the be-all and endall. 

You certainly want them to register; and if they are not registered and the SEC receives a tip on them, well, that is a glaring 

red flag that fraud is taking place here. So it is an immediate red 

flag to the SEC that there is something here, they are not registered, we are getting a complaint about someone who is not registered. And they can go in expecting to find fraud, and chances 

are, they will find it. So I just think it is a great idea to make them 

register. 

Mr. MANZULLO. I have a last question. That is—you obviously 

brought this to the attention of the SEC. Do you have any idea how 

many other funds, characters, had been brought to the attention of 

the SEC? Is it in the tens, the hundreds, the thousands? 

Mr. MARKOPOLOS. I just know that you saw the example of my 

work that I turned in. I have seen several examples just like that 

of at least as high a quality that were turned into the SEC by people who have come to me asking for advice, how to go to the SEC, 

because they know—they knew that I was going to the SEC. And 

they submitted their complaints to the SEC that were at least as 

good as mine, and the SEC never bothered to pick up the phone 

or even show up to investigate. 

So this is common and systemic. They ignore the big cases. 

Mr. MANZULLO. Thank you. 

Chairman KANJORSKI. Thank you very much, Mr. Manzullo. 

Now Mr. Perlmutter of Colorado. 

Mr. PERLMUTTER. Thank you, Mr. Chairman. 

And, Mr. Markopolos, thank you for your testimony today and 

your persistence in this. I really appreciate sort of the forensic approach you took to this. 

But first I have to make a statement, because you talked about 

it: It starts at the top down. And I want to take a shot at my 

friends on the other side of the aisle. When you vilify people who 

are regulating the system so that taxpayers don’t have to pick up 

the pieces, or that the depositors of a bank don’t have to pick up 

the pieces, or shareholders don’t have to pick up the pieces, but you 

vilify those regulators and you make them out to be the bad guys 

in the system, then they become the bad guys in the system. 

So there are philosophical differences between my side of the 

aisle and the need for regulation so that the taxpayer doesn’t pick 

up all the pieces when everything goes to hell and wanting to keep 

the markets completely free so that the guy can make the last obscene buck. So that is my statement for the record. 

Now let’s just talk about a couple of things. I think you are right 

on the money with young people, inexperienced, ultimately wanting 

to go into the business, you know, to go to investment bankers, etc., 

being the regulators in the first place. They are going to be nervous. And you are right about picking some people who have seen 

31 

this stuff before. This is not rocket science, finding a Ponzi scheme. 

You found it in 4 hours, and I know you were looking for it. But 

when it is too good to be true, then you stop and you take a breath 

and say, what is going on here? 

My questions are, you went to the media and you had stories 

written about this. You have, supposedly, sophisticated investment 

fund managers who were investing into this. What happened with 

them? Why didn’t they see this? 

Mr. MARKOPOLOS. I think one big reason is the feeder funds were 

preying on the people that they were close to. Ponzi schemes are, 

above all, an affinity fraud. We saw that in the United States, 

where Mr. Madoff was Jewish, he preyed on the Jewish community. But that is all he did here. 

Overseas, he used different connections, and he actually took 

royal families to the cleaners, European aristocracy and high-born 

families and the nouveau riche. So I think the losses in Europe will 

actually be bigger than they are here in the United States; but 

they are going to be more hidden because a lot of that money invested from overseas was untaxed money in offshore jurisdictions, 

and they can’t admit the losses or else their host nation authorities 

will come and investigate them. 

So there are reasons for this failure. 

Mr. PERLMUTTER. Here is my question. I mean, you were looking 

for this, I think. You know, I look at your timeline, your chart here, 

which is very good; and you were asked by Rampart Investment to 

try to figure out what this, you know, split strike strategy—which, 

in my opinion, is a bunch of baloney; you know, it is like the black 

box that everybody uses for a Ponzi scheme. 

But you were asked and you discovered this. Shouldn’t those investment managers have seen something that just didn’t smell 

right? 

Mr. MARKOPOLOS. But they were paid so much to look the other 

way. 

Let me explain the fee scheme in the Madoff Ponzi. 

Mr. PERLMUTTER. Please. Thank you. 

Mr. MARKOPOLOS. Mr. Madoff was purporting to only be taking 

commissions from this product, even though he was a hedge fund 

manager who usually would take a 1 percent management fee and 

20 percent of the profits. He was so generous a human being that 

he was offering those fees to the feeder funds to lure in new victims. 

And so, let me explain the fee structure to you. To deliver 12 percent annual returns, he needed to be earning 16 percent gross, because there were 4 percent in fees. He was passing the 4 percent 

in fees along to the feeder funds and keeping only a smidgen for 

himself. And so those feeder funds were incentivized not to ask the 

questions, to be willfully blind, if you will, and not get too intrusive 

into the Madoff scheme. 

Mr. PERLMUTTER. Okay. 

What happened—you know, I noticed, in December of 2005, you 

went to the Wall Street Journal. What happened? Did they publish 

anything about this? It says you went to—I start to doubt New 

York SEC and contact WSJ. I assume that is the Wall Street Journal, Washington Bureau. 

32 

Mr. MARKOPOLOS. I did go to them, and I lost confidence quickly 

in the New York regional SEC to conduct this investigation. I lost 

it very quickly; it just took a couple weeks to lose confidence in 

them. I could see how bumbling they were. 

And I was worried with my safety because the New York branch 

chief and the team leader knew my name. And if they were corrupt, I thought I was a dead man. And so to protect myself, I went 

to the Wall Street Journal’s Washington Bureau; and that reporter, 

who was very senior and very good, was ready to come on a plane 

to Boston several times in 2006–2007. But I believe that senior editors at that publication respected and feared Mr. Madoff, and they 

never let him get on a plane, no matter how much he wanted to 

get on that plane. 

Mr. PERLMUTTER. Thank you for your testimony. Thank you for 

your service on this. 

Chairman KANJORSKI. Thank you, Mr. Perlmutter. 

Mr. Donnelly of Indiana. 

Mr. DONNELLY. Thank you, Mr. Chairman. 

Mr. Markopolos, thank you for being here. You talked about respect and fear of Mr. Madoff. And in reading your document entitled, ‘‘The World’s Largest Hedge Fund is a Fraud,’’ you mentioned 

some pretty prominent financial organizations that basically said, 

oh, we don’t touch this guy; we know it is a fraud. 

Do you know if any of those organizations also contacted the SEC 

with their concerns, in effect putting more weight behind what you 

were saying? 

Mr. MARKOPOLOS. I am not privy to all the complaints that the 

SEC receives, so I can’t answer that question from their perspective. But I believe that I was the only one to investigate and do 

the math proofs. And my team were the only ones out there closely 

tracking Mr. Madoff every step of the way and building a voluminous volume of information against Mr. Madoff. 

So I think my team was the only one out there tracking him. 

And we feared for our lives if he discovered that we were tracking 

him. 

Mr. DONNELLY. And these very prominent Wall Street organizations that said, hey, Madoff is a fraud, we stay away, was it in effect a club-like atmosphere where, well, we are not going to say 

anything about Bernie because, you know, that might come back on 

our business? 

Was that atmosphere rife throughout the people you were dealing with? 

Mr. MARKOPOLOS. In Wall Street there is a code of silence. And 

when you live in a glass house, you do not throw stones. 

Mr. DONNELLY. And with that code of silence, this is with the 

very same people that the American people are looking to trust, because they are giving every dollar of retirement savings or the 

funds they have accumulated, working hard every day at the shop, 

that they have been placing their trust in. 

Mr. MARKOPOLOS. If it is misplaced trust in fraudsters, especially 

the white collar variety. These people are much more dangerous 

than any bank robber or armed robber because these people, the 

white collar fraudsters, are the most prestigious citizens, they live 

33 

in the biggest and best houses and have the most impressive resumes. 

So when they commit a fraud scheme, they destroy companies 

and they throw thousands of people out of work, and they destroy 

confidence in the American system such that capital becomes unavailable at any price or it raises the price of capital. We cannot 

afford not to find white collar criminals out and punish them severely. 

Mr. DONNELLY. And is there—you mentioned that so many of the 

companies knew Bernie was a fraud, Bernie Madoff was a fraud. 

Is there also, even today, within these organizations like a list of 

other companies that they look at and say, we stay away from 

these guys; it doesn’t smell right, it is not working right? Is there 

a whole group that people are staying away from at this time? 

Mr. MARKOPOLOS. Yes, there are. And they don’t come forward. 

There could be many reasons. I think the main reason is, if you 

are committing fraud yourself, you are not going to tell on somebody else’s fraud scheme for fear somebody will do the same to you. 

And so they remain silent; there is a code of silence. They know 

who these people are, the fraudsters are. 

They need to start coming forward. Otherwise, our Nation’s system of finance falls apart, investors will stay away, and businesses 

won’t have access to capital. 

Mr. DONNELLY. So one of the things the SEC—it would be beneficial to do is, find out who else the organizations that are—that 

there are concerns about out there; and go through their books and 

find out how they are running their businesses and find out who 

has red flags out there. 

Mr. MARKOPOLOS. Right now, there are no incentives for the 

SEC. Right now, the SEC exists to protect financial predatory organizations from investors. That seems to be their mission statement. 

And we need to change the whole focus. 

The only way you can do that is to offer incentives to the staff 

such that anybody that gets in their way when they go after a 

fraud scheme, for whatever reason, they run them over with a bulldozer, because they have their own bonus on the line and they 

want their bonus. 

Mr. DONNELLY. We asked the Inspector General of the SEC when 

he was here, or the question I asked him was, ‘‘How many red flags 

do you need before it sets off an alarm with a particular organization that you send the examiners in?’’ And he said, ‘‘It should only 

be one.’’ 

In the Madoff case, in your document, I think you were in the 

20s on red flags; but certainly just in that testimony, we had four 

or five. 

And so they should, the SEC, have a list of organizations that 

there are red flags that they can look at to make sure that investors, that Americans who are working hard every day, can have 

confidence again. 

Mr. MARKOPOLOS. That is true. They have both an inability to 

find fraud, and they lack the willingness to attack fraud. And that 

needs to change. And I think the only way you are going to change 

that is, change the tone at the top. And you need to replace the 

34 

senior staff of the SEC, because right now the junior rank and file 

out in those regional offices has lost confidence in their senior staff. 

Mr. DONNELLY. Mr. Markopolos, thank you very much for your 

time. 

And, Mr. Chairman, thank you for having this hearing. 

Chairman KANJORSKI. Thank you, Mr. Donnelly. 

Now the gentlelady from California, Ms. Speier. 

Ms. SPEIER. Thank you, Mr. Chairman. Maybe we should get it 

straight. Is it ‘‘Markopolos’’ or ‘‘Markopolos?’’ 

Mr. MARKOPOLOS. I answer to all. 

Ms. SPEIER. All right. Mr. Markopolos, I would like to just say 

for the record that I see you as a modern day Greek hero; and I 

want to thank you for the perseverance. 

I was kind of amused a little bit to note that after all these 

years, you finally quit the investigation earlier last year. Why was 

that? 

Mr. MARKOPOLOS. It was so much pent-up frustration. To that 

point, I had been on the SEC’s doormat for 8 years and taken a 

lot of abuse from that Agency, and was ignored by that Agency. 

I only had two champions within the SEC out of 3,500, so 3,498 

people at the SEC were not helping me. I had two advocates, two 

champions, in Boston—Ed Manion and Mike Garrity. That was the 

only support I got. And Mr. Manion told me it was my public duty 

to keep leading the investigative team forward because if I didn’t 

do it, no one would; and it was such a danger to our capital markets if this was left unchecked that I needed to step into the breach 

and do something. 

But after my April 2nd submission of last year to the SEC’s Director of Risk Assessment, Mr. Jonathan Sokobin, and I got no response back, at that point I lost all confidence in the SEC. 

Ms. SPEIER. You spoke about not using your name, handing over 

documents with gloves on. You know, that is a bit of paranoia, one 

might say. And I want to know why you had that concern and if 

you suffered any recriminations. 

Mr. MARKOPOLOS. I don’t consider it paranoia. And the reason is 

Mr. Madoff was running such a large scheme of unimaginable size 

and complexity. And he had a lot of dirty money. Let me describe 

dirty money to you. When you are that big and that secretive, you 

are going to attract a lot of organized crime money and—which we 

now know came from the Russian mob and the Latin America drug 

cartels. And when you are zeroing out mobsters, you have a lot to 

fear. He could not afford to get caught, because once he was caught 

and once he knew—if he would have known my name, and he knew 

that he had a team tracking him, I didn’t think I was long for this 

world. 

Ms. SPEIER. All right. 

In your testimony, you reference Ms. Cheung in New York as the 

Branch Chief. And you say, ‘‘She never grasped any of the concepts 

of my report, nor was she ambitious enough or courteous enough 

to ask questions of me. Her arrogance was highly unprofessional, 

given my understanding of her responsibilities and mandates. 

‘‘When I questioned whether she understood the proofs, she dismissed me by telling me that she had handled the multibillion-dollar Adelphi case. I then replied that Adelphi was a mere few-bilVerDate Nov 24 2008 18:30 Jun 16, 2009 Jkt 048673 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\48673.TXT TERRIE
35 

lion-dollar accounting fraud, and that Madoff was a much more 

complex derivative fraud that would easily be several times the 

size of Adelphi. She never expressed even the slightest interest in 

asking me questions. 

‘‘She told me that she had my report, and if she needed more information, she would call me. She should be fired.’’ 

Mr. MARKOPOLOS. She already left the Agency, but otherwise I 

would agree. 

It is too late. 

Ms. SPEIER. You referenced that you thought there needed to be 

housecleaning. And yet there are people, by your own reference, in 

the New York attorney general’s office and in the Massachusetts 

Securities Division who are doing great work. 

So it is not a lack of talent out there. It is a lack of really identifying the talent and bringing them in; wouldn’t you say that? 

Mr. MARKOPOLOS. I would agree. And I would urge the Congress 

to consider the fine examples set by the New York attorney general’s office and the Massachusetts Securities Division. They give 

great regulation on the big cases that are nationwide fraud cases, 

and they get full restitution to the victims. They are aggressive. 

But they are small. They don’t do a lot of examinations. All they 

do is take in whistleblower tips and act upon them and act vigorously. They are pit bulls against financial fraudsters. And here we 

have a pip-squeak of a flea in the SEC. 

So it is not the size of the dog, it is the size of the fight in the 

dog. And that is why I commend those two State regulators. They 

are very aggressive. 

And if the SEC does not reform itself, you have an option. Just 

disband the SEC, zero out their budget, put all 3,500 of those people on the streets, because they are not protecting us right now; 

and just fund the New York attorney general’s office and the Massachusetts Securities Division. 

Ms. SPEIER. All right. My time is about to expire so let me ask 

you one final question: Fairfield Greenwich and Tremont, sophisticated investors, and yet they did not do their due diligence. Should 

we be going after them as well? Should someone be going after 

them because they ripped off the American people? 

Mr. MARKOPOLOS. I would say they need to be looked into. If 

they didn’t know, they were willfully blind, and they got paid a lot 

of money to be willfully blind. 

Ms. SPEIER. Since I have opportunity for one more question, 

there was a reference made to the attorney in the SEC who later 

married Mr. Madoff’s niece. 

Do you know any more about that? 

Mr. MARKOPOLOS. I am not privy to the SEC’s investigation. 

Ms. SPEIER. Thank you. 

Chairman KANJORSKI. The gentleman from Ohio, Mr. Wilson. 

Mr. WILSON. Thank you, Mr. Chairman. 

Thank you, Mr. Markopolos, for coming forward today and for 

what you have done to this point to point out the greed and what 

is really going on. It always amazes me in America that we can 

lock up a single mother for stealing a can of spaghetti sauce at the 

convenience store, but we allow this kind of stuff to go on. It is just 

hard to understand. 

36 

Do you think that the size of the SEC—you said 3,500 people— 

is that they need 4,000; or do they need a little mission statement 

or maybe some integrity in there? What—in your own opinion, 

what do you think can be done with the SEC to make them effective? 

Mr. MARKOPOLOS. First of all, I think 3,500 is a lot of people. 

You need 3,500 better people to start with. Before you get bigger, 

you need to get better. You need to replace the people that you currently have, upgrade them with industry veterans. And then you 

need to equip them adequately for the fight. Right now they do not 

use Bloomberg’s. Every portfolio manager, every trader, every analyst on Wall Street uses a Bloomberg machine. And the SEC, they 

are lucky if they have one per regional office. If you are not 

equipped with the tools to do the fight, you are showing up at the 

gun fight without a gun, you are going to lose every time, and that 

is why they lose every time. 

Mr. WILSON. So in other words, the quality of what they are 

doing, the equipment to work with, and the ability to move forward 

and actually make change is what really needs to be done. 

Mr. MARKOPOLOS. Yes. 

Mr. WILSON. My second question has to do with auditing, which 

I would think is one of the things the primary would focus when 

there are wrong things being done. Could it be a random assigned 

auditor rather than the same old same old that they have every 

time? 

Mr. MARKOPOLOS. I would rotate the teams personally. You want 

a fresh set of eyes looking at the books and they want a fresh set 

of trained eyes. Right now those eyes are not trained. They are also 

not trained in human intelligence gathering. When they come in to 

inspect a firm, they are led to a conference room. They meet the 

compliance staff and they are fed controlled pieces of paper. That 

is what they do. They inspect pieces of paper because they are too 

untrained to realize what to look for on the financial end. All they 

are looking for is pieces of paper. If they see the pieces of paper, 

you are going to get a fine audit report back from the SEC. 

What they need to be doing is talking to the portfolio managers, 

to the traders, to the marketing people, to the client service officers, the information technology people. And they need to be interacting with them and saying, is there any fraud here? Is there anything illegal or unethical happening here? And if you get a ‘‘no’’ answer, say fine, thank you. Is there any fraud anywhere else in any 

other organization that your firm deals with or that you know 

about? And then you hand them your business card. And you say 

if there is, if you ever discover a fraud, please let me know. And 

hand them the card. I think if you do that, you will increase audit 

effectiveness. 

Mr. WILSON. It sounds like a pretty good commonsense way to 

approach it. I guess part of my question, too, is instead of having 

the same firm each time where a lot of times you know we could 

see just the cover pages change and the numbers reflect whatever 

happened that year. But are they really reaching in and interviewing with the people who are preparing those papers with 

them? As you said, are they really drilling down on it and saying, 

is there fraud? Is there anything that you are upset about or that 

37 

you are concerned about? And yes, here is my card. And contact me 

as soon as possible if there is anything you can help us with. 

Mr. MARKOPOLOS. The SEC staff are afraid to ask those questions because they fear the answer would be yes, there is fraud. 

Mr. WILSON. That is tough. What about the bounty hunter situation that has been mentioned? Is that any kind of a way to look 

to try to get a grip on this thing, to get a handle on it? 

Mr. MARKOPOLOS. If you incentivize private parties who work at 

these firms that are committing fraud and you incentivize them 

enough, they will come forward with the books and records that 

solve the case quickly, easily, at low or no expense to the government. They would be your best source. 

Mr. WILSON. That is good to hear. Sounds like some pretty good 

commonsense things could correct a lot of what is going on. Thank 

you, Mr. Markopolos. 

Chairman KANJORSKI. Thank you very much, Mr. Wilson. The 

gentleman from Florida, Mr. Grayson. 

Mr. GRAYSON. Thank you, Mr. Chairman. Mr. Markopolos, in the 

year 2000, the last year of the Clinton Administration, the SEC 

brought 69 cases of securities fraud and prosecuted them. In the 

year 2007, the 7th year of the Bush Administration, it brought 9 

cases; that is 69 versus 9 cases. What is your experience in general 

with the enforcement of the securities laws in the Bush years? 

Mr. MARKOPOLOS. There is a difference between zero tolerance 

for fraud and zero enforcement of fraud, and I think we have had 

zero enforcement. 

Mr. GRAYSON. Zero enforcement for the past 8 years? 

Mr. MARKOPOLOS. Correct. 

Mr. GRAYSON. Now you have referred to this several times, the 

Ponzi scheme. Is that a rather newfangled thing? 

Mr. MARKOPOLOS. It is rather old. It is from where I am, Boston, 

Massachusetts, 131 School Street in downtown Boston. These are 

rather old schemes. You would think that the SEC would be on to 

them by now, but apparently they are not. 

Mr. GRAYSON. So when did Mr. Ponzi actually operate? 

Mr. MARKOPOLOS. He operated in, I believe, the early 1930’s, late 

1920’s. 

Mr. GRAYSON. So this isn’t a question of mastering some complicated derivatives, right? 

Mr. MARKOPOLOS. No. Mr. Madoff was actually not using any derivatives whatsoever. That was just the hook, that was just the facade. Underneath it, there was nothing. 

Mr. GRAYSON. I understand that in 2005 you wrote a letter regarding the scheme and the title was, ‘‘The World’s Largest Hedge 

Fund Is a Fraud’’; is that correct? 

Mr. MARKOPOLOS. It is. 

Mr. GRAYSON. Could you have possibly been more explicit? 

Mr. MARKOPOLOS. I even drew pictures. So I don’t know how I 

could have been more explicit. I gave them a roadmap and a flashlight to find fraud and they didn’t go where I told them to go or 

ask the questions that I told them to ask or call the people that 

I told them to call. 

Mr. GRAYSON. Who did you address that letter to? 

38 

Mr. MARKOPOLOS. I initially sent it to the SEC regional office in 

Boston, to Mr. Ed Manion. He put me in touch with Mike Garrity, 

an SEC Branch Chief in Boston, who actually believed me, and 

knew my credentials, he vouched for me, found several irregularities. In a week’s time, he did more than the entire New York regional office and he said, there is something here. I am going to 

put you in touch with that New York regional office. And he did. 

But they refused to follow up. 

Mr. GRAYSON. The year before you sent that letter in 2004, I understand the SEC convened a session and a gentleman made this 

statement at that session regarding what he proposed, the deregulation of Wall Street firms. He said, ‘‘You really have to start with 

the assumption that most of us in this industry really are our clients’ interest coming first.’’ Do you know who made that statement? 

Mr. MARKOPOLOS. No. 

Mr. GRAYSON. Mr. Madoff made that statement. Are you familiar 

with the concept of capture when you are talking about regulation? 

What is that? Do you know that concept? 

Mr. MARKOPOLOS. Yes. It is basically when the regulator is in 

bed with the industry they purport to regulate and do not regulate 

the industry. In fact they consider the industry the clients, not the 

public citizens. 

Mr. GRAYSON. And have you seen that in action? 

Mr. MARKOPOLOS. Yes. At the Food and Drug Administration 

and at the SEC. 

Mr. GRAYSON. As of now, Mr. Madoff was arrested and he is confined, correct? 

Mr. MARKOPOLOS. He is under penthouse arrest. 

Mr. GRAYSON. Penthouse arrest. Can you explain that further? 

Mr. MARKOPOLOS. He is leading a life of luxury, and he does 

have serious complaints. He is not able to go out for his knosh. 

Mr. GRAYSON. I understand that his luxury apartment costs $7 

million. Does that sound about right? 

Mr. MARKOPOLOS. It does. 

Mr. GRAYSON. Where did he get that $7 million from? 

Mr. MARKOPOLOS. From the victims. 

Mr. GRAYSON. Now I also understand that he is confined and his 

confinement is regulated and guaranteed by security guards, is 

that correct? 

Mr. MARKOPOLOS. Yes. 

Mr. GRAYSON. And who hired those security guards? 

Mr. MARKOPOLOS. I am not aware of who hired them. 

Mr. GRAYSON. Actually he hired them. Isn’t that correct? 

Mr. MARKOPOLOS. I am not sure. 

Mr. GRAYSON. I yield back the rest of my time. Thank you, Mr. 

Chairman. 

Chairman KANJORSKI. The gentleman from Illinois, Mr. Foster. 

Mr. FOSTER. You had mentioned that actually you are blacklisted 

from industry if you bring forth one of these cases. Are there more 

specifics that you can give us on that or examples where that has 

happened? 

Mr. MARKOPOLOS. Yes, me. I have crossed the Rubicon. I can 

never go back. 

39 

Mr. FOSTER. Are you aware of other similar cases where people 

are basically not allowed to participate or are informally 

blacklisted? 

Mr. MARKOPOLOS. Yes. 

Mr. FOSTER. Like this? 

Mr. MARKOPOLOS. Many. 

Mr. FOSTER. I guess it is unreasonable to ask about details, but 

I may ask you privately about that. 

You know, I am very interested in this issue of the principles 

from right sizing the SEC, that there be some sort of balance between the losses that are suffered from the SEC from securities 

fraud and the amount of money you put in. I guess that may have 

been handled recently, but I think that is the fundamental question that this committee has to deal with, to make it so that, you 

know, perhaps automatically the SEC is scaled as the industry expands so that it has the right level of staffing competence and, 

well, competence and manpower for these. 

One of the things that troubled me was the whole issue of secrecy. I guess there is something that is absolutely necessary that 

these things have to be handled secretly because if nothing else, for 

the possibility of market manipulation. I was wondering if you are 

experienced with the necessity of secrecy during these investigations. Is that something that you view as an essential thing or 

something you have been frustrated with when you see it not operating properly or not operating properly in secret? 

Mr. MARKOPOLOS. For me, I had to remain secret. We have 

feared for our health and safety. The government should have no 

fear, but it seemed all they did have was fear of Mr. Madoff and 

fear of the big cases. 

Mr. FOSTER. And then another thing that struck me was the 

business of segmenting and compartmentalizing what the regulators were looking at. I was wondering if it was easier for the SEC 

to be overseeing a more compartmentalized interest, if there were 

not things like dual registration and self-custodians, if you had people whose job it was just to look at custodianship issues and they 

would just go through everyone that claimed to be a custodian and 

they would have a simple set of things to look at. If you are understanding what I am saying. Just putting up firewalls and very 

clear separations in the segments of the industry, that might solve 

part of the problem with the—sort of the competence issue that it 

is easier—you know, that is one of the young kids that you referred 

to that aren’t really well trained could be taught, here is exactly 

what you look at for custodianship issues, and make the oversight 

more effective. 

Mr. MARKOPOLOS. You can do that. You need subject matter experts who are very familiar with specific areas. But you need to 

have combined enforcement teams, where that is one person on 

your team. You also have the investment manager guy or gal who 

came from industry and knows exactly what to look for. You also 

need the accountant on the team who knows how to read the financial statements with a fine-toothed comb. So you need to combine 

those people on the same team and have them coordinate and communicate among themselves in order to attack the truly big frauds. 

40 

Mr. FOSTER. Okay. I just thought—probably reiterate my respect 

for what you have done. We need thousands more like you out 

there. 

Mr. MARKOPOLOS. Thank you. 

Mr. FOSTER. I yield back. 

Chairman KANJORSKI. The gentleman from Texas, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. And I especially thank 

you because I am an interloper today. I am grateful you have allowed me the opportunity to ask Mr. Markopolos a few questions. 

Mr. Markopolos, or Markopolos, by any name, you have done 

your country a great service. By any name, your country owes you 

a debt of gratitude. 

Mr. MARKOPOLOS. Thank you. 

Mr. GREEN. And by any name, I and many others can understand why you were in fear of your life. And I believe that fear to 

have been well-founded because you were dealing with a ruthless 

person who was in bed with other ruthless people. When you deal 

with the kind of characters that you were trying to bring to the bar 

of justice, you have to be concerned not only about yourself but 

about other family members who are near and dear to you. 

I am not sure that the American people really know who you are. 

You are not just some person off the street. And while every person 

is important and all life is precious, you are not just a person off 

the street. You are a person with credentials. You are a person who 

has paid dues and who is respected. And I would like for you, if 

you would, to share some of your credentials with the public so 

that people can really understand who you are. 

Mr. MARKOPOLOS. Thank you, Congressman. I am a Chartered 

Financial Analyst. I am a Certified Fraud Examiner. I have an undergraduate degree in business administration from Loyola College 

in Baltimore, Maryland. I have a masters in science in finance degree from Boston College. I used to manage billions and billions of 

dollars in equity derivatives and trade these securities as chief investment officer for a rather mid-sized firm in Boston. I have a 

military background. I served this Nation for 17 years as an officer. 

I commanded troops at every level from second lieutenant to major. 

My last 7 years were in Army Special Operations where my unit 

that I commanded had teams overseas. This was a reserve unit. 

This is part time. I had people overseas 24/7 every day of the year 

serving this Nation. 

Mr. GREEN. Thank you. Two other points, and I will yield back 

the balance of my time. The first is, do you agree that the tone and 

tenor of the behavior of those who serve at the bottom is shaped 

by those who serve at the top? 

Mr. MARKOPOLOS. I do. You lead from the front. If the SEC Chair 

is not aggressive and competent, the organization cannot succeed. 

Everything comes from the top. 

Mr. GREEN. And do you also agree, sir, that we could have a million people in place to perform the investigative function. But if we 

don’t have the will to perform that function, the number of people 

becomes to some extent inconsequential? 

Mr. MARKOPOLOS. I would agree. Right now, the SEC staff consists of 3,500 chickens. We need to put some foxes in there and we 

need to compensate them. We need to give them incentives. We 

41 

need to get the right people. I don’t think it is a matter of right 

sizing. It is a matter of right staffing. And right now we have the 

wrong staff, particularly at the senior levels. 

Mr. GREEN. And finally, sir, in your quest for justice, did you 

happen to go by way of your own entry or by way of some sort of 

communication device, a communication to the Inspector General’s 

Office? And I am asking, did you go personally or did you send 

some message to the Inspector General’s Office which has some degree of oversight? 

Mr. MARKOPOLOS. I did not. 

Mr. GREEN. For edification purposes, if you had the chance to do 

this one more time, and I pray that you will never have to do what 

you have done again, would that be an office that you would consider taking your evidence to? Or were there reasons that you 

would like to share as to why the Inspector General’s Office was 

not a part of the circle that you tried to get this intelligence to? 

Mr. MARKOPOLOS. An Inspector General’s Office is only as good 

as the Inspector General in the office. And with Mr. Cox, if he had 

been the Inspector General back then when I was doing this investigation, I would have gladly gone to him and trusted him to do the 

right thing. But the prior occupants of that office, I would have 

never gone to them. 

Mr. GREEN. Thank you, Mr. Chairman. I yield back the balance 

of my time. 

Chairman KANJORSKI. Thank you very much, Mr. Green. Now we 

have had a nonmember of the committee waiting for an awfully 

long time, Mr. Arcuri. And Mr. Maffei, who is a member of the 

committee, has kindly consented to passing over his right under 

the rules to be heard now to give it to you. So Mr. Arcuri, your 5 

minutes. 

Mr. ARCURI. Thank you, Mr. Chairman and Mr. Ranking Member, for allowing me to sit in on this hearing. It is very interesting. 

And thank you for holding the hearing. And Mr. Markopolos, thank 

you very much for what you have done. 

You know, I think many people look at the Madoff scandal and 

they think that it is just the wealthy and sophisticated investors 

who have been hit by this. But I am here today to talk a little bit 

about some of the other people who have been hit by it. I just want 

to mention a few of the groups: The Bricklayers, Allied Craft Workers, the International Union of Operating Engineers, the United 

Association of Journeymen, United Association—a second group of 

journeymen, Local 267, 73 and 112 of New York, the Carpenter’s 

Local 747 out of Syracuse, and the United Union of Roofers. All of 

these groups are from upstate New York. They were hit for pension 

and health care benefits between $300- and $400 million. These are 

not very wealthy people. These are hard-working people who have 

lost not only their health care benefits but also their entire retirement. There has been a long line outside of my office door. And I 

think I can speak for my colleague, Mr. Maffei, outside of his door 

as well, as we both represent upstate New York. 

Obviously, my concern is this, many of these investors are not 

the very sophisticated investors. They are—they manage small 

pension funds. What can the small investors do to keep an eye out 

for the sharks that are out there like Mr. Madoff? 

42 

Mr. MARKOPOLOS. I am afraid that they may be on their own unless they hire consultants and trust those consultants, and hire 

only competent consultants because clearly the SEC is not out 

there guarding the hen house. 

Mr. ARCURI. You know, and the point that you made when you 

held your arm out and showed the 45 degree angle curve. And you 

can’t help but think, if it looks too good to be true, it probably is. 

Does the market itself, do they look at, you know, competitors who 

are out there, who are doing jobs that are too good to be true and 

say, hey, something must be wrong here; somebody needs to look 

into this? 

Mr. MARKOPOLOS. Well, I am afraid not. They missed subprime. 

They missed the collateralized debt obligations, the collateralized 

loan obligations. They missed so much it is hard to just trust in 

the professionals. You need competent regulators as well, and you 

also need common sense. 

Mr. ARCURI. My concern is this, if I am an investor and I am 

looking at the two prospective groups to invest my money in and 

one is doing everything legally and they are giving, let’s say, 5 or 

6 percent, and then you are looking at a Madoff who is giving a 

return of, say, 10 or 12 percent, the person who is giving the 5 or 

6 percent has to be looking at Madoff and saying, something has 

to be wrong here, someone needs to look at that. Isn’t there more 

pressure from the actual private sector itself to look into these? 

Mr. MARKOPOLOS. I am afraid the private sector would look at 

the Madoff returns and say, he is getting more return, taking less 

units of risk, therefore I love Mr. Madoff better and I want to invest with him more. So greed often overrules common sense. 

Mr. ARCURI. Now do you think there is a way to strike a balance 

between the SEC type of oversight and oversight from the private 

sector itself? 

Mr. MARKOPOLOS. I am sorry. 

Mr. ARCURI. Is there any way to strike a balance between actual 

oversight by the SEC type entities or the New York Attorney General and the private sector in terms of overseeing itself? 

Mr. MARKOPOLOS. Regulators overseeing itself or private sector 

overseeing itself? 

Mr. ARCURI. Private sector, yes. 

Mr. MARKOPOLOS. That is why I recommended a whistleblower 

program to compensate people from within the industry who know 

about the fraud but fear blacklisting, to step forward anonymously—or the government would know who they are so that an 

investigation could be conducted immediately and put a quick halt 

to these frauds before they lure in too many victims. 

Mr. ARCURI. And the last question I have for you is this: You talk 

about needing the SEC to be looking at bringing in the people who 

have been in the private sector for a while, who are the fox that 

you call them, and putting them in charge. But then you make references to the New York Attorney General, to the—I think it was 

the Massachusetts. 

Mr. MARKOPOLOS. Securities Division. 

Mr. ARCURI. Securities, thank you. And yet they don’t have that 

type of people in their office. They have small, lean offices. How do 

they do it and the SEC is not able to do it? 

43 

Mr. MARKOPOLOS. It is easy. They rely on whistleblowers to come 

in with tips which they vigorously pursue. When the SEC gets a 

tip, it vigorously ignores it. 

Mr. ARCURI. I want to thank you again very much and thank you 

on behalf of the hundreds, in effect thousands, of people in my district who have been ripped off and, hopefully more importantly, to 

thank you for the people that you have prevented from being 

ripped off because you were able to stop this and blow the whistle 

on Mr. Madoff. So thank you for what you have done. 

Mr. MARKOPOLOS. Thank you. 

Mr. ARCURI. Thank you, and I yield back, Mr. Chairman. 

Chairman KANJORSKI. Thank you, Mr. Arcuri. Finally, Mr. Maffei of New York. 

Mr. MAFFEI. Thank you, Mr. Markopolos. Thank you, Mr. Chairman. I, too, am not on the subcommittee, though I am a member 

of the full Financial Services Committee. As Mr. Arcuri pointed 

out, I do have a neighboring district and many of those same 

groups overlap in my district and then there are some additional 

ones. I wanted to ask you just a couple of questions that may be 

along roughly the same lines. It is interesting that you said that 

you worked for a competitor of the firm that Madoff had. And I actually worked until coming to Congress for a small locally owned 

broker-dealer that was actually a competitor of some of these feeding broker-dealers. I guess we weren’t quite as smart as you. We 

couldn’t figure out how in the world they were getting back these 

returns. But of course we didn’t know enough about what they 

were doing to avoid that risk. But it is interesting. There are a lot 

of victims here in terms of the good players in the financial services 

industry who didn’t do these practices, who have been missing out 

on business. 

But what I would like to know, do you think, given that it took 

you 5 minutes and then 4 hours, do you think that any responsible 

broker-dealer or investment adviser should have known there was 

something wrong? 

Mr. MARKOPOLOS. Yes. But I also think that they were so highly 

compensated—because a majority of the fees—and this is where 

Madoff was very clever. He left them 3 to 4 percent of the fees and 

took just a tiny bit for himself. So they became blinded by greed 

or willfully blind, if you will, and assiduously looked the other way. 

Mr. MAFFEI. Thank you. Given the fact that, according to your 

testimony, the Securities and Exchange Commission so dropped the 

ball on regulating this, so dropped the ball on catching this, do you 

think that like in so many other areas that the Federal Government has dropped the ball on regulation, that we have some responsibility to not make these investors whole again maybe but to 

do something for them, do some sort of a program? 

Mr. MARKOPOLOS. I will leave that to the Congress. I can’t make 

those decisions for you. But clearly if the government had acted 

and acted responsibly, we wouldn’t be dealing with these victims. 

So there is some obligation. We pay taxes. We want good government. We expect it to be provided. If we have regulators receiving 

paychecks, we want them to earn those paychecks and they did not 

in this case. So I think the victims would like some justice. I think 

44 

they want heads to roll at the SEC. They want someone to clean 

house with a very wide broom. 

Mr. MAFFEI. Okay. Thank you. And I guess my last question is, 

who do you want to play you in the movie? 

Mr. MARKOPOLOS. Well, it had better be someone who is a Red 

Sox fan. That is all I ask. 

Mr. MAFFEI. I will avoid commenting on that. But I do appreciate 

your service to our country, Mr. Markopolos. Thank you very much. 

Chairman KANJORSKI. Do you want somebody with hair? 

Mr. MARKOPOLOS. Not necessarily. Michael Chiklis is Greek and 

from Massachusetts, so I think he would be perfect. 

Chairman KANJORSKI. Let me follow up on one little question 

there regarding the SEC. Feeder funds have to disclose their fees 

and commissions paid to the SEC in some audited form, is that correct? 

Mr. MARKOPOLOS. The feeder funds? 

Chairman KANJORSKI. Yes. 

Mr. MARKOPOLOS. The feeder funds that are registered with the 

SEC do make disclosures about fees in their ADV form, yes. 

Chairman KANJORSKI. Examining this thing of appealing to the 

greed of the feeder funds, somebody at the SEC, if they are going 

over this, were passing over it, but think about a $7 billion fund 

that was being operated by Madoff from a feeder fund. And you are 

saying rather than a 1 percent fee going to them, he was allowing 

them to get 4 percent, which was huge. That is huge. It is $280 

million. And somebody sitting down at the SEC should have looked 

at that, it seems to me, and said, that is quite a fee for just placing 

money, getting it from the client and placing it with the actual investment company. And so obviously they were not checking these 

audits or these reports. Or is that passed over and no one considers 

the difference in fees? It does not really matter? 

Mr. MARKOPOLOS. I don’t think the SEC staff came from industry 

and understood how unusual and absurd this relationship is. Why 

would the ultimate investment manager, Mr. Madoff, take just a 

smidgen for himself, just commissions, and why would he allow the 

1 percent asset under management fee to be charged plus the 20 

percent override of profits each year which, as you totally spoke 

about, $280 million a year is what Fairfield Sentry was getting in 

fees each year, and they weren’t looking very closely, were they? 

No. But the SEC never spotted it. And that leads me to say that 

the SEC examiners are very, very underqualified. What is worse is 

the Wickford Fund, which came out in May of 2007, offered 3 to 

1 leverage to the Fairfield Sentry Fund. And I sent that to the 

SEC, Meaghan Cheung, New York City Branch Chief, on June 29, 

2007, with more glaring red flags. And again they ignored the evidence. 

Chairman KANJORSKI. Now if I remember some of your earlier 

responses to some of the other members, you indicated that you felt 

that the FINRA you felt was corrupt but the SEC was just incompetent. That is correct? 

Mr. MARKOPOLOS. That is correct. 

Chairman KANJORSKI. Which is better, to be incompetent or to 

be corrupt? 

45 

Mr. MARKOPOLOS. I would say I would give an A-plus to the SEC 

for incompetence and I would give the same grade to FINRA for 

corruption. And fortunately, the SEC was not corrupt as far as I 

could determine in this case. I think I am living proof of that. 

Chairman KANJORSKI. In what way? They saved your life in 

some way? 

Mr. MARKOPOLOS. I am still standing. I don’t think I would have 

been if they had taken money to look the other way and told Mr. 

Madoff my identity and, by the way, these are the SEC’s submissions he has been giving us over the years. I don’t think I would 

be here today. 

Chairman KANJORSKI. Very good. Well, we are going to have the 

SEC’s representatives testify on the next panel. So we are looking 

forward to some of their responses. 

Mr. Garrett, do you have any further questions? Mr. Ackerman? 

Mr. ACKERMAN. Thank you very much, Mr. Chairman. If I could 

address for just a moment what I generally would categorize as the 

cloak and dagger aspects of this, you have referenced, I think 7 or 

8 times, about a fear for your life and handing documents over 

wearing gloves so that you didn’t leave fingerprints and the fact 

that you are still alive, just a moment ago. Is that because the dollars are so big? Or was there some kind of threat that you actually 

perceived and reported or didn’t report to lawful authorities? And 

following up on that, you made reference to, I believe in a question 

by one of our colleagues, that we now know that organized crime 

and the Russian mob were involved and investors. I am afraid we 

don’t know that. Or at least I don’t know that, and neither does 

any of the people that I have checked with on this side. 

Could you explain the involvement of the Russian mob and organized crime investing in Madoff? And how do you know, as I would 

presume they don’t register as the Russian mob and put it in that 

name. 

Mr. MARKOPOLOS. We knew because of the offshore feeder funds 

and just the— 

Mr. ACKERMAN. Offshore feeder funds. 

Mr. MARKOPOLOS. The feeder funds that were offshore in taxhaven nations attract dirty money. The only reason you go offshore 

is if it is dirty money, and we knew a very high percentage of that 

was from organized crime in various locales. 

Mr. ACKERMAN. How much of it is from organized crime? 

Mr. MARKOPOLOS. When you are dealing with offshore, anywhere 

from 5 to 50 percent would be— 

Mr. ACKERMAN. How much would Madoff in dollars, what percent was offshore? 

Mr. MARKOPOLOS. I would say— 

Mr. ACKERMAN. And how do you know that? 

Mr. MARKOPOLOS. I knew that from my June 2002 trip to Europe 

where I was meeting private client banks in France and Switzerland. I knew many of them were operating offshore. And just given 

the size, it is a statistical conclusion. If 5 percent of the world’s currency comes from organized crime, well, Mr. Madoff was going to 

be at least 5 percent organized crime for his investors. It is just 

common sense. But because it is a hedge fund that was so secretive 

46 

and the returns were so good, it was a great bet, a very high odds 

bet that it was a lot larger percentage for Mr. Madoff. 

Mr. ACKERMAN. You are talking about all foreign investors from 

foreign countries? 

Mr. MARKOPOLOS. Not all. 

Mr. ACKERMAN. I am talking about when you talk about the Russian mob and organized crime. These are people who invested 

through European investors or European feeder funds? 

Mr. MARKOPOLOS. Correct. And I didn’t fear them. I didn’t think 

they were going to come after me. I want to make this perfectly 

clear to all those Russian mobsters and Latin American drug cartels out there. 

Mr. ACKERMAN. You are talking directly to them. 

Mr. MARKOPOLOS. I was acting on your behalf, trying to stop him 

from zeroing out your accounts. I am the good guy here. Make that 

clear. 

Mr. ACKERMAN. Yes. I think we registered that. 

The final question, I represent a large number of people who invested with Mr. Madoff, recently impoverished former philanthropists among them. The question that we get asked, all of us all 

the time, is, why didn’t people do due diligence? If the SEC didn’t 

pick it up, if the feeder funds who, as you say, were disincentivized 

from picking it up and everybody else, how were others, even sophisticated investors or large investors, able to do due diligence? 

Why didn’t anybody else pick this up? What could they have done? 

Mr. MARKOPOLOS. The reason they didn’t pick it up is that they 

looked at their friends at the country clubs— 

Mr. ACKERMAN. Yes. We know what happened. It was, you know, 

fabled and you look pretty stupid if you didn’t. 

Mr. MARKOPOLOS. Correct. 

Mr. ACKERMAN. In some of those circles. The question is, what 

should they have done to have picked this up besides calling you? 

Is there nothing they could have done to figure this out? They all, 

as you say, got their statements. They figured it out. It was to the 

penny. 

Mr. MARKOPOLOS. I don’t think that anybody had figured it out. 

Mr. ACKERMAN. Could anybody have figured it out? 

Mr. MARKOPOLOS. If you did not have a derivatives and quantitative finance background, it would have been very difficult to figure this out on your own as an individual investor. 

Mr. ACKERMAN. The people who are blaming the victims for 

being stupid and not doing due diligence are off the mark? 

Mr. MARKOPOLOS. A lot of the victims thought they were getting 

highly diversified portfolios. This is the beauty of Mr. Madoff’s 

scheme. He was purporting to own 30 to 35 of the bluest chip 

stocks, the largest companies in America, and they would see that 

on their statement, and they felt very comfortable owning those 

companies and they considered it a very diversified basket because 

it really was a very diversified basket. 

Mr. ACKERMAN. But there was nothing they could do to check it 

out, that he didn’t actually buy it. 

Mr. MARKOPOLOS. You could. As an individual investor, you 

could not. But as a feeder fund, you should have been able to go 

to the New York Stock Exchange and see that those volumes of 

47 

stock did not trade on that day at that price. They could have gone 

to the option price reporting authority that the Chicago Board Options Exchange offers, and you would have seen that no OEX index 

options traded at those prices that day. That is what you could 

have done and no one did that. 

Mr. ACKERMAN. And the SEC could have done that, too? 

Mr. MARKOPOLOS. If they knew how to do it, they could have 

done it. And if they had the willingness to do it, they could have 

done it. But they did not. 

Mr. ACKERMAN. Thank you very much. 

Chairman KANJORSKI. If they knew how to do it. Are you suggesting they do not know to do that? 

Mr. MARKOPOLOS. I am suggesting that if you flew the entire 

SEC staff to Boston and sat them in Fenway Park for an afternoon, 

that they would not be able to find first base. 

Chairman KANJORSKI. Well, one of the questions that struck me 

after they were forced to register in 2006—it is the usual custom 

that there is an audit performed within the first year after registration, and that was not done for whatever reason? But further, 

it did not have to be an extensive audit. Somebody just walked in 

and asked to see the securities, physically. That would have set off 

the alarm and there are not any, is that not correct? 

Mr. MARKOPOLOS. That was Basic Auditing 101. And the SEC 

staff was incapable of even that level of due diligence. 

Chairman KANJORSKI. Would you like to change places with us 

when we get the SEC up here next so you can ask some questions? 

Mr. MARKOPOLOS. I would like that. 

Chairman KANJORSKI. Thank you very much, Mr. Markopolos. 

We are delighted with your willingness to come forward. It is a 

compliment to the committee that you chose this committee to 

make this public disclosure of your long-term investigation, and we 

thank you for that. We want to work with you closely and hope 

that your services will be further available to the subcommittee 

and the committee as we move on toward regulatory reform. 

Obviously we can see from the example in your testimony and in 

the interest of the membership that we have a long road to haul. 

But certainly you have made it in significant ways here in shining 

light on this particular problem. And of course as you know we are 

using the Madoff scandal as a platform to set the basis for regulatory reform, long-term regulatory reform. This is a major step in 

the right direction in my opinion. 

So thank you very much. Your life may be in jeopardy, but I 

would say Mr. Madoff, if he took the mob and the Russian Mafia 

on, maybe he should stay in that $7 million apartment. 

Mr. MARKOPOLOS. Thank you, Mr. Chairman. It has been a singular honor. 

Chairman KANJORSKI. Thank you very much. Okay. We will now 

have the second panel. If they will step to the desk, we will start 

the introductions thereof. 

I am pleased to welcome our second panel. First we have Ms. 

Linda Thomsen, Director of the Division of Enforcement at the Securities and Exchange Commission. Ms. Thomsen. 

48 

STATEMENT OF LINDA THOMSEN, DIRECTOR, DIVISION OF ENFORCEMENT, U.S. SECURITIES AND EXCHANGE COMMISSION 

Ms. THOMSEN. Good afternoon. Chairman Kanjorski—excuse me. 

Let me start again, Chairman Kanjorski, Ranking Member Garrett, 

and members of the subcommittee, I appreciate very much the opportunity to appear today on behalf of the Securities and Exchange 

Commission to discuss the mission and mandate of the SEC, our 

critical work to protect investors, the work of the Division of Enforcement, and certain general information with respect to the alleged fraud perpetrated by Bernard L. Madoff and Bernard L. 

Madoff Investment Securities LLC. 

I am Linda Thomsen, and for nearly 14 years it has been my 

privilege to serve on the staff of the SEC’s Division of Enforcement. 

Let me assure the subcommittee that the Commission and every 

single member of the SEC staff takes the alleged Madoff fraud very 

seriously. The losses incurred by investors as a result of his alleged 

fraud are tragic. And we appreciate the impact of those losses on 

the lives of those investors. The activities and conduct of Mr. 

Madoff and others are under active and ongoing investigation by 

criminal authorities, by the SEC’s Enforcement Division and, with 

respect to past regulatory activities, by the SEC’s Office of Inspector General. We are not authorized to provide specific information 

about matters under active investigation or past regulatory activities in this matter. We simply cannot jeopardize the process of 

holding the perpetrators accountable. 

On December 11, 2008, the SEC sued Mr. Madoff and his firm 

for securities and investment advisory fraud in connection with an 

alleged Ponzi scheme that allegedly resulted in substantial losses 

to investors in the United States and other countries. The Commission’s complaint alleges that Mr. Madoff admitted to two senior employees of his firm that for many years he had been conducting the 

investment advisory business of his firm as a Ponzi scheme using 

funds received from new investors to pay returns to previous investors, and he estimated that the scheme had resulted in losses of approximately $50 billion. The complaint alleges that Mr. Madoff also 

informed these senior employees of his firm that he had approximately $200 to $300 million left which he planned to use to make 

payments to selected employees, family, and friends before turning 

himself in to authorities. 

The SEC immediately sought and obtained a preliminary injunction and other emergency relief to prevent the dissipation of any 

remaining assets. The SEC’s Enforcement Division is coordinating 

its ongoing investigation with that of the United States Attorney’s 

Office for the Southern District of New York, which filed a parallel 

criminal action on December 11, 2008, in connection with Mr. 

Madoff’s alleged Ponzi scheme. These two actions, filed by the SEC 

and the United States Attorney’s Office, could potentially result in 

billions of dollars in liability and decades of incarceration for Mr. 

Madoff. 

As noted in our written testimony, which we have submitted to 

the committee for all witnesses on behalf of the Commission, the 

SEC’s New York regional office commenced an investigation of Mr. 

Madoff and his firm in early 2006. Two years later, in January of 

49 

2008, that investigation was closed without any recommendation of 

enforcement action. 

Returning if I might to the broader picture, the mission of the 

SEC is to protect investors, maintain fair, orderly, and efficient 

markets, and to facilitate capital formation. The Agency’s staff is 

dedicated, hardworking, and committed to the mission of the SEC. 

Our investor protection mission is more compelling than ever. As 

investors turn to the markets to help secure their futures, pay for 

homes, and send children to college, they must have confidence 

that their interests are being protected. 

Crucial to the SEC’s effectiveness is its enforcement authority. 

Each year the SEC brings hundreds of civil enforcement actions 

against individuals and companies for violations of the securities 

laws. The Division of Enforcement investigates possible violations 

and enforcement lawyers, accountants, and investigators investigate these violations, recommend that the Commission bring civil 

action in Federal court or before an administrative law judge and 

prosecute those cases on behalf of the Commission. 

Enforcement staff obtain information about possible violations of 

the securities laws from many sources, including market surveillance activities, investor tips and complaints, other divisions and 

offices of the SEC, the self-regulatory organizations, and other security industry sources and media reports. The SEC staff receives 

hundreds of thousands of tips each year from various sources with 

various levels of specificity and credibility. While the SEC does not 

have the resources to fully investigate all tips and complaints received, we use the staff’s expertise, skill, and judgment to triage 

the complaints to devote attention to the most promising leads and 

the most serious potential violations. 

Of the approximately 600 enforcement actions that are brought 

each year, many first came to the attention of the staff through a 

complaint or a tip. Yet SEC staff is now also working on ways to 

improve the handling of complaints, tips, and referrals to make optimal use of resources. This is just one of our efforts to improve the 

identification and assessment of risk. Collectively, together with 

Chairman Schapiro and the Commissioners, we are committed to 

reducing opportunities for fraud, to detecting it quickly, and to best 

protect investors from those who would seek to prey upon them. 

In conclusion, let me reiterate our commitment on behalf of the 

SEC and its staff to the vigorous protection of the American investors. Thank you, and I would be delighted to take questions, as I 

think would my colleagues. 

[The joint prepared statement of the SEC can be found on page 

174 of the appendix.] 

Chairman KANJORSKI. Thank you, Ms. Thomsen. 

Next, we have Mr. Andrew Donohue, Director of the Division of 

Investor Management at the Securities and Exchange Commission. 

STATEMENT OF ANDREW J. DONOHUE, DIRECTOR, DIVISION 

OF INVESTOR MANAGEMENT, U.S. SECURITIES AND EXCHANGE COMMISSION 

Mr. DONOHUE. Chairman Kanjorski, Ranking Member Garrett, 

and members of the subcommittee, I am Andrew Donohue, Director 

of the SEC’s Division of Investment Management. I appreciate the 

50 

opportunity to appear today on behalf of the SEC to discuss the 

mission and mandate of the SEC, our critical work to protect investors, the work at the Division of Investment Management, and certain general information with fraud perpetrated by Bernard L. 

Madoff and Bernard L. Madoff Investment Securities LLC. 

As an initial matter, let me say that each member of the Division 

of Investment Management takes our role in protecting America’s 

investors and the integrity of our markets very seriously. I deeply 

regret the losses suffered by Madoff investors. As you have heard, 

the activities and conduct of Mr. Madoff and others are under active and ongoing investigation by criminal authorities, by SEC’s Division of Enforcement and, with respect to past regulatory activities, by the SEC’s Office of Inspector General. 

I am not authorized to provide specific information about past 

regulatory oversight of the regulatory firm. I am not participating 

in the current investigation or examinations involving the alleged 

Madoff fraud. I can provide the following general information concerning our work at the Division of Investment Management. 

The Division of Investment Management conducts regulatory activities on behalf of the Commission with respect to investment 

companies, including mutual funds and investment advisers. The 

Division of Investment Management reviews investment company 

disclosures for the compliance with Federal securities laws, responds to no action requests and requests for exemptive relief, develops rulemaking recommendations concerning investment companies and investment advisers for Commission consideration, interprets laws and regulations for the public and for SEC inspection 

and enforcement staff, and assists the Commission and its staff in 

enforcement matters involving investment company and investment advisers. 

The Division of Investment Management has approximately 150 

staff members. The investment management industry is large and 

diverse, including approximately 11,300 investment advisers and 

950 investment company complexes representing over 4,600 registered investment companies. The number of registered investment advisers has increased dramatically in recent years, going 

from 7,547 in 2002 to nearly 11,300 today. 

As you know, Bernard L. Madoff Investment Securities LLC registered with the Commission in September of 2006. As described 

more fully in our written testimony, it is unlawful for an investment adviser to defraud clients or prospective clients. Investment 

advisers have a fiduciary duty to their clients to act in their best 

interest and to avoid conflicts of interest or to fully disclose them. 

The anti-fraud provisions apply to all persons and firms meeting 

the definition of an investment adviser whether or not registered 

with the Commission. In addition, investment advisers registered 

with the Commission are required, among other things, to have 

written policies and procedures designed to prevent violations of 

the law and rules, to designate a chief compliance officer responsible for administrating the adviser’s compliance policies and procedures, to maintain and preserve specified books and records, and 

make them available to Commission examiners for examination, 

and to deliver to advisory clients and prospective clients a written 

51 

disclosure statement or a brochure describing the adviser’s business practices and material disciplinary events. 

Under the custody rule, registered investment advisers must 

maintain client securities and funds with a qualified custodian 

which includes regulated banks, registered broker dealers, registered future commission merchants, and foreign financial institutions that meet certain conditions. Investment advisers may have 

self-custody or use an affiliated custodian if the adviser or affiliate 

is also registered as a broker-dealer, futures commission merchant, 

or it is regulated as a bank. 

The Division of Investment Management actively coordinates its 

functional responsibilities with staff of the Commission’s other divisions and offices. For example, the Division of Investment Management staff often consult with the Office of Compliance Inspections 

and Examinations and enforcement staff, providing legal advice in 

connection with examinations or investigations involving investment management regulatory issues. 

Finally, there are some ideas that the Division of Investment 

Management is considering recommending to the Commission to 

explore in light of the Madoff matter, including both changes and 

improvements to regulation and oversight which might make fraud 

less likely to occur and improve the ability to detect it. We are reviewing the adequacy of the custody rule to determine whether to 

recommend to the Commission any amendments that enhance the 

safety of client assets. We also are reviewing the adequacy of disclosures that advisers are currently making and required to make 

to the Commission—to determine whether additional required information would enhance the staff’s ability to detect and prevent 

fraud by advisers. 

In addition, the Division is looking at ways to improve the assessment of risk and at the adequacy of information required to be 

filed by registered firms and used to assess risk and whether the 

risk assessment process would be improved with routine access to 

additional information. 

In a range of ways, we are thinking expansively and creatively 

about changes that could reduce opportunities for fraud as American investors deserve the best possible protection from Ponzi 

schemes and other frauds. 

Thank you, and I would be happy to take any questions. 

Chairman KANJORSKI. Thank you very much, Mr. Donohue. Next 

we have Mr. Erik Sirri, Director of the Division of Trading and 

Markets at the Securities and Exchange Commission. Mr. Sirri. 

STATEMENT OF ERIK SIRRI, DIRECTOR, DIVISION OF TRADING AND MARKETS, U.S. SECURITIES AND EXCHANGE COMMISSION 

Mr. SIRRI. Chairman Kanjorski, Ranking Member Garrett, and 

members of the subcommittee, I appreciate the opportunity to appear today on behalf of the Securities and Exchange Commission. 

I am the Director of the Division of Trading and Markets, which 

is responsible for administering statutes and rules designed to establish and maintain standards for fair, orderly, and efficient securities markets. Bernard L. Madoff Investment Securities was a registered broker-dealer. Given the focus of this hearing today, I will 

52 

briefly discuss two functions of the division related to broker-dealers: first, administering the broker-dealer financial responsibility 

rules; and, second, providing oversight of Securities Investor Protection Corporation, or SIPC. 

Broker-dealers are subject to extensive financial responsibility 

rules designed to protect customers from a firm’s illiquidity or misuse of customer funds and securities. These rules impose a system 

of requirements intended to reduce the likelihood of customer 

abuse, including requirements for capital, a safe keeping of customer cash and securities, the making and maintaining of books 

and records, and the filing of periodic financial statements and annual audits with SROs and with the Commission. The broker-dealer net capital rules is designed to ensure that a firm maintains sufficient liquid assets, such that if the firm fails it can promptly liquidate and pay all claims to customers and other creditors without 

the need for a formal bankruptcy proceeding. The rule requires an 

absolute minimum amount of net capital in order for the brokerdealer to conduct a securities business, below which it cannot operate. 

In addition, a broker-dealer must immediately notify the Commission and the relevant SRO if its net capital falls below certain 

early warning levels. The broker-dealer’s customer protection rule 

is designed to safeguard customer securities and consists of two 

parts. 

First, firms are required to maintain possession and control of all 

fully paid and excess margin securities carried for customers. Second, all net cash owed to customers must be deposited in a special 

reserve bank account for the exclusive benefit of customers. The 

rule prevents a broker-dealer from using customer cash and securities for its own proprietary business, and it is designed to keep 

these assets available for prompt return to customers in the event 

a broker-dealer fails. 

The Commission’s books and records rules require broker-dealers 

to make and keep extensive written records on their business. 

These include stock records that show the amount and locations of 

the securities carried by the broker-dealer, ledgers showing cash 

positions and securities purchased sold, received or transferred to 

or from other customer accounts, the records of the net capital computation and the customer reserve fund computation. 

The Commission also requires broker-dealers to file periodic financial reports with the SROs. These financial reports must contain a statement of financial condition, a statement of income, a 

statement of cash flows, a statement of changes in stockholders’ 

partners or sole proprietors’ equity, a statement of changes in liabilities subordinated to the claims the general creditors and supporting schedules, including the computation of net capital, a computation for the termination of the reserve fund requirement, and 

information related to the possession or control requirements under 

the customer protection rule. 

With a few limited exceptions, broker-dealers registered with the 

Commission are required to follow similar information in annual 

audit reports with the Commission and with each SRO of which 

the broker-dealer is a member. The audit report also requires that 

the scope of the accountant’s audit and review must provide reaVerDate Nov 24 2008 18:30 Jun 16, 2009 Jkt 048673 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\48673.TXT TERRIE
53 

sonable assurance that any material inadequacies existing on the 

date of the examination would be disclosed. If an accountant finds 

any material inadequacies on the part of its review, a special report 

must be provided to the Commission. 

With respect to the matter of the registration of broker-dealer 

auditors with the Public Company Accounting Oversight Board, I 

note that while Sarbanes-Oxley requires auditors of registered 

broker-dealers to be registered with a PCAOB, the Act focuses on 

PCAOB’s responsibility, specifically on the auditors of public companies. Most broker-dealers are not public companies either because they are privately held or are subsidiaries of public companies. The Commission gave temporary exemptions from registration 

while discussing with the PCAOB the treatment of these brokerdealer auditors. Subsequently, the PCAOB determined that the 

statute does not give it the necessary authority to examine auditors 

of nonpublic broker-dealers after they have registered or to discipline them for audit failures after which the Commission determined to let these exemptions expire. 

Finally, I note that the Division is primarily responsible for administering the Commission’s oversight of SIPC. This oversight includes examination authority as well as the authority to review the 

rules SIPC adopts with respect to the conduct of SIPC liquidations. 

Generally, all broker-dealers registered with the Commission must 

be SIPC members. SIPC must pay advances to compensate customers when the amount of securities and cash recovered from a 

failed firm are insufficient to make customers whole. These advances are limited to $500,000 per customer, including a maximum 

of $100,000 for cash claims. SIPC initially pays for customer advances and the administrative costs of liquidation out of the SIPC 

fund, which is funded through member assessments. 

I would be happy to take any questions. 

Chairman KANJORSKI. Thank you, Mr. Sirri. 

Next we have Mr. Andrew Vollmer, Acting General Counsel at 

the Securities and Exchange Commission. Mr. Vollmer. 

STATEMENT OF ANDREW VOLLMER, ACTING GENERAL 

COUNSEL, U.S. SECURITIES AND EXCHANGE COMMISSION 

Mr. VOLLMER. Thank you for inviting me today. The Office of the 

General Counsel provides a variety of legal services to the Commission and the Commission staff, such as preparing all of the Commission’s appellate briefs and providing legal advice and counseling 

concerning the Federal securities laws, administrative laws, and 

government ethics rules. 

The SEC witnesses here today prepared a joint written statement on behalf of the Commission. I would like to ask that it be 

included in the record. To the extent questions seek information beyond the scope of the written statement, each of us will be expressing our own personal views that do not necessarily reflect the views 

of the Commission or other SEC staff. 

This hearing is being held at the same time that several important investigations into matters related to Mr. Madoff are open and 

being actively pursued. Some of them are pending law enforcement 

proceedings and investigations. 

54 

In December 2008, the Commission filed a civil law enforcement 

complaint in the Southern District of New York against Mr. Madoff 

and his securities firm. The SEC’s Division of Enforcement is both 

litigating that case and conducting associated investigations into 

possible violations of the securities laws by others. It is also coordinating its investigation with a criminal investigation being conducted by the United States Attorney’s Office in the Southern District of New York, and that office filed a parallel criminal action 

also in December of 2008 against Mr. Madoff. 

A third investigation is the one by the Inspector General of the 

SEC into past investigations and examinations of Mr. Madoff’s firm 

by divisions and offices of the SEC. He is also looking into any SEC 

staff relationships with persons related to Mr. Madoff that might 

have affected those investigations and exams. 

Questions that seek information that could bear on or be relevant 

to any of the Madoff investigations could affect the independence 

and integrity of the investigations and could harm law enforcement 

efforts. I want to express my appreciation to the subcommittee for 

its understanding of these concerns. 

Chairman KANJORSKI. Thank you, Mr. Vollmer. 

Next we have Ms. Lori Richards, Director of the Office of Compliance Inspections and Examinations at the Securities and Exchange 

Commission. 

Ms. Richards. 

STATEMENT OF LORI A. RICHARDS, DIRECTOR, OFFICE OF 

COMPLIANCE INSPECTIONS AND EXAMINATIONS, U.S. SECURITIES AND EXCHANGE COMMISSION 

Ms. RICHARDS. Thank you, Chairman Kanjorski, Ranking Member Garrett, and members of the subcommittee. I am Lori Richards, 

Director of the SEC’s Office of Compliance Inspections and Examinations, and I very much appreciate the opportunity to appear here 

today to discuss the important work of the SEC to protect American investors, the work of the Office of Compliance Inspections 

and Examinations, and to provide certain general information with 

respect to the alleged fraud committed by Bernard Madoff. 

I want to assure this committee at the outset that the SEC takes 

the alleged fraud by Mr. Madoff extremely seriously, and that collectively, together with Chairman Schapiro and the other Commissioners, we are focused very hard on identifying possible improvements, both to regulation and to oversight, which might make 

fraud less likely to occur in the first place, and more likely to be 

detected. 

I begin by noting that I have served as a member of the Commission staff for more than 20 years, and that the Agency staff are 

dedicated, they are hardworking, and they are keenly committed to 

the Agency’s mission to protect investors. 

As described more fully in our written testimony, the Office of 

Compliance Inspections and Examinations is the functional program at the SEC that administers the SEC’s nationwide compliance examination program for firms that are registered with the 

SEC. So those include self-regulatory organizations, broker-dealers, 

transfer agents, clearing agencies, investment companies, investment advisers, and rating agencies. 

55 

As you have heard, the activities and conduct of Mr. Madoff and 

others are under active and ongoing investigation by criminal authorities, by the SEC’s Division of Enforcement, and, with respect 

to past regulatory activities, by the SEC’s Office of the Inspector 

General. I am not authorized to provide specific information about 

past regulatory oversight of the Madoff firm, and I am not participating in the current investigation or examinations involving the 

alleged Madoff fraud. I can, however, provide you with the following general information concerning examinations of the Madoff 

business. 

The Madoff firm became registered as an investment adviser in 

September of 2006. The SEC staff did not examine the investment 

advisory operations of the firm. The Madoff broker-dealer operation 

was subject to routine examination oversight by the Financial Industry Regulatory Authority, and was also subject to several limited-scope examinations by the SEC for compliance with, among 

other things, trading rules that require the best execution of customer orders, the display of limit orders, and possible front running, most recently in 2004 and 2005. These examinations were focused on the firm’s broker-dealer activities. The firm’s investment 

advisory business, as I said, became registered in 2006, and was 

not examined by the SEC. For the reasons I noted, I must not detail or discuss these examinations in any greater detail. 

By way of background, in a compliance examination, examiners, 

accountants or lawyers, and these people are not just lawyers, they 

are also examiners and CPAs and CFAs and other people with experience, they review the books and records and gather information 

that can indicate whether a firm is in compliance with the securities laws. Examinations also include often interviews with relevant 

personnel at a firm. These examinations are not audits. They are 

limited in their scope, and they are targeted to specific firms and 

to specific activities of a registered firm. 

The firms that we examine vary in size and in type, and they include firms that are run honestly and in compliance with the law, 

and they also include firms that may be engaged in deception, dishonesty, falsification of records, and fraud of various kinds. I can 

assure you that examiners don’t pull punches based on the type of 

firm that we examine or inspect. They are meant to identify deficiencies and violations of the law, and to ensure that those are corrected, regardless of the size or type or nature of the firm under 

examination. 

Broker-dealers are under primary oversight by a self-regulatory 

organization that conducts periodic routine examinations. Investment advisers, mutual funds, and other types of registrants are not 

subject to routine examination by a self-regulatory organization. 

For these firms, the SEC provides primary examination oversight. 

The SEC has about 425 staff people dedicated to examinations 

of all registered investment advisers and mutual funds, and about 

315 staff dedicated to examinations of registered broker-dealers. 

Given the number of registered investment advisers today, over 

11,000, and the fact that this population has grown significantly in 

recent years, the SEC cannot examine every investment adviser on 

a routine frequency. A small percentage of investment advisers are 

examined on a routine frequency. 

56 

The SEC also conducts cause examinations when we learn of a 

possible complaint or a problem that could indicate a violation of 

the law. We conduct random examinations of investment advisers, 

as well as sweep examinations focused on a particular risk issue. 

Finally, I want to assure this subcommittee that at the SEC we 

are thinking expansively and creatively about changes that could 

reduce the opportunities for fraud. And we are committed to protecting investors from those who would prey on them in Ponzi 

schemes and other types of fraud. 

Our testimony describes generally some ideas that the staff of 

the SEC are considering, and these are subject to refinement as 

more analysis is conducted and more facts are learned. But among 

the ideas that we are considering are the examination frequencies 

for investment advisers, the existence of unregistered investment 

advisers and funds, the different regulatory structures that surround broker-dealers and investment advisers, the existence of unregulated products, and the need to strengthen custody and audit 

requirements for regulated firms. 

We are also looking very hard at ways that we can improve the 

assessment of risk and the adequacy of information that is required 

to be filed by registered firms and used by the SEC to assess risks, 

and whether the risk-assessment process could be improved with 

routine access to additional information. 

In addition, we are targeting firms for examinations of their custody of assets, and we are expanding our efforts to examine investment advisers and broker-dealers in a coordinated approach to reduce the opportunities for firms to shift activities to areas where 

they may not be subject to regulatory oversight. 

In conclusion, I want to assure this subcommittee that in a range 

of ways we are thinking expansively and creatively about changes 

that could reduce the opportunities for fraud, as American investors deserve the best possible protection from Ponzi schemes and 

other types of frauds. 

Thank you. I would be happy to answer any questions you have. 

Chairman KANJORSKI. Thank you, Ms. Richards. 

And lastly, we will here from Mr. Stephen Luparello, interim 

Chief Executive Officer of the Financial Industry Regulatory Authority. 

Mr. Luparello. 

STATEMENT OF STEPHEN LUPARELLO, INTERIM CHIEF EXECUTIVE OFFICER, FINANCIAL INDUSTRY REGULATORY AUTHORITY 

Mr. LUPARELLO. Chairman Kanjorski, Ranking Member Garrett, 

and members of the subcommittee, thank you for the opportunity 

to testify today. My name is Steve Luparello. I currently serve as 

interim CEO of the Financial Industry Regulatory Authority. Also 

known as FINRA, we are the primary nongovernmental regulator 

for securities brokerage firms doing business in the United States. 

Unfortunately, we are all here today because the fraud that Bernard Madoff reportedly conducted has had tragic results for investors who entrusted their money to him. Investors are disillusioned 

and angry, and are rightfully asking what happened to the system 

that was meant to protect them. There was no doubt that Madoff 

57 

knew that system well, and perhaps that knowledge assisted him 

in avoiding detection and defrauding so many unsuspecting individuals and institutions. By all accounts, it appears that Mr. Madoff 

engaged in deceptive and manipulative conduct for an extended period of time during which he defrauded the customers who invested 

with him and misled those that had the responsibility to regulate 

him. 

Mr. Madoff’s alleged fraud highlights how our current fragmented regulatory system can allow bad actors to engage in misconduct outside the view and reach of some regulators. It is undeniable that in this instance the system failed to protect investors. 

Investor protection is the core of FINRA’s mission, and we share 

your commitment to identifying the regulatory gaps and weaknesses that allowed this fraud to go undetected, as well as potential 

changes to the regulatory framework that could prevent it from 

happening in the future. 

Bernie Madoff’s broker-dealer was registered with FINRA and its 

predecessor organization, NASD, since 1960. Prior to 2006, Mr. 

Madoff also operated an unregistered money-management business. In 2006, the SEC required Mr. Madoff to register that moneymanagement business as an investment adviser. 

While Congress authorized FINRA to regulate broker-dealers in 

1938, FINRA is not authorized to examine for or enforce compliance with the Investment Advisers Act. Only the SEC and the 

States have that authority. In fact, while we have the authority to 

bar broker-dealers and registered persons from the brokerage industry, FINRA is often powerless to prevent those persons from reentering the financial services industry as advisers. 

Within Madoff’s firms there were two discrete lines of business, 

the broker-dealer and the money-management business that ultimately registered as an investment adviser. Given the limitations 

imposed by Federal law, FINRA’s authority over Madoff was and 

is limited to its broker-dealer operations, even though the Madoffregistered investment adviser was in the same legal entity. 

For two decades, FINRA examined Madoff’s broker-dealer operations at least every other year. We began a separate market regulation exam program in 1996, and conducted that exam at the 

Madoff broker-dealer each year since. The Madoff broker-dealer 

consistently reported to FINRA that 90 percent of its revenue was 

generated by market making and 10 percent by proprietary trading. 

When examining the Madoff broker-dealer operations, FINRA 

found no evidence of trading for customer accounts, which is consistent with the market-making model, and no evidence of the kind 

of fraud that Madoff allegedly carried out through his advisory 

business. While we did receive a small number of customer complaints throughout the years, those complaints were filed by customers of other broker-dealers that had transacted business with 

the Madoff broker-dealer. FINRA did not receive any retail customer complaints that might have alerted us to the existence of the 

advisory accounts, and there were no complaints related to the investment advisory business as a whole. 

FINRA also did not receive whistleblower complaints alleging either front running or Ponzi schemes at the Madoff money-manageVerDate Nov 24 2008 18:30 Jun 16, 2009 Jkt 048673 PO 00000 Frm 00063 Fmt 6633 Sfmt 6633 K:\DOCS\48673.TXT TERRIE
58 

ment business, nor did the SEC share the tip it received or alert 

FINRA to any concerns that it may have had with Madoff. 

FINRA has long expressed concerns regarding a firm’s ability to 

avoid our jurisdiction by keeping its customers outside the FINRAregistered broker-dealer. As early as the 1980’s, NASD officials 

issued public statements urging reform. As recently as this past 

year, FINRA’s former CEO, Mary Schapiro, personally raised these 

issues with the SEC Chairman. Unfortunately, the statutory limits 

of FINRA’s jurisdiction did not allow it to be an extra set of eyes 

looking at the totality of the business. Any number of misrepresentations that can facilitate a fraud like this—the firm did have customers or it didn’t, the trades ran through the broker-dealer or 

they didn’t, the firm custodied the assets or they didn’t—might 

have come to light much earlier. And one of the key parts of the 

FINRA exam program is that we confirm the existence and location 

of customer assets that are reflected in customer accounts on the 

broker-dealer. We follow the money to where the regulated firm 

says it is and ensure that those customer assets are properly segregated from those of the firm itself. 

As I stated at the outset, what has happened to Madoff’s investors is tragic. The fact is no regulator is perfect, and Ponzi schemes 

can be difficult to uncover. But that is all the more reason to give 

regulators the tools they need to ferret out fraud. As I have testified today, we take our mission very seriously. We have vigorous 

exams and enforcement programs, and have not hesitated to take 

actions against firms of any size for wrongdoing, or any individual, 

regardless of their position in the industry. 

Mr. Chairman, investors should receive the same basic regulatory safeguards and protections no matter which investment 

product or service they choose. FINRA is committed to working 

with this committee as it considers how best to move forward on 

these important issues. 

[The prepared statement of Mr. Luparello can be found on page 

94 of the appendix.] 

Chairman KANJORSKI. Thank you very much, panel. We have a 

vote on. It is a 15-minute vote, but if we take the break now, we 

will all be able to return, and I expect to take more than one round 

of 5 minutes. All of the members are welcome to participate in the 

additional round. 

This is going to be a difficult panel to work with. As you know, 

they are asserting certain rights to not respond to certain questions. But I think this panel has the capacity to invade the selfrestrictive protective devices of this panel. 

With no other statements, we are going to take a break, recess 

the committee to get the vote, and then we will return for questions. 

[Recess] 

Chairman KANJORSKI. The committee will reconvene. Thank you 

for being here as a panel. 

There was a little consternation before you arrived here, so I just 

want the record to be corrected, because, Mr. Vollmer, when you 

testified, you thanked us for our understanding of the limitations 

of this panel to the committee, and I think that was premature, because I do not recognize any right of the Agency to lay down limitaVerDate Nov 24 2008 18:30 Jun 16, 2009 Jkt 048673 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 K:\DOCS\48673.TXT TERRIE
59 

tions as to what members of the SEC have to testify to or not testify to before the Congress of the United States. And unless I am 

mistaken, if there is any objection to be made, it will be raised either by the Department of Justice or others. 

But that notwithstanding, I think we are going to try and be as 

amenable as we can and as civil as we can just with the idea that 

I want it clear to the members of this panel, and particularly to 

you, Mr. Vollmer, that in our discussions and prior preparations for 

the testimony of this panel, it became obvious to me that there 

seems to be a dysfunction between the Securities and Exchange 

Commission and this committee of the Congress in that there 

seems to be a misunderstanding as to who created whom and who 

is responsible to whom under the Constitution. And I hope we can 

disabuse ourselves of that misunderstanding. If we cannot, we 

should probably take any legal proceedings necessary to determine 

that, because I think we are involved in an extremely serious case 

that requires litigation. And from listening to the testimony of this 

panel, it appears to me that if these cases remain, as they very easily may, for years in trial and work, and it is the position of the 

SEC that they cannot discuss the matter, cannot be called upon to 

testify on the matter, and are completely removed from participating with the Congress in creating legislation that may be necessary to correct the matters. 

And although I take great sympathy as a lawyer with the protection of cases to be prosecuted and not to compromise the same, we 

are obviously dealing here with two different situations. One is 

what laws have to be made or changed to protect the greater members of the public, and what kind of potential compromises would 

that cause to a particular case. 

And in terms of hearing the testimony today of Mr. Markopolos, 

I have tentatively come to the conclusion that the Securities and 

Exchange Commission has been annointed by God to be all righteous. I hope I can disabuse the members of this panel of that fact, 

because, quite frankly, we are about to decide just in what nature 

and how the Securities and Exchange Commission should continue 

to exist. And the lack of cooperation shown in the last several 

weeks, and I think the abuse of authority, or the attempt to bring 

a protective shield over an executive agency or independent agency 

of this government is not acceptable. And if that is going to be the 

process, the easiest thing is to follow Mr. Markopolos’s advice and 

just do away with the entire regulatory system as it is presently 

constructed and start anew. 

I make that point obvious for a reason. There are several things 

that have happened in the last several years that should be embarrassing to the SEC. Let me ask that question. Are you embarrassed 

as members of the higher echelon of the SEC with how the Madoff 

case has been handled, or do you feel that embarrassment does not 

come into it, and it is unimportant, and that you are above all 

those things? Would anybody like to tell me that? 

Ms. THOMSEN. Let me start. First of all, if we have in any way 

suggested a self-righteousness to you, I don’t feel that. I don’t feel 

it towards the Congress. 

Chairman KANJORSKI. So it is understood, and I will break a confidence, one of the members of the panel here originally told me he 

60 

was not going to testify because he is exempt. And it precipitated 

a call, myself, to the Chairman, which I rarely make, although I 

know her very personally and have known all the Chairmen for 20 

years. But it was so annoying to me that when that individual 

thought he did not have to testify before a committee of the Congress of the United States, I made it very clear that either he 

would be here today or appropriate subpoenas would be issued. 

And those subpoenas would have been issued to everybody who is 

here today. Quite frankly, we would not have accepted any excuse 

offered or request for lack of testimony on any facts and have structured a case. And let us just see what kind of protections you 

would have under the law for not testifying. 

If we cannot have comity between two branches of government 

to handle the people’s business, we have a serious problem. And 

right now as this panel is constituted, and as I have heard the testimony, I mean—you know, I like oatmeal, and that is about how 

I classify the testimony I heard today. And I do not know whether 

that testimony was written that way and presented that way in 

order to be a slap at this committee or the Chairman himself, but 

it is not appreciated. We did not call you up here for us to hear 

a traveler’s guide of the Securities and Exchange Commission. 

We are spending our time and effort, many of us, to get to the 

roots of how a Madoff scandal continues to occur for more than 10 

years, when a rather credible expert in the field tries to do everything he can year in and year out to alert the appropriate regulator 

of the Federal Government that they should have handled or 

looked into that. 

That is a little therapy on my part. Now let me hear your response of how good you intend to be. 

Ms. THOMSEN. Mr. Chairman, we are here to help you in your 

effort. We think this is an important hearing. 

As to your original question, I don’t think—I think I speak for 

everyone when I say we hate fraud. We hate the fact that people 

are victimized by fraud. We wish it never happened. We wish we 

could get to every— 

Chairman KANJORSKI. But your job is to prevent fraud, not to 

hate it. 

Ms. THOMSEN. Well, in the Enforcement Division and the division that I know the best, our job is in part to prevent it, but only 

as a derivative effect of our enforcement actions, because we can 

only bring actions when a violation of the law has occurred. Now, 

we want to get to every violation the instant it happens, and we 

hope that by our actions there is less fraud to pursue. That is our 

mission. That is our passion. 

I have heard today issues about wanting to avoid going after big 

players. There is nothing that makes a member of my staff happier 

than bringing a case. The only thing that makes them happier is 

a big case. And if it is against someone of some notoriety or fame, 

that makes them happier still. We live for bringing those cases. We 

hate the fact that people lose money. And we bring hundreds of 

them every year. 

And I have to say that sitting here today, it is every law enforcer’s worst nightmare to miss something, and yet it is something 

that we know is going to happen because there is— 

61 

Chairman KANJORSKI. How do you explain the fact that you not 

only missed this, but now that the Congress is attempting to close 

the loopholes and attend to it, you feel disposed not to cooperate 

100 percent to see that we do that to protect other frauds that may 

be occurring and going on right now? 

Ms. THOMSEN. Let me try to address it. And I understand your 

frustration, but when we talk about moving forward, what we can 

do to address it, the first and, to my mind, most important thing 

we can do to address it is to hold fraudsters accountable, to bring 

them to justice, to bring the full force of the law against them. That 

includes criminal prosecution, civil prosecution. And, for example, 

quite specifically, when you talk about what we did in the past, 

some of what happened in the past may in and of itself violate Federal criminal law. And the ability to pursue those cases to the full 

extent that we can is what we are here to protect. That does not 

mean that we should not examine what happened and even examine it theoretically to think what we could do, make assumptions 

about what the past was, and move from there. 

Chairman KANJORSKI. Okay. Let me just say that justice delayed 

very often is justice denied. And if we are going to have cooperation, and we are going to have an effective enforcement tool of the 

Securities and Exchange Commission, we cannot have the culture 

or mentality that I sense over there that in examination and investigation, a process can go on forever. I mean, I have stories that 

will shrivel your ears with how long enforcement proceedings have 

just laid around with no action having been taken. I am getting the 

impression that is the culture now, that there is not an intent to 

do something. 

So one of the things the committee will be considering in some 

of this legislation is whether or not we can impose a 180-day rule. 

You know, if we can get criminal prosecutions within 180 days in 

this country, it seems to me once we charge some corporate activity 

as being a violation of the SEC, let us move along; 180 days get 

to a trial, let us get it decided. Something like this. 

I want to ask the question, how long do you need to resolve the 

problems that are causing you not to speak or cooperate with this 

committee? How long do you think these prosecutions are going to 

take before you can speak up? 

Ms. THOMSEN. I honestly don’t know the answer. And there are 

three things that are going on. 

Chairman KANJORSKI. So if that is the case, you do not know the 

answer, it could be years; is that correct? 

Ms. THOMSEN. I don’t know. 

Chairman KANJORSKI. Well, if it is years, and you do not intend 

to say anything, if I listen to how your statement and your counsel 

structured the statement, there are three things. You cannot help 

if it is a pending criminal investigation; you cannot help if the Inspector General is doing something; you cannot help if it is an ongoing violation. I mean, if there is a snowstorm in Washington, the 

SEC cannot help. That must be one of the conditions. 

What I want to find out is, how long is it going to take for that 

to be vitiated? And when can we get together and cooperate in developing legislation that will protect the people other than Madoff? 

62 

Ms. THOMSEN. Sure. Let me suggest an approach that may help, 

because I understand your concerns about how much time it takes 

to get to specifics. But if you want to try to think about how we 

can help generally, we can make assumptions. So, for example, you 

could assume that—to my mind, I like to assume a case where I 

think the solution is the hardest, because if we find that solution, 

we will be considerably better off. So when I look at a potential investigation, let me hypothesize. The SEC gets a credible lead, a 

lead is followed up on to a certain extent, and the investigation is 

closed without action, as it can happen. 

Now, when an investigation is closed, it seems to me there are 

one of two possibilities—well, maybe four. Either there was nothing 

to be found, and nothing was found; or there was something to be 

found, and it wasn’t found—there are probably more. But in those 

circumstances, if we assume that something could have been found 

and wasn’t, what are the reasons underlying that? And if it is complete and utter corruption, the answer is easy: You get rid of that 

which is corrupt. 

If, on the other hand, the answer is that people of good will were 

trying very hard, the answer may be they lacked training. And so 

that is one of the issues that I know has been addressed. Or they 

lack expertise. So what do we do to provide additional expertise to 

people so that they have the expertise to look further? It could also 

be that it is a resource issue. That is you look, you find nothing, 

you keep looking, you find nothing, and then something else blows 

up somewhere else that is appearing to be more important at the 

time. 

I mean, one of the issues that we are obviously struggling with 

is if we knew going into something that it was a fraud, a provable 

fraud, with evidence that we could present to a fact finder, it would 

be easy. When you don’t know, that is what you pursue. 

So I think we would be happy to have that conversation, that 

dialogue, to make the assumptions to make us better. We try every 

day to learn from our experience. And so among other things we 

are thinking about, as the committee has suggested, what can we 

do on risk? What can we do for expertise? What can we do to maximize our resources? And those are precisely the kinds of things 

that we are thinking about, even though we can’t necessarily share 

the specifics with the committee. 

Chairman KANJORSKI. Thank you, Ms. Thomsen. 

I am going to call on my ranking member here, who obviously 

has some additional questions. I took more than enough time. Particularly I had to have therapy. 

Mr. GARRETT. I thank you. And you know, Mr. Chairman, when 

I began my remarks, before I got into my remarks, I commended 

you on the statements that you made earlier today on CNBC with 

regard to the hearing with regard to what needed to be done. And 

it was actually by watching that program I learned a bit of other 

information. On there they were issuing—talking about an OIG, an 

Inspector General’s report that was just listed on their Web site either today or yesterday with regard to a different issue, but still 

within the SEC. And it is regarding to uncollected disgorgement, 

what it is called. 

63 

That is not the point of this here, but after seeing that on, I 

guess it is Squawk Box, I had my staff go and we pulled out a copy 

of the report because it didn’t really go to what we are talking 

about here, but after going through it, it does in two ways. One, 

it goes to—on the weed side or getting into it, it goes to the issue 

of enforcement and whether there is being enforcement done in 

general. 

And as I assume the panel knows, this report raises a number of serious questions. There is about $177 million in uncollected 

disgorgement. And for those who don’t know, disgorgement just 

means once you have a case, and you find the guy, and you get the 

guy who did the bad thing, and then you want to go after him and 

actually get back those revenues from him, the ill-gotten gains. I 

guess the OIG says there is at least $176-, $177 million in uncollected disgorgement. That would be one issue. 

But the larger issue is in going through it, this goes back all the 

way through 1999, I believe it was at the very beginning, talking 

about that the OIG had done similar studies or reviews. And then 

if you go back at the very end to look to the Inspector General’s 

responses to the management’s comments, since the OIG gives 

their opinion, and then management is able to give the response, 

and then OIG gives a response to that, the very ending of it is— 

this is obviously OIG speaking—notwithstanding this effort— 

speaking to, in other words, the OIG saying over the last 1999, 

2001, 2002, 2003, 2004, 2005, so almost 8 years, 9 years—notwithstanding the efforts of trying to address this situation, the language and the tone of the Enforcement’s response leaves us unconvinced that Enforcement will take the OIG’s findings seriously and 

implement tangible and concrete measures to improve its 

disgorgement waiver process. 

I know, Mr. Chairman, we are not going into the issue of 

disgorgement. It just did raise a proverbial red flag that if there 

has been 7 or 8 years or more of OIGs saying—as an auditor basically saying, here is our recommendations to make changes, and 8 

or 9 years later there are still those questions, it raises the flag 

here is that if this as a body comes up with our recommendations 

saying that we will just leave it to the SEC to act unilaterally to 

try to implement changes, that we may very well, as the chairman 

says, be waiting a long time. So it just raises those questions. I appreciate the fact I was able to learn that by watching the TV today, 

quite literally. 

What I would like to learn a little bit more, though, is going into 

some of the issues that the first panel raised. And here is an easy 

one to start things out, to whomever can either address this right 

now or address it later on. And I see a lot of gray-haired people 

sitting in front of me, the gentlemen that is, which the previous 

panel was speaking to the issue of— 

Ms. THOMSEN. There is gray here, too. 

Mr. GARRETT. Well, I was never going to go there. 

The issue was as far as the experience of the people who are conducting in the enforcement side and the examination side. Can you 

provide us with a response to that as to your number of employees, 

the salaries of your employees, the years of experience that they 

have within the Department? 

64 

Now, I noticed a number of you spoke to your experience here 

within the Agency, the SEC. First panel, Mr. Markopolos would 

probably indicate that he would be suggesting, as others would, 

that we look for experience outside of the Agency as well. So if you 

could provide that to us, a detailed summary of that as prior experience to address that issue. And if anybody would like to, I know 

you are not going to have that at your fingertips right now, want 

to address that general allegation, if you will, that the SEC is 

made up of folks who really come to the table without the adequate 

practical business experience necessary to get the job, and that 

they are simply government employees. 

Ms. THOMSEN. Sure. I think we would probably all appreciate the 

opportunity to get specifics to you. Why don’t I start, because my 

division is probably the division that has the greatest characteristic 

that was complained of. We do have a lot of lawyers in the Division 

of Enforcement, and that is because we have to prove our cases in 

court. 

Mr. GARRETT. Can we just run through? I see my time has almost run out. 

Ms. THOMSEN. Okay. Never mind. Let me stop. We have lawyers, 

accountants, and analysts, as well as market surveillance types. 

But I would let the others talk. 

Ms. RICHARDS. Do I have time to supplement that? 

Mr. GARRETT. Sure. 

Ms. RICHARDS. In the examination program, we are mostly accountants and examiners. There are some lawyers, but the majority of the staff are examiners and accountants. They are CFAs and 

CPAs. 

After the Congress adopted pay parity legislation, it gave the 

SEC the authority to pay our staff at higher salaries that were 

commensurate with other Federal banking regulators. It allowed us 

to bring in a greater number of staff that had experience; either experience in the industry, in auditing, in compliance. And so in the 

last, I would expect, 4 years, 5 years, our staff has become much 

more experienced, much more well-rounded than they were in earlier years, where they were more likely to be hired right out of 

school. 

So that happened with the change that Congress gave us to pay 

our people a little bit more. And as a result, we began to keep people longer so they could gain experience in examinations, gain experience in dealing with complex products, complex strategies, and 

emerging types of compliance risks. So in the last 4 or 5 years, I 

believe it is a much better situation at the SEC in terms of the caliber and the experience of the examination staff. 

Mr. GARRETT. With the chairman’s permission to ask for elaboration on that, the suggestion was, and it is probably a good one, 

that if you were able to get some people who were in the industry, 

have worked in the industry most of their lives, and then come into 

the SEC to start doing enforcement, examination, rulemaking, etc., 

is that a practice to actually go out and seek that individual who 

has the 20-some-odd years’ experience who is about to—well, whatever to go into this field later on in life? 

Mr. SIRRI. Let me see if I can answer that question. We understand that such people are very valuable, they are very desirable. 

65 

It is simply hard to recruit them. We absolutely go out of our way 

to find people with industry experience. And we have such people 

in our division, Trading and Markets. 

More to the point, within the Division of Trading and Markets, 

we have a group of people who are explicitly not lawyers who are 

collected together to supervise certain risk issues at broker-dealers. 

These are people with Ph.D.s in economics, accounting, statistics; 

master’s degrees; exactly the kind of people you would think of you 

would want who have quantitative backgrounds to deal with just 

these kind of issues. And I will point out that some of them teach 

courses in derivatives on their own time, either before they came 

to the SEC or as they are at the SEC in the evenings to just those 

MBA students that were referred to on the prior panel. 

Ms. RICHARDS. I also just want to add, just to supplement that, 

that we have in recent years hired former traders in the exam program, which is extremely beneficial to help us look at trading 

records and unscramble what could be violative trading patterns. 

And that expertise brought in from the industry has been extremely valuable to us. 

One of the things we really want to do going forward is to expand that expertise to hire more quants, to hire more economists, 

to hire more former traders so that they can provide a resource, 

that expertise as a resource, to all the staff at the SEC. 

Mr. GARRETT. I would just close on this. And let us say that the 

dilemma that I think that any government regulator is going to 

have was expressed to me by someone in the industry, and that is 

when they deal with you, that if they find somebody, whether he 

is a young guy out of school or somebody who has been around for 

a long time and can teach the course or do these other things, and 

he is a real top-notch guy, no matter what you guys are offering 

him, in the private market they are going to offer him a whole lot 

more. And so we are always going to have that dilemma of trying 

to get the best and the brightest, because the best and brightest 

are going to go where the pay is, and that may not be with the 

SEC. But I thank you for the latitude to expand. 

Chairman KANJORSKI. Mr. Ackerman. 

Mr. ACKERMAN. I am frustrated beyond belief. We are talking to 

ourselves, and you are pretending to be here. I really don’t understand what is going on. The previous witness said that you guys 

as an Agency act like you are deaf, dumb, and blind. I figured you 

were coming here, and you were going to testify before Congress. 

Don’t you dare tell anybody you testified before Congress. You are 

going to be subjected to violation of false advertising lawsuits. All 

right? 

You have told us nothing, and I believe that is your intention. 

I figured you would leave your blindfolds and your duct tape and 

your earplugs behind, but you seem to be wearing them today. And 

instead of telling us anything, you read from the preamble of your 

mission statement and broke it up into five segments. 

What the heck went on? You said your mission was to protect investors and detect fraud quickly. How did that work out? What 

went wrong? It seems to me a private—with all of your investigators and all of your Agency and everything that you all described, 

one guy with a few friends and helpers discovered this thing nearly 

66 

a decade ago, led you to this pile of dung that is Bernie Madoff, 

and stuck your nose in it, and you couldn’t figure it out. You 

couldn’t find your backside with two hands if the lights were on. 

Could you explain yourselves? You have single-handedly defused 

the American people of any sense of confidence in our financial 

markets if you are the watchdogs. You have totally and thoroughly 

failed in your mission. Don’t you get it? And now other people are 

investigating what you should have found out, and you are hiding 

behind, well, maybe we can’t talk because someone else is looking 

at it. Well, you forfeited your right to investigate by not doing it, 

certainly not doing it properly or adequately. And now you are trying to tell us that because other people are looking at it, you are 

not going to tell us what is going on? Like hell you won’t. 

What happened here? That is a question. Do we start with hear 

no evil, see no evil, or do no evil? Take your pick. I only have 5 

minutes. 

Ms. THOMSEN. Let me start with Enforcement. As I said, we did 

an investigation—we began an investigation in 2006, and it was 

closed without action. 

Mr. ACKERMAN. Why was it closed without action? What did you 

investigate? What methodology did you use? 

Ms. THOMSEN. And in the interests— 

Mr. ACKERMAN. Were you suspicious when the guy had a one- man accounting firm investigating a $50 billion empire? And you 

keep saying alleged, alleged. This guy confessed on national television, you might have noticed. 

Ms. THOMSEN. And as I said, our objective is to actually hold him 

accountable in a court of law, bearing our burden of— 

Mr. ACKERMAN. You missed your chance. 

Ms. THOMSEN. We have a pending action pending in the Southern District of New York. 

Mr. ACKERMAN. You took action after the guy confessed. He 

turned himself in. Don’t give yourself any pat on the back for that. 

Ms. THOMSEN. Congressman, every time— 

Mr. ACKERMAN. Why didn’t you find him, is the question? 

Ms. THOMSEN. I understand your question, and we cannot answer as to the specifics. I can talk generally— 

Mr. ACKERMAN. You know, if anybody made the case better than 

Mr. Markopolos, and I didn’t think anybody could, about you people 

being completely inept, you have made the case better than him. 

Ms. THOMSEN. Well, sir, I am sorry you feel that way, profoundly. 

Mr. ACKERMAN. I think I am reflecting what the American public 

feels. How are they supposed to have confidence that if somebody 

goes to you with a complaint, gives it to you on a silver platter, 

with all of the investigation, with all of the numbers, with all the 

of the data, tell you exactly what he did, how he did it, and why 

he did it and how he knows that, and after a period of 6 or 8 years, 

you don’t know anything. 

Ms. THOMSEN. I can only talk about what we do overall. 

Mr. ACKERMAN. No, no, we want to know specifically. I don’t 

want to know what your general purpose in life is. I don’t need you 

to come here to tell me that you hate fraud. I hate when that happens, don’t you? You are supposed to find it out before it happens. 

67 

Ms. THOMSEN. In Enforcement, obviously we can’t. And I understand that concern. In Enforcement we bring—last year we brought 

670-some-odd cases. In the past 2 years, we brought 70 cases involving Ponzi schemes. In those 70 cases, close to half— 

Mr. ACKERMAN. Listen, I am sure you have medals and ribbons— 

Ms. THOMSEN. No, sir. 

Mr. ACKERMAN. —and stuff like that. And congratulations on all 

the good stuff you have done. I don’t want to belittle any of that. 

But this is huge. How do you miss that? And we know that there 

are many Madoffs out there. They are starting to surface. You 

missed all of those, too. But this one you were pointed at. And Mr. 

Markopolos says he is going to give you another one tomorrow. He 

is not even giving it to you. He is giving it out to someone else because nobody has confidence in you guys anymore. 

Maybe the General Counsel, Mr. Vollmer, I believe you were the 

one who thought that your people didn’t have to testify here today. 

I don’t know where you got that, but some of us think otherwise. 

Maybe you could tell us. How did they miss all this? 

Mr. VOLLMER. We are as committed as each of you— 

Mr. ACKERMAN. That is not the question. We give you credit for 

being committed. 

Mr. VOLLMER. Perhaps you could let me answer. 

Mr. ACKERMAN. Perhaps you can try to answer. 

Mr. VOLLMER. And what we are asking— 

Mr. ACKERMAN. No, no, we are asking. You have to tell us things. 

You are forgetting what this procedure is. You aren’t coming here 

to ask. We are asking you. How did you screw up? 

Mr. VOLLMER. Let the process work. It is a process Congress set 

up to identify the facts that we all need to make these judgments. 

Let us let the system work that Congress created. There will be 

some recommendations. There will be time for this committee to 

look at the facts and to think of recommendations themselves. 

Mr. ACKERMAN. Tell that to people who have lost their whole 

lives, that they have time. 

Mr. VOLLMER. And that is the appropriate way to proceed in this 

matter. 

Mr. ACKERMAN. People don’t have time. We need you to tell us 

something instead of lecturing us, Mr. Vollmer. 

Mr. VOLLMER. And the other thing that matters is that there are 

law enforcement proceedings going on, there are personal rights at 

stake, there is the integrity of the investigation. 

Mr. ACKERMAN. We wouldn’t be in this mess if you people did 

your job. 

Mr. VOLLMER. And that is why we have asked the committee to 

bear with— 

Mr. ACKERMAN. No, we are asking you. We are asking you. 

Mr. VOLLMER. —these investigations to allow them to proceed. 

Mr. ACKERMAN. Could you cite whatever authority you are citing 

and have cited? 

Mr. VOLLMER. I would be delighted, I would be happy to do that. 

I would be happy to talk with your— 

Mr. ACKERMAN. Because you have a right not to answer the Constitution’s fifth amendment procedure. 

Mr. VOLLMER. —your lawyer. 

68 

Mr. ACKERMAN. I am not a lawyer. I am a citizen. 

Mr. VOLLMER. I would be happy to talk to your lawyer. 

Mr. ACKERMAN. I am a frustrated citizen. 

Mr. VOLLMER. Happy to give the references to you or to your lawyer. 

Mr. ACKERMAN. I am listening. Give us the references. 

Mr. VOLLMER. There is a very important opinion from Attorney 

General Robert Jackson in 1941, where he explained the need to 

discharge the constitutional and statutory obligations of the Executive Branch in connection with law enforcement and civil litigation— 

Mr. ACKERMAN. Are you citing Executive Branch immunity, Mr. 

Vollmer? 

Mr. VOLLMER. —in response to requests for information from the 

Congress. 

Mr. ACKERMAN. Are you citing Executive Branch immunity, Mr. 

Vollmer? 

Mr. VOLLMER. There are various protections— 

Mr. ACKERMAN. Are you citing Executive Branch privilege, Mr. 

Vollmer? 

Mr. VOLLMER. I would like you to allow me to answer your question. 

Mr. ACKERMAN. It is a yes or no question, sir. Either you are or 

you are not. 

Mr. VOLLMER. No, it is not. There are a variety of reasons and 

privileges and protections. One of them is Executive Branch protections. There is a deliberative process protection. They stem from 

the same desires that you have. And we are asking that you allow 

those processes to work. 

Mr. ACKERMAN. We are out of patience. And the question, obviously, is a yes or no question. Either you are citing Executive privilege immunity or you are not doing that. 

Mr. VOLLMER. I have just explained there are various doctrines. 

Mr. ACKERMAN. You know, if you are citing your fifth amendment privilege, you don’t make a speech. 

Mr. VOLLMER. And that one of them was the Executive privilege. 

Mr. ACKERMAN. Was that a yes, you are citing Executive privilege immunity? 

Mr. VOLLMER. I said in part it is, yes. 

Mr. ACKERMAN. I am sorry? 

Mr. VOLLMER. I said yes, it is in part. 

Chairman KANJORSKI. Have you inquired of the Justice Department or someone else that they have analyzed that position for this 

hearing today, and they found that the Securities and Exchange 

Commission, requested by Congress to discuss a very important 

pending piece of legislation that is being established to protect hundreds of thousands, perhaps millions, of people, that you have a 

right, representing the Executive Branch, the President of the 

United States, to stand on that authority? Have you posed that 

question to the Attorney General or— 

Mr. VOLLMER. No. 

Chairman KANJORSKI. Then this is on your interpretation? 

Mr. VOLLMER. This is the position of the Agency. 

69 

Chairman KANJORSKI. And you are the General Counsel for the 

Agency. I assume you make the legal determinations for the Agency. 

Mr. VOLLMER. No, the Commission makes the decisions for the 

Agency— 

Chairman KANJORSKI. So this question— 

Mr. VOLLMER. —after obtaining advice from a variety of sources, 

and the General Counsel’s Office is one of them. 

Chairman KANJORSKI. So this has been passed through the new 

Director or Chairman of the Commission, and the members of the 

Commission, and they agree and have instructed you to instruct 

this panel not to respond to the questions of Congress because of 

Executive privilege and maybe other privileges contained in the 

1941 Supreme Court case; is that correct? 

Mr. VOLLMER. The Commission supports this position. 

Mr. ACKERMAN. That wasn’t the chairman’s question. 

Mr. VOLLMER. The answer to that specific question is no. 

Mr. ACKERMAN. The answer is no. So you are acting on your own 

volition. 

Mr. VOLLMER. No, I didn’t say that. No, and I would disagree 

with that. 

Mr. ACKERMAN. You know, most of us speak English, and we are 

having a hard time getting an answer from you. This was not discussed by the Commission, but it is the Commission’s position. Is 

that what you just said? Do you divine that? 

Mr. VOLLMER. The Commission has approved taking this position. 

Mr. ACKERMAN. The Commission has voted the position that you 

will cite Executive privilege in not testifying before this committee 

and answering its questions. 

Mr. VOLLMER. I couldn’t say that to you honestly, because the 

specific reasons— 

Mr. ACKERMAN. Obviously. 

Mr. VOLLMER. —weren’t discussed and given by the Commission. 

But the basis is that we were— 

Mr. ACKERMAN. Your value to us is useless. 

Mr. VOLLMER. —in accommodation— 

Mr. ACKERMAN. Your value to the American people is worthless. 

Your contribution in this proceeding is zero. 

Mr. VOLLMER. We ask that you take into account the concerns 

that have been well settled over many years, and we would ask you 

to take those into account. 

Mr. ACKERMAN. Our economy is in crisis, Mr. Vollmer. We 

thought the enemy was Mr. Madoff. I think it is you. You were the 

shield. You were the protector. And you come here and fumble 

through make believe answers that you concoct and attribute it to 

Executive privilege that you have not consulted with the Executive 

Branch on. 

Mr. Chairman, I am through. 

Chairman KANJORSKI. May I just add a second, were you all in 

the room when we had a prior witness? If I remember correctly, his 

testimony was that FINRA was corrupt, and the SEC was incompetent. Do you all not want to defend against that, or do you all 

accept that? 

70 

Ms. THOMSEN. Of course not. 

Mr. LUPARELLO. Mr. Chairman, on behalf of FINRA, we take 

great issue with the representation that we as an organization are 

corrupt. 

Chairman KANJORSKI. Are you going to break your—are you asserting the same Executive authority or— 

Mr. LUPARELLO. I am not. 

Chairman KANJORSKI. —privilege? 

Mr. LUPARELLO. I am not. 

Chairman KANJORSKI. So you are willing to break any rights or 

privileges you have in order to speak? I just want to make sure. 

Mr. LUPARELLO. FINRA is not involved in the investigation. It is 

therefore a little bit less complicated for FINRA. But I am here to 

answer any question you would ask. 

Chairman KANJORSKI. Very good. 

Mr. Royce, we are going to give you a shot to see if you can get 

any responses. 

Mr. ROYCE. Well, in order to try to do that, maybe what we could 

do is go back to Mr. Markopolos’s testimony, and maybe we can try 

to get an answer to some of the points that he raised. Specifically, 

one was what he described as the overlawyering at the SEC. His 

argument was that it was the inability for some of the regulators 

to even comprehend the complicated investment strategies that he 

presented them. Is there a concurrence that perhaps that was indeed the problem, or can anybody speak to that? 

Ms. THOMSEN. Well, I don’t know if Erik wanted to start. I will 

start from the— 

Mr. ROYCE. Why don’t you start, because this would be Enforcement, right? And you are the Director for the Division of Enforcement. And I think that is the big question mark here. Was he right 

in that assertion? And then we can go to the next point he raised. 

Okay? 

Ms. THOMSEN. Sure. I think without speaking specifically about 

whether he was right or not, let us talk about the issue of expertise, and I think that is a fair and important issue to discuss. As 

I said earlier, the Enforcement Division is largely lawyers, because 

our expertise is trying and winning cases. We have to comply with 

court rules. We have to meet burdens of proof. And that is traditionally a lawyer job. 

Within Enforcement, we have lots of accountants who help us, 

lots of market specialists and investigators to help us on the core 

mission of the specific cases. Ours is a pretty micro job. Did this 

person commit a fraud? A ‘‘Can I prove it’’ kind of question. Now— 

Mr. ROYCE. Right, but the complexity of the fraud is the problem. 

And you have a few people who had maybe 25 years experience as 

portfolio managers, but unfortunately they were on his side in this 

debate. They got shut out by the lawyers apparently. He had his 

allies in the SEC, but obviously— 

Ms. THOMSEN. Again, let me not talk about the specifics— 

Mr. ROYCE. Okay. 

Ms. THOMSEN. —but talk about the expertise that we do have 

available to us within the Agency. And lots of them are represented 

to my left. We do go to our peers at the Division of Investment 

Management. We go to Trading and Markets, an enormously valuVerDate Nov 24 2008 18:30 Jun 16, 2009 Jkt 048673 PO 00000 Frm 00076 Fmt 6633 Sfmt 6633 K:\DOCS\48673.TXT TERRIE
71 

able resource for us when we are dealing with broker-dealers, 

broker-dealer issues. We have our Office of Risk Assessment, which 

is growing. It is a need we recognized some time ago. We have the 

Office of the Chief Economist. 

Mr. ROYCE. Let me get to a question really quick then. 

Ms. THOMSEN. Sure. Of course. 

Mr. ROYCE. The percentage maybe, if you could give me an estimate in your division there, of broker-dealers or investment advisers or those who have that experience in the exchanges or rating 

agencies that also maybe are lawyers, but have that kind of experience— 

Ms. THOMSEN. Within the Division itself? 

Mr. ROYCE. —who are basically in a position to be key decisionmakers on these kinds of cases. 

Ms. THOMSEN. Within the division itself, very few. 

Mr. ROYCE. I think that was his point, wasn’t it? 

Ms. THOMSEN. I understand the point. And I think the issue of 

expertise is one that I mentioned earlier we do need to address. We 

have— 

Mr. ROYCE. Let me—because my time is limited, let me go to 

Erik Sirri really quick with a question, because the testimony this 

morning mentioned the vast difference in fraud cases uncovered 

from cases initiated by industry tips. And that then was explained 

against those from audits by regulatory bodies. And you must have 

been struck, as we were, by the discordant—by the extreme difference in terms of how many of these came from people in the industry that apparently knew more and discovered more in advance. 

Somehow the private sector was well aware of the Madoff Ponzi 

scheme before the SEC. 

And so, you know, do you believe that is an accurate assessment? 

And do you believe the investigative priorities maybe of the SEC 

are properly set, given the outcome, that we are not just talking 

about one case here; he was taking in aggregate the number of 

cases brought because of whistleblowers, how much more effective 

that was than the experience of the auditing by the regulatory 

body. 

Mr. SIRRI. I did understand the point that he made, and I, too, 

was struck by that point, though in many ways not surprised by 

it. People on the inside, of course, have knowledge, and they have 

their own motivation for releasing that information. When you are 

on the outside, of course, it is much more difficult to make those 

inferences and ferret it out. 

The division I supervise is a policy division. We do not have examiners. We don’t have an enforcement function, so I can’t speak, 

I think, to the heart of what you asked. But I would like to follow 

up on a point that Linda Thomsen made. 

The questions that you had asked were on expertise, and I think 

this event that has happened with Mr. Madoff has caused us to 

think about the way I think we deploy expertise. Chairman 

Schapiro, in her opening e-mail to us as a staff, said it is time to 

think about self-evaluation, and that we need to honestly take a 

look at what we are doing and how we are doing it. And I think 

we all as staff take that precisely to heart. When it comes to a 

point like expertise, nothing could be truer because that doesn’t 

72 

cost more money. That is just a matter of working smarter. And 

I think we try do that as best we can. 

We have resources within the SEC. The Office of Economic Analysis, almost exclusively economists with Ph.D.s; my division, mostly lawyers; but as I said, many, many other folks. I have a Ph.D. 

in finance, so I price derivatives for a living at times, so I am comfortable with that. Nonetheless, not all those people are brought to 

bear on the right problem at the right time. That is clearly something we need to work on. And when we see instructions like we 

got from Chairman Schapiro, I think it is a clue to all of us to figure it out so something like this doesn’t happen again. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Let me see, Melissa Bean from Illinois. 

Where did you appear from? 

Ms. BEAN. I snuck in on you. Thank you, Mr. Chairman. And 

thank you all for your testimony here today. 

I guess I would direct my questions either to Ms. Thomsen of Enforcement or Lori Richards of Compliance. I am not sure where this 

would fall, but clearly, the challenges that people feel we are facing 

as a Nation where there has been lack of compliance and enforcement isn’t new to the SEC. Congress certainly provided additional 

funding. We all remember Enron and WorldCom and other situations where there needed to be greater scrutiny than has been provided. 

I guess my question is how proactive is—and what level of best 

practices are in place to ensure that, number one, when people actually make complaints and suggest someone gets looked at, are 

lower-level staffers allowed to just dismiss those without a full investigation? And should that continue? Or should things have to be 

escalated automatically through at least several levels of authority 

before dropping further inquiry? 

And where there haven’t been any issues raised, what types of 

best practices are in place to go out there proactively in the industry to seek where there may be problems and investigate that at 

least on a sampling type of basis? 

Ms. THOMSEN. Why don’t I start with the complaint process, and 

perhaps Ms. Richards can talk about some of the examination process which is directed at proactively identifying issues. 

On the complaint process, as we mentioned in our testimony, we 

literally receive hundreds of thousands of complaints every year, 

hundreds of thousands. So we simply—we can’t investigate all of 

them. We take them all seriously. We try to respond to them. So 

the process for us is trying to triage them to identify those which 

have the greatest risk of the greatest harm, as well as the greatest 

likelihood of being accurate or verifiable. And all of you get all 

kinds of information, tips, mail, too. And the real challenge is you 

can get something that looks terribly credible with lots of detail 

and lots of exhibits, and it can be, for whatever reason, not true, 

not verifiable, etc. 

Ms. BEAN. If I can interrupt only because we have limited time. 

Given that, and given the constraints of resources, what is the criteria when you get multiple complaints about the same organization year after year; how is it that this doesn’t rise to senior-level 

attention? 

73 

Ms. THOMSEN. Let me just back up. So we are not being specific 

about this particular issue, but complaints get followed up. They 

get triaged, and they are worked. If someone decides to pursue it— 

it is not an on-off switch. You look at something, you do some work 

on it, you consult with your supervisors along the way. You may 

do a little investigation. If it looks promising, you may do more. 

How much more you do is a decision that gets made along the way, 

balanced against what you are finding. 

Ms. BEAN. So there are no checks and balances within the SEC 

to say if someone has decided based on their—the degree of knowledge they have taken to pursue how big the risk or harm is—clearly if we look at the Madoff scenario, if we have met both of those 

criteria, what are the checks and balances in place to say that 

someone else decided that that was worth moving past? 

Ms. THOMSEN. I am struggling with how to answer that because 

in the specifics— 

Ms. BEAN. Does that have to happen, or can it just be arbitrarily 

dismissed by an individual? 

Ms. THOMSEN. It is going to be assessed within an organizational 

group through—up through supervisors. And I think that is as far 

as I can go specifically. 

Now, there are certain kinds of complaints that do have specific 

procedures. For example, if we get online complaints, there are 

very specific procedures that are followed in terms of responding. 

And which ones get picked up for further investigation also involve 

judgment calls. There are specific procedures with respect to SARS, 

suspicious activity reports, that we review. We try to—for example, 

depending on the nature of the complaint, if it is an accounting 

complaint, we have people with accounting expertise review them, 

all with an eye towards bringing expertise to those complaints. 

Ms. BEAN. Let me interrupt again. So given that obviously this 

was a really big miss, and was dropped repeatedly, is it a lack of 

resources or a lack of skill sets among those who are in place who 

are making these decisions, in your opinion? 

Ms. THOMSEN. What I would like—let us not assume— 

Ms. BEAN. Well, I am not assuming, I am asking. So which is 

which? 

Ms. THOMSEN. Well, first, there is a premise I would like to address first. I would not necessarily assume that a complaint was 

not addressed. 

Ms. BEAN. The assessment was inaccurate. Is that a skill set 

issue? 

Ms. THOMSEN. Not—and I am not trying to quibble, because the 

issue is, if the assess—assume there is a complaint with a very— 

which led to something, as you say, dramatic and specific. That 

complaint in a matter—as a matter of practice would be pursued 

in an investigative way. Then the question becomes, what happens 

in the investigation? And that depends on what you find by way 

of— 

Ms. BEAN. My time is up. So I will yield back. 

Ms. THOMSEN. Thank you. 

Chairman KANJORSKI. Thank you very much. 

Mr. Posey wishes to examine for 3 minutes and reserve 2 minutes. 

74 

Mr. Posey. 

Mr. POSEY. Thank you very much, Mr. Chairman. 

I was watching this on TV, eating my lunch, and it just occurred 

to me how shocked I would be if somebody dropped into my local 

police department and said, you know, there is a bank robbery 

going on down the street. Can you do something about it? And they 

said, yes, if we get around to it, we will. Or, well, we have done 

bigger robberies than that before. We are not going to worry about 

that. 

It is amazing to hear the stories and the testimony that we have 

heard today, truly amazing. 

A question for Ms. Richards at this point, and then I would like 

to reserve some of my time. You stated that you had been recused 

from the Madoff investigation, and I was just wondering why that 

was. 

Ms. RICHARDS. Yes. Thank you for the question. 

I am not participating in the current examinations or investigation due to the fact that a former employee who was under my 

chain of command married a member of the Madoff family, and I 

attended the wedding. So the SEC has established a process that 

would allow the staff to recuse themselves from any current or ongoing investigation or examination so as to ensure that no possible 

questions are raised about the objectivity or the impartiality of the 

examination or the inspection. So for those reasons, I am not participating in the current examinations of the firm. 

Mr. POSEY. Could I follow up, Mr. Chairman? 

Chairman KANJORSKI. Yes. 

Mr. POSEY. So you asked to be recused? 

Ms. RICHARDS. Chairman Cox in December decided that the SEC 

would establish a process for SEC staff to ensure that there were 

no questions— 

Mr. POSEY. I understand. But you asked to be recused; is that 

correct? 

Ms. RICHARDS. Yes. When guidance was provided by our ethics 

counsel, I then took that guidance and recused myself. 

Mr. POSEY. Do you think had you not been recused, you could 

have added anything, any information at all whatsoever that would 

be at all pertinent? 

Ms. RICHARDS. Add it to this testimony? To today’s hearing, you 

mean? 

Mr. POSEY. No, to the investigation. It is a question that begs for 

an answer. Is it innocuous that you recused yourself, and it would 

have no effect on it? Or do you consider your knowledge and insight and service to be of any value in this? 

Ms. RICHARDS. I am sorry, sir. I didn’t understand your question. 

There are very senior staff at the SEC, very experienced staff examiners who were working on the examination and on the investigation. So I don’t believe that there will be any compromises to 

the quality of the work. 

Mr. POSEY. Thank you. 

I thank you, Mr. Chairman. 

Mr. ACKERMAN. [presiding] The gentlewoman from New York, 

Mrs. Maloney. 

Mrs. MALONEY. Thank you very much. 

75 

Mr. Markopolos in his testimony earlier testified that he brought 

complaints 5 times in writing to the SEC, and these were detailed 

complaints. It wasn’t, ‘‘I think something’s wrong.’’ These were detailed complaints that this is wrong. They are not trading. They 

are not doing this. There is examples. And it was a very specific 

complaint, not once, not twice, not 3 times, but 5 times to the SEC. 

He said he had the support of some people in the SEC, professionals, saying that this needed to be investigated. And how many 

more times would a whistleblower have to bring complaints to the 

SEC for them to have investigated the Madoff case? 

Ms. THOMSEN. As I think we have made clear, we did investigate 

in 2006, and the investigation resulted in no action—no recommendation of enforcement action. So the issue, I think, to a certain extent becomes in investigations—with any complaint, our job 

is to verify the information. 

Mrs. MALONEY. But one of the things he said was that Madoff 

wasn’t conducting trades. Now, if you went in and just asked for 

the trade slips or proved that they were doing trades when whistleblowers were saying they weren’t doing trades, then you could have 

shut him down in one-half hour. You could have shut Madoff down 

in one-half hour by just following up on one of his allegations that 

they were not conducting trades. 

So did the SEC ever use any tools to confirm that Madoff’s trades 

could be confirmed in market transactions? 

Ms. THOMSEN. As to the specifics of the investigation, I can’t answer. As to what we do when we investigate, we try to confirm if 

we can—if there is a complaint, we try to confirm the elements of 

the complaint. Oftentimes a complaint takes us— 

Mrs. MALONEY. Well, let me tell you something. I am not an SEC 

official, I am not an attorney, but I have common sense, and if I 

were sent in to find out whether or not he was trading, I would 

ask, where are your trade slips? Where is the proof that you are 

trading? It doesn’t have to be classified information. 

I find this absolutely outrageous, and if you won’t answer it, I 

think I am going to appeal to the chairman to subpoena and find 

out what you did in this case. 

He further testified today in very riveting testimony that in 

2001, he offered to go undercover. He offered to risk his life to work 

with the SEC to prove this fraud. Why was that request turned 

down? 

Ms. THOMSEN. Without talking about the specifics, let me say 

that we are a civil law enforcement agency and do not do undercover operations. They are exclusively the province of the—of criminal authorities. We don’t do them. 

Mrs. MALONEY. He also said, and I quote, and he wrote in his 

testimony, that Madoff was, ‘‘one of the most powerful men on Wall 

Street and in a position to easily end our careers or worse.’’ He told 

me he was afraid for his life that he was bringing these allegations. 

He was afraid Madoff would have somebody kill him because he 

was bringing these allegations, and yet, they were brought in a 

very comprehensive way that would have been easy to prove. And 

you can’t testify as to what tools you used or what results you got 

on looking at, whether or not he was conducting trades. 

76 

I mean, that is pretty basic. When people say, he is not conducting trades, it is a complete lie, that would have been able to 

be proved within a half hour if you looked at it. But maybe the 

SEC was afraid of—do you think the personnel were afraid of having their careers ended or worse if they looked at Madoff, as Mr. 

Markopolos said? 

Ms. THOMSEN. On that one, again, without regard to Mr. Madoff, 

absolutely not. Absolutely not. 

Mrs. MALONEY. Have any employees at the SEC ever gone to 

work for Madoff? 

Ms. THOMSEN. I don’t know the answer to that. 

Mrs. MALONEY. Can you look into that? 

Ms. THOMSEN. I think we can. I think we can. And I would say 

that the issue of revolving doors, the ethics rules are very seriously—we take them seriously. 

Mrs. MALONEY. I know we have ethics rules. My question was, 

have any SEC employees gone to work for Madoff? 

Ms. THOMSEN. I don’t know the answer, but we will find out. 

Mrs. MALONEY. The Madoff feeder funds were advertising unbelievably high sharp ratios. Can you tell us what a high sharp ratio 

is? 

Mr. SIRRI. Yes, I can. A sharp ratio is the ratio between the expected return on the fund and the risk of the fund. So a high sharp 

ratio means that fund is returning a great deal of return for a unit 

of risk. 

Mrs. MALONEY. And Mr. Markopolos testified about the sharp ratios advertised by Madoff and his feeder funds. Or do you agree 

that the sharp ratios shown by Madoff’s equivalent to a baseball 

hitter hit 150 home runs a year, wouldn’t you think that was a 

warning sign? His ratios were so successful; wasn’t that a warning? 

No one else could get those numbers. 

Mr. SIRRI. I have not seen those ratios, so I can’t say anything 

specifically again about this case. 

Mrs. MALONEY. Maybe it is something the SEC should have 

looked at. 

Mr. ACKERMAN. The time has expired. 

The Chair will next recognize the gentleman from Colorado, Mr. 

Perlmutter, and request of him if he would yield me 1 minute, I 

would be glad to extend his time by that amount. 

Mr. PERLMUTTER. Mr. Chairman, I will so yield. 

Mr. ACKERMAN. You will be made whole. 

I just wanted to follow up on Mrs. Maloney’s very important 

question to which the answer was neither opaque nor vague. It was 

just avoiding. But let me—inasmuch as you are not going to talk 

to us about specifics, which is why we invited you, could I ask you 

a hypothetical question? Hypothetically, if somebody came to you 

with evidence and a charge that somebody was committing a multibillion-dollar Ponzi scheme and said that person was not actually 

even making trades, would it not be standard operating procedure 

for you to go and see if he had trade slips? 

Ms. THOMSEN. Our investigations would follow— 

Mr. ACKERMAN. This is a yes or no question. 

77 

Ms. THOMSEN. There is no standard operating procedure other 

than if we took a complaint seriously, we would try to find out 

whether the facts were true or not. 

Mr. ACKERMAN. If you took a complaint seriously, which obviously you did not, is that what you just told us? 

Ms. THOMSEN. No, sir. That is not what I said. 

Mr. ACKERMAN. Then if somebody brought you evidence and 

made a charge that somebody was committing this type of fraud 

hypothetically, would your procedure and investigation—I am asking you a procedural question now, having nothing to do with Bernie anybody. If somebody brought you this information tomorrow, 

would it not be reasonable to expect that you would ask to see their 

trade slips? 

Ms. THOMSEN. I think it would be fair to say those are among 

the things that we would look at. 

Mr. ACKERMAN. And if you did not, would you consider that malfeasance? 

Ms. THOMSEN. Not necessarily, depending on what we saw. 

Mr. ACKERMAN. Thank you very much. 

Mr. Perlmutter. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. 

I have to say just as an opening statement, the charges and the 

vehemence that Mr. Markopolos directed towards all of you, the 

only person who had any emotion in her voice in the initial opening 

statements was Ms. Richards. Cozy; captive; gullible; go along, get 

along; lazy; he couldn’t have used any more adjectives to describe 

what he felt about this particular investigation. 

We have heard about all the red flags. I don’t want to talk about 

that. I would like to know, Mr. Donohue, what a split strike strategy is, if you know. 

Mr. DONOHUE. First, I would start off by saying that I have only 

been at the Commission for 3 years. I started on Wall Street in 

1975 and had many different positions in Wall Street prior to coming to the SEC. 

Mr. PERLMUTTER. Do you know what a split strike strategy is? 

Mr. DONOHUE. I understand what a split strike strategy is, that 

one creates a collar. You will buy either stocks or a basket of stocks 

and sell a call, which limits your upside opportunity, and you 

would buy a put, which would limit your downside risk. 

Mr. PERLMUTTER. Had you in your experience ever used a split 

strike strategy? 

Mr. DONOHUE. No, I had not. 

Mr. PERLMUTTER. Mr. Luparello, what is your understanding of 

what a split strike strategy is? 

Mr. LUPARELLO. Similar to what Mr. Donohue’s is. 

Mr. PERLMUTTER. In your experience, have you ever used split 

strike strategy? 

Mr. LUPARELLO. I have not. 

Mr. PERLMUTTER. Just so you two know, I asked Mr. Cox and 

Mr. Harbeck the same question a month ago. They didn’t have any 

clue what a split strike strategy was. They had never used it. And 

it is classic Ponzi scheme doubletalk. Okay? You can call it whatever it is. And then there is, you know, secrecy and all that sort 

of stuff. 

78 

Let us drop back here for a second because I really wanted to 

give all of you the benefit of the doubt coming into this thing. But, 

Mr. Donohue, there actually was a guy named Jim Donohue, James 

Donohue, in Colorado with a little company called Hedged Investments. It had exactly the same Ponzi scheme in 1992, only $100 

million was stolen, not $50 billion. My question is, when you are 

training your people, do you talk about; it is too good to be true, 

therefore, it has to be? What kinds of things do you ask your people 

to look for so they are sheriffs, they are cops, they stop this stuff 

from happening? Mr. Donohue? 

Mr. DONOHUE. I will start off by saying that my division is a policy division. I don’t have any examiners. I do ask folks when they 

are looking at registration statements and things of that nature 

that they look at things that might be abnormal, things that are 

too good to be true. And that is one of the things that we do ask 

people to look at. There is no free lunch, and that is one of the 

things I do try and impress on folks who are in my division. 

Ms. RICHARDS. Can I answer that question, sir, with respect to 

examiners? It is the field office examination staff who go out and 

conduct examinations. The risk of Ponzi schemes, the risk of theft 

is foremost in their minds. So they are examining for compliance 

with lots of provisions of the Federal securities laws. But they are 

always alert to the possibility of fraud. So one of the things that 

examiners do is they verify records that are provided to them. They 

would never, for example, just simply ask, are you in compliance 

with the law, or are you engaged in fraud? That wouldn’t be 

enough for an examiner. They want to see backup records. And one 

of the routine aspects of every routine investment advisory exam 

is to seek confirmation of the holdings of clients directly with a 

third-party custodian. It is a very basic audit step. And then the 

examiners will match that with the records that they see at the advisor— 

Mr. PERLMUTTER. That sounds great. 

Let me ask you the question point blank, and anybody can answer this, and then I am going to yield the balance of my time to 

Mr. Arcuri. The coziness, okay, those sound like very good precautions. Is the SEC too cozy with the industry? Are they captive 

by this industry, or are they looking out for us, looking out for the 

taxpayers? Ms. Richards, you answer that. 

Ms. RICHARDS. Absolutely not. Examiners, as I said at the outset, 

they are taught to pull no punches. They are taught to communicate deficiencies in violations without regard to the type of firm, 

the influence of the person. They are blind to the type or the nature of the firm that they are examining. They truly have a ‘‘pull 

no punches’’ attitude. 

Mr. PERLMUTTER. I would like, Mr. Chairman, to give my last 

minute to Mr. Arcuri if I could. I have 1 more minute, right, because I had given a minute? 

Mr. ACKERMAN. Yes. 

Mr. PERLMUTTER. I would yield that to Mr. Arcuri. 

Mr. ARCURI. Thank you. I thank the gentleman. 

Really quickly, Ms. Thomsen, how long were the Madoff actions 

allegedly going on? 

Ms. THOMSEN. Well, I can’t answer that as to the specifics. 

79 

Mr. ARCURI. The answer is, you don’t know. 

The next question is, you talked about credible lead. What do you 

consider a credible lead? 

Ms. THOMSEN. Whether or not a lead is credible and how we assess it depends on the nature of the— 

Mr. ARCURI. I understand the process. I am a former prosecutor. 

What do you consider a credible lead for the SEC? 

Ms. THOMSEN. It depends on what is in it. It depends on the 

specificity and how important, how big it is. 

Mr. ARCURI. I get it. Do you look at the person who is giving you 

the lead? 

Ms. THOMSEN. Absolutely. 

Mr. ARCURI. And obviously you weigh the credibility of the person who is presenting the lead to you; do you not? 

Ms. THOMSEN. Yes. 

Mr. ARCURI. You give certain greater credibility to people who 

you deem to be a credible person and less to someone you would 

deem to be noncredible? 

Ms. THOMSEN. Generally speaking, yes, although I have to say 

that some people who appear incredible have credible leads. 

Mr. ARCURI. That is true. 

Now, when Mr. Markopolos came before you, did you consider 

that a credible lead? 

Ms. THOMSEN. I can’t answer that. 

Mr. ARCURI. You can’t answer that? How does that affect your 

ability to investigate or Mr. Madoff’s investigation? 

Ms. THOMSEN. Because that is subject of the Inspector General’s 

investigation, and— 

Mr. ARCURI. Ma’am, I have used that excuse a number of times, 

and I can’t even fathom how this could in some way be affecting 

the investigation. 

All right. Let me ask you this. 

Ms. THOMSEN. Sure. 

Mr. ARCURI. In 2006, when you investigated, did you make a determination of any wrongdoing on Mr. Madoff? 

Ms. THOMSEN. We did not bring an enforcement action, and we 

did not— 

Mr. ARCURI. That was not my question. Did you make a determination whether or not there was any wrongdoing? 

Ms. THOMSEN. Again, I can’t answer the specifics on the underlying investigation other than to say what is public was that there 

was no enforcement action. 

Mr. ARCURI. Did you make a referral based upon your analysis 

in 2006? 

Ms. THOMSEN. I can’t answer that. 

Mr. ARCURI. You can’t answer whether or not you made a referral? 

Ms. THOMSEN. I cannot. And again, this goes back to whether or 

not—it is to protect the criminal prosecution. 

Mr. ARCURI. I understand. Thank you. I understand about a defendant’s rights. But you can’t answer whether or not you made a 

referral? 

Ms. THOMSEN. No. 

80 

Mr. ARCURI. Okay. Now, my next question is this—do I have any 

more time, Mr. Chairman? 

Chairman KANJORSKI. I don’t know whether we should— 

Mr. ARCURI. I yield back the balance of my time. Thank you. 

Chairman KANJORSKI. Thank you. 

We have Mr. Posey here. We will give him 2 minutes, so maybe 

he can crack this egg. 

Mr. POSEY. Thank you, Mr. Chairman. And I will yield back a 

minute or two to him if I have any left. 

It is just such an incredulous tale, I think, for everybody up here 

to understand. Maybe you all don’t have that kind of a problem 

grasping with it, but it is just incredibly unbelievable to the people 

in this committee to hear these stories. 

Besides Mr. Markopolos, we have the Barron’s article, we had 

what is called the Ocrant article. We had Merrill Lynch, Goldman 

Sachs telling their investors, don’t touch this. This is impossible. 

This has got to be a scam. We have hedge fund managers, money 

managers with the absolute minimal amount of due diligence, you 

know, telling their clients by the thousands, this is a joke. This 

cannot possibly be working. Stay away from this thing. And yet, 

you know, our enforcement agency is blind to the whole—I mean, 

it is literally hard for everybody to believe. And, you know, the 

question I have is, did anyone else report to you like Mr. 

Markopolos did and ask you to look at this? You know, report the 

bank robbery going on a block over? 

Ms. THOMSEN. While I can’t answer it specifically as to this, I 

can verify one of the things Mr. Markopolos talked about, which is 

a reluctance on the part of people in the industry to bring information to us about their peers or others in the industry. It is a frustration to us that people who—legitimate actors in the securities 

business who ought to be protecting the legitimacy of their business sometimes do not come to us sort of with leads about potential 

problems. 

So, that I can say. I can’t talk specifically about this particular 

situation. And if I could turn to—I think we all understand your 

frustration. And if we knew going into something that it actually 

was a fraud, we wouldn’t investigate. We would bring that action. 

If we had the evidence to bring it, we would bring it. There is nothing—I mean, in a perverse way—there is nothing that makes us 

happier than bringing those kinds of cases. 

Mr. POSEY. I think a lot of frustration was probably because we 

can’t believe when they reported the bank robbery in process, nobody bothered to look, number one. And since you brought it up, 

all these insiders who kept their mouths shut who apparently knew 

something was going on, is there anything in the statutes that 

would make them culpable in this crime? I mean, if I see somebody 

being mugged, and I am able to do something about it, and I don’t, 

I think I share some guilt with the crime. 

Ms. THOMSEN. I think, sir, you may at a sort of moral or ethical 

level. I think legally the issues become whether you participated 

enough to be responsible as either a cause or an aider or an abettor. And we will, in all investigations, look—cast our net wide and 

deep to bring— 

81 

Mr. POSEY. Okay. Let us say it wasn’t illegal. When you license 

people, don’t they have to have a relatively clean background, be 

free of what they call moral turpitude? And wouldn’t that blemish 

the license of every licensed person if they knew something—maybe 

it is not illegal, but it is a breach of morality at least held by most 

people in this country that would be a view. And I would think 

anyone that you suspect that knew this was going on and didn’t 

report it—although obviously it would have been unacknowledged 

even if they had—but had they not reported it, I think their licenses should be in jeopardy, just on the grounds of the moral-turpitude-free background that you expect them to be when they get 

licensed. 

Ms. THOMSEN. Let me defer that issue to those who know the licensing issues. I don’t necessarily disagree. 

Chairman KANJORSKI. Mr. Donnelly, you are recognized for 5 

minutes. 

Mr. DONNELLY. Thank you, Mr. Chairman. 

I asked the Inspector General when he came how many red flags 

are enough red flags that you stop what is going on? And one of 

the flags was a $50 billion fund with a one-person accounting firm. 

Why was that one flag not enough for you to shut this down earlier? 

Ms. THOMSEN. Without regard to the specifics of this particular 

case— 

Mr. DONNELLY. Let us have a theoretical $50 billion fund with 

a theoretical one-man accounting firm. 

Ms. THOMSEN. That is where I was headed. We need evidence, 

and that is what we pursue, and if we have enough evidence of 

fraud, we bring those cases. 

Mr. DONNELLY. How early on did you know that there was a oneman accounting firm involved? 

Ms. THOMSEN. I can’t answer that question. 

Mr. DONNELLY. You were told that in 2001, if I am not mistaken. 

Ms. THOMSEN. Sir, I simply can’t discuss the specifics of this one. 

Mr. DONNELLY. Then let me ask you the next question, which is, 

is there a form for examination when your examiners go in, things 

that if you see these, you say, this is a red flag, something has to 

be done? 

Ms. THOMSEN. Let me defer to Ms. Richards, who is the expert 

on examinations. 

Mr. DONNELLY. Let me ask Ms. Richards. 

Ms. RICHARDS. In the examination context, sir, given the number 

of registered investment advisors—and I am assuming your question goes to investment advisors and the breadth of activity—we 

have to take a risk-based approach to deciding both which firms to 

examine and which issues— 

Mr. DONNELLY. Let me ask you this: When you go in and your 

examiners go in, and they see a $50 billion firm and one accountant, does that tip them off that there may be a situation here? 

Ms. RICHARDS. Investment advisors are not required to have an 

audit, so the fact that it was a small auditor or a no-name auditor 

may or may not present a risk. We would look at other things, 

however, like how are the assets custodied, what are the performance claims the advisor is making. 

82 

Mr. DONNELLY. How about you combine the accounting with the 

fact that they go into cash at the end of every quarter? Does that 

then start to smell a little differently? 

Ms. RICHARDS. If examiners had selected that firm for examination and had gone in, they would definitely look at the trading in 

client accounts and look at whether it is consistent with— 

Mr. DONNELLY. So in and of itself, those are not red flags to you? 

Ms. RICHARDS. It could be. It certainly could be depending on 

what representations the advisor made to the customer. 

Mr. DONNELLY. Do you have a form of examination that here are 

some absolutely critical things that we will never pass on when we 

do an exam? One, two, three, four, five; these are things when we 

go in we look for? These are things when we look at each company, 

the basics we want to see? 

Ms. RICHARDS. Yes. When we conduct a routine examination of 

an investment advisor, we are looking at such things as do they 

have—what are the representations they make to clients? Are they 

living by those disclosures? What are the expenses that they are 

deducting from client accounts? Are they in some way— 

Mr. DONNELLY. I am going to give my last minute to Mr. Arcuri 

after this question, but it is this: Back home in Indiana, there is 

a fellow running a tool and die shop who is looking to put a few 

bucks back into his mutual fund to try to save for his retirement. 

Why should he have any confidence that the organizations out 

there have been thoroughly vetted by you? 

Ms. RICHARDS. Well, with respect to mutual funds, which is your 

question— 

Mr. DONNELLY. Or hedge funds. Or like any of these security 

funds. The organizations that you have jurisdiction over. 

Ms. RICHARDS. We have examination responsibility over firms 

that are registered with the SEC, so that may not include hedge 

funds. It does include mutual funds. There is a robust regulatory 

structure around mutual funds. They are also subject to examination by the SEC, though given our resources, we don’t examine 

every mutual fund firm on a regular basis. 

Mr. DONNELLY. Let me say one last thing, and then I will turn 

it over to Mr. Arcuri. We had a 78-year-old man, I believe he was 

a friend of Mr. Ackerman’s, who came before us. And in 2001, you 

were contacted by Mr. Markopolos. He continued to put money in, 

this gentleman did, into the Madoff funds because he had confidence in the system, in the SEC. He believed in you guys as a 

gold standard. He has zero now, and they are going to foreclose on 

his house. 

Mr. Arcuri. 

Mr. ARCURI. Thank you, Mr. Donnelly. 

Ms. Richards, if you were to see an investor continually over, let 

us say, a 10-year period consistently make a 10 or 12 percent return for his investors, would you consider that a red flag? 

Ms. RICHARDS. Yes, sir, I absolutely would. The SEC does not— 

Mr. ARCURI. If you were to receive that, you would consider that 

possibly a red flag? 

Ms. RICHARDS. Yes, sir. 

Mr. ARCURI. My next question is, how about if you saw an investor who was giving 4 percent of the profit he would normally reVerDate Nov 24 2008 18:30 Jun 16, 2009 Jkt 048673 PO 00000 Frm 00088 Fmt 6633 Sfmt 6633 K:\DOCS\48673.TXT TERRIE
83 

ceive to the feeder companies; would you think that might be a red 

flag? 

Ms. RICHARDS. It would be an unusual situation. 

Mr. ARCURI. Okay. How about if you saw a company that continually at the end of each period turned their cash into government 

securities; would you consider that perhaps a red flag? 

Ms. RICHARDS. We would want to understand why. 

Mr. ARCURI. Okay. Now, if you had those sort of situations, and 

then you had someone come in who maybe you considered to be a 

credible lead, give you information, what would then prevent you 

from investigating that? Why would you not investigate that situation? 

Ms. RICHARDS. My office has authority to conduct examinations, 

routine and cause, of registered investment advisors. So the first 

threshold is, is it a firm that is registered— 

Mr. ARCURI. But if you were see those situations, wouldn’t it be 

something—and you were to receive what would be a credible lead, 

wouldn’t that be the kind of thing that you would want to look 

into? 

Ms. RICHARDS. In situations where we receive credible leads, the 

first step is, is it a registered advisor? If it is, we send examiners 

out immediately. They show their badges without notice. 

Mr. ARCURI. The bottom line is, you didn’t do it. You had all of 

these situations in a particular case, and nothing was done by the 

SEC, correct? That is a yes or a no. Nothing was done. 

Ms. RICHARDS. This firm registered with the SEC in 2006. Following that, there was no SEC exam of— 

Mr. ARCURI. So you had the scenarios that I just described; you 

had a credible lead, and yet nothing was done by the SEC, correct? 

There was nothing done by the SEC, was there? 

Ms. RICHARDS. I think that is not correct. I have testified about 

the extent of the regulatory examinations of the firm. And Ms. 

Thomsen talked about— 

Mr. ARCURI. Well, you just indicated these things would be possible red flags. Ms. Thomsen said that maybe it was a credible 

lead. You had all these situations, either somebody wasn’t talking 

to someone, or there was no investigation done. 

I have nothing further. I yield back. 

Chairman KANJORSKI. Thank you very much, Mr. Arcuri. 

The ranking member of the full committee, Mr. Bachus. 

Mr. BACHUS. Thank you. 

Ms. Thomsen, in your testimony you say you can’t pursue every 

tip. And are you characterizing Mr. Markopolos’s dialogue as a tip? 

Ms. THOMSEN. I do characterize it as a lead or a tip, just like others. 

Mr. BACHUS. Well, at some point, it became much more than a 

tip or a lead, right? Because Madoff was already under investigation. 

Ms. THOMSEN. I can’t talk about it specifically. 

Mr. BACHUS. No. I am saying that in a case where someone is 

already under investigation, and someone gives you—in 42 different contacts—and I am talking about meetings, discussions— 

they gave you a case on a silver platter, he described what was 

going on to a T. And the auditor for Madoff was one person in a 

84 

storefront on Long Island. This begs for investigators. Would you 

agree that a case like that, with all that information, should have 

caused someone already under investigation—someone that had 

failed to register, that that begged for investigation? 

Ms. THOMSEN. Without reference to the specifics, the more credible, the more informative a complaint is, the more we are going 

to investigate. And a complaint or a lead, no matter what, our job 

is to turn it into evidence. And that is what we love to do. When 

we follow things up, we are looking for evidence. We can take leads 

that are very unspecific. 

Mr. BACHUS. I am talking about those where they—where you 

know, public knowledge, what is published in the newspaper. What 

you knew from his operation, because you had investigated it, you 

knew that he had failed to comply for years with the law. Was 

there any penalty for that? Was he sanctioned, or was he penalized 

for that? Was there a heightened—when someone has violated the 

law for years in billions of dollars in transactions, is there any punishment or heightened investigation, particularly when someone 

comes to you, a credible source, and gives you documented evidence? 

Ms. THOMSEN. Without reference to the specifics, there are penalties that may be applied to failing to register for— 

Mr. BACHUS. But they were not applied to him? 

Ms. THOMSEN. There is no enforcement action. There is no public 

enforcement action prior to the action that we brought in December 

as to Mr.— 

Mr. BACHUS. Well, that is after it all blew up. 

Ms. THOMSEN. Yes, sir. And as I have indicated, unfortunately— 

and this is one of the great sort of limits of law enforcement. It is 

always after the fact when we come in. We don’t want it to be— 

we want it to be as close in time to the illegality as possible. 

Mr. BACHUS. I will characterize this. He gave you a case on a silver platter, someone you had been investigating for years, someone 

who had failed to comply with your own rules, and he wasn’t even 

penalized. 

Let me take another pay for play. In 1997, my now chief of financial services helped compose a letter with 42 pages of documentation on what was happening. What we didn’t know—we had no 

idea what was alleged to have happened in Jefferson County. Mr. 

Markopolos said it was happening all over the country. Municipalities are out billions of dollars from this pay-for-play scheme. We 

sent that information to the SEC, chapter and verse. I have now 

determined that there was apparently no follow-up. Is a county 

commissioner with documented evidence and a Congressman writing, is that not credible information? 

Over 2 years ago I wrote again pointing out that now some of 

these people have been disclosures and cases in Birmingham that 

substantiated all this, and I asked for an investigation. Now, I 

think at a certain point after meeting with the Commissioner himself, actually calling and asking him to come to my office, finally 

there was some initiation. But, you know, it was all in the paper 

by the time that y’all— 

Ms. THOMSEN. Well, more generally about municipal securities 

issues, municipal securities issues are a priority for us. We have 

85 

a working group focused on it. We have brought several cases over 

the last years. And it is one of those areas where, unlike some 

broker dealers, etc., there are fewer regulatory speed bumps along 

the way, so that our tools are predominantly enforcement, and our 

ability to discover the issues is limited as a consequence. But I 

agree it is an important area to pursue. 

Mr. BACHUS. Let me just—and I will close with this. I have requested that you consider disgorgement for these folks or for the 

feeder groups in the Madoff scheme, that they disgorge their profit; 

that these wrongdoers in the pay-for-play scheme, that they disgorge to the ratepayers and the taxpayers all over America their 

ill-gotten gains. And I have heard nothing. I have had no response 

to multiple requests that you all consider that. I would ask you to 

pursue that. 

Ms. THOMSEN. I would be happy to get back to you on that. 

Mr. BACHUS. Thank you. 

Chairman KANJORSKI. Thank you very much, Mr. Bachus. 

We are ready to close because we have another markup that has 

to proceed immediately. We have 2 minutes for Ms. Speier. But I 

will hold you to 2 minutes. 

Ms. SPEIER. All right. I want you to each grade the SEC on how 

they handled the Madoff case, very quickly. 

Ms. THOMSEN. Can’t do it. 

Ms. SPEIER. Why can’t do you it? 

Ms. THOMSEN. Because it would inevitably— 

Ms. SPEIER. You are giving an opinion. Did the SEC do a good 

job? A, B, C, D, or F? 

Ms. THOMSEN. I wish we had found it earlier. 

Ms. SPEIER. Would you give the SEC an F? 

Ms. THOMSEN. I would not. I would not grade it. 

Ms. SPEIER. What is the employee salary in the Compliance and 

Enforcement Section on average? What are they making? 

Ms. THOMSEN. You know, I don’t know. It is in the hundreds of 

something. 

Ms. SPEIER. So they are making $100,000, $150,000. 

Ms. RICHARDS. I can give you more specific information. This is 

the range of salaries for an examiner in our New York office. So 

a typical examiner could range from $47,000 a year to as high as 

$177,000. 

Ms. SPEIER. All right, $40,000 to $170,000. How many of your 

employees—what percentage of your employees in those two 

branches, Enforcement and Compliance, leave the SEC and go to 

work for an SEC-regulated entity? 

Ms. THOMSEN. In enforcement, it is very few. Most, if they leave, 

go to private practice of law. 

Ms. SPEIER. Ms. Richards. 

Ms. RICHARDS. I think fewer people leave the SEC than they 

used to, but when they do go, they often go to a regulated entity 

in the compliance area. 

Ms. SPEIER. Mr. Swanson was the lead attorney on this case. He 

leaves the SEC, marries Mr. Madoff’s niece. Did you for 1 minute 

think that maybe you should go back and look at how he handled 

that case? 

86 

Ms. RICHARDS. Yes. And that is exactly what the Inspector General is investigating, the role of current and former SEC employees 

and their interactions with the Madoff firm, and whether those 

interactions in any way, in any way, impacted the conduct of the 

regulatory oversight of the firm. That is exactly what the Inspector 

General is looking at. 

Ms. SPEIER. Mr. Einhorn complained about Allied. He came to 

the SEC. The attorney who handled that case, Mr. Braswell, criticized him instead of Allied. Mr. Braswell left the SEC and then 

went to become a lobbyist for Allied. Do you see any kind of pattern here? 

Ms. THOMSEN. I don’t know enough to know whether there was 

a pattern. 

Chairman KANJORSKI. Okay. We will have to close it there. I am 

sorry, Ms. Speier. 

Mr. Maffei, we are going to give you 2 minutes, but I ask you 

to take 1 minute. 

Mr. MAFFEI. Yes, I will, Mr. Chairman. Thank you very much. 

I just have one question. We heard a lot about the general policy 

for enforcement at the SEC. Ms. Richards talked about the ‘‘pull 

no punches’’ attitude. And indeed, I have talked to folks who are 

very, you know—in the financial services industry who are very 

afraid of an SEC investigation. But what I want to know, given the 

apparent mess of the Madoff scheme, is can you give us any data— 

and I really would like to know. If you can’t do it now, can you provide any data on the size of the companies on which the investigatory or enforcement actions have been taken so that we will be assured that you are not just picking on the little guys and throwing 

the big fish back? 

Ms. THOMSEN. I think we can get you that. But among other 

things, I would point to the auction rate securities cases, which we 

talked about before this committee not very long ago. I think it was 

in August. And some of the aiding and abetting cases we brought 

against the biggest financial institutions in this country for aiding 

and abetting Enron’s fraud—Citi, Merrill, JPMorgan Chase. 

Mr. MAFFEI. I would appreciate the specific data. 

Ms. RICHARDS. Can I just add that we inspect firms, small firms 

and large firms, in much the same way with the same pull no 

punches attitude, and those include firms with billions and billions 

and billions of dollars in management. So all types of firms are 

subject to inspection. 

Mr. MAFFEI. I would, of course, hope that there is the same 

standard. And then obviously the question continues, why did we 

miss Madoff? But I know that is a specific case, so I am not asking 

that question. 

Thank you very much, Mr. Chairman. 

Chairman KANJORSKI. Mr. Posey, 12 words. 

Mr. POSEY. Thank you, Mr. Chairman. I haven’t seen this much 

bobbing and weaving since Muhammad Ali’s rope-a-dope. 

Mr. BACHUS. Mr. Chairman, I would like to acknowledge Ms. 

Thomsen and Ms. Richards and Mr. Donohue, that there has been 

some very good investigative actions by the SEC, and you have 

some top-flight professionals over there. And we don’t mean—at 

87 

least I don’t mean to convey that there hasn’t been some very good 

work by the SEC. 

Ms. THOMSEN. Thank you very much. 

Chairman KANJORSKI. Thank you very much. 

The Chair notes that some members may have additional questions for today’s witnesses, which they may wish to submit in writing. Without objection, the record will remain open for 30 days for 

members to submit written questions to today’s participants and to 

place their responses in the record. 

Before we adjourn, the following documents and/or written statements will be made part of the record of this hearing: Mr. 

Markopolos’s communications with the Securities and Exchange 

Commission. Without objection, it is so ordered. 

The complete set of documents referred to above can be accessed 

at the following link: 

http://www.mccarter.com/new/ 

homenew.aspx?searchlink=showarticlenew&Show=3229 

Before we adjourn the panel, I just wish to say we are going to 

inquire into a process or procedure to see whether the limitations 

placed upon this panel’s testimony comport with the law, and 

whether or not we are able to take such action as to overcome 

those objections. We will be proceeding with that in the immediate 

future. 

The panel is dismissed, and this hearing is adjourned. 

[Whereupon, at 2:46 p.m., the hearing was adjourned.] 

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