Hearing of the Capital Markets, Insurance and Government-Sponsored Enterprises Subcommittee of the House Financial Services Committee - Assessing the Madoff Ponzi Scheme and Regulatory Failures

Hearing of the Capital Markets, Insurance and Government-Sponsored Enterprises Subcommittee of the House Financial Services Committee - Assessing the Madoff Ponzi Scheme and Regulatory Failures

PANEL I OF A HEARING OF THE CAPITAL MARKETS, INSURANCE AND GOVERNMENT-SPONSORED ENTERPRISES SUBCOMMITTEE OF THE HOUSE FINANCIAL SERVICES COMMITTEE

SUBJECT: ASSESSING THE MADOFF PONZI SCHEME AND REGULATORY FAILURES

WITNESS: HARRY MARKOPOLOS, CHARTERED FINANCIAL ANALYST AND CERTIFIED FRAUD EXAMINER AND AN INDEPENDENT FINANCIAL FRAUD INVESTIGATOR FOR INSTITUTIONAL INVESTORS AND OTHERS SEEKING FORENSIC ACCOUNTING EXPERTISE

CHAIRED BY: REP. PAUL KANJORSKI (D-PA)

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REP. KANJORSKI: (Sounds gavel.) 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, so ordered.

Pursuant to 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 five 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, 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 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 adviser 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 sympathy with 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 road map and heed his warnings. As a result, thousands of investors were hurt.

With today's second panel, we will hear from the front-line 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 it. We need to pursue long-scale reforms like creating an effective method for monitoring systemic risk. While we have already begun to 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.

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'd like to recognize the ranking member for his opening statement. Mr. Garrett?

REP. SCOTT GARRETT (R-NJ): Well, thank you. And before I begin, just thank you, and I look forward to working with you on this very important issue and noting your comments on air this morning that I concur on a number of the positions that we'll be taking on this going forward. So I'm looking forward to --

(Cross talk.)

REP. GARRETT: So thank you.

I will yield myself three minutes for my comments. Thank you, Chairman, for holding this hearing, and also for the witnesses that 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's actually the case. See, 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.

Secondly, 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 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 seems incumbent upon the SEC that they should have ordered an internal audit when the investment advisory business registered in '06. Unfortunately, I don't think we'll learn today why that was not done. At the very least, they should have informed FINRA of the newly registered investment advisory business and recommended to them to look back over their audits of the broker-dealer business with this new information in going forward to examine any other inconsistency.

Third point: While I appreciate the SEC cannot follow up every single complaint -- they say they get literally tens of thousands of them -- with the specificity that we'd like, I do not see that the failures were not 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.

So in conclusion, we really cannot end all fraud nor guarantee the changes that we'll be recommending or that the chairman will recommend will 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's sort of sad, when you think about it, but for the fact that Mr. Madoff came out and confessed his scandal, this scam would still be going on today.

And with that, I yield.

REP. KANJORSKI: Thank you very much, Mr. Garrett. Are you going to use your additional two minutes?

Mr. Royce.

REP. ED ROYCE (R-CA): Well, thank you, Mr. Chairman. And I really want to thank Mr. Markopolos for not only 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're not discussing here how we stop all fraud. We're discussing the greatest fraud on record. We're talking about a systemic fraud here that has done untold damage, really, in terms of confidence of the system. And we're also talking about a fraud in which a few things surfaced, and we'll hear about some of it in your testimony later.

But I think that the concept of over-lawyering, the fact that -- and we saw this in Britain too with the FSA. You have bureaucrats. You have people, you know, who are attorneys that 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've got 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, and not only here but around the world. And for that - (audio break) - we want to express our appreciation - our appreciation for you being here today.

I've read your testimony and look forward to the questions that we would ask you, because we have got to reengineer the SEC, going forward, so that these kinds of systemic risks to the system are prevented, especially when a citizen like you comes forward and does their best in order to lay out the case.

Thank you, Mr. Chairman.

REP. KANJORSKI: Thank you very much, Mr. Royce.

And now I'm pleased to introduce our first panel, our first witness. And, without objection, your statement will be made part of the record. You will be recognized for a five-minute summary of your written statement.

And we are pleased to have Mr. Harry Markopolos, an independent financial fraud investigator and chartered financial analyst and certified fraud examiner. Mr. Markopolos is joined at the witness table by his attorneys, Ms. -- (inaudible) -- and Mr. Philip Michael. His attorneys are here for advice only and will not be testifying themselves.

Mr. Markopolos, it's all yours.

MR. MARKOPOLOS: Thank you, Mr. Chairman. Good morning. Thank you for inviting me here to testify before your committee today regarding my nine-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 me to this case being repeatedly ignored over an eight-and-a-half 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 over-lawyering at the SEC very soon. Let me say, I have nothing against lawyers, and, 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 (billion) to $7 billion fraud.

We knew then that we had provided enough red flags and mathematical proof 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 (billion) 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 submission 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 were over $40 billion in additional damages, and I hope to be able to provide some of those answers to you today.

Just as there is no "i" in "team," I had a brave, highly-trained team that assisted me throughout the nine-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 Fortune 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 in 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, 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 1st, 2001, his publication, MARHedge printed, "Madoff Tops Charts: Skeptics Ask 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 fund to collect additional pieces of the puzzle. My Amy 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 a 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'd face little-to-no downside to removing whatever threats he felt we posed. At various points in time throughout these past nine 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'd also like to recognize Ed Manion, of the Boston Regional Office of the SEC. He was my constant confidante throughout the past nine 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 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. Madoff (sic) 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 financial 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 and November, 2005 he examined my evidence, investigated and found irregularity, vouched for my credentials and put me in touch with the appropriate SEC staff in 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 was 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 disastrous 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 and multiple warnings over a nine-year time span.

As my formal written testimony makes clear the SEC is over lawyered and has too few staff with relevant 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 only the financial -- that the only financial regulators bringing the big cases in the 21st century are the New York Attorney's General's office and the Massachusetts Security Division. New York and Massachusetts brought the big cases against the market timing scandals, the auction rate security scandals, while the SEC watched quietly from the 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 fight 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've heard is one senior official after another saying that they cannot comment about the Madoff investigation because it is ongoing.

We've 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 this -- 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, say, of five (ph) major investment Wall Street banks under SEC supervision either failed, were forced by the government to merge with commercial banks, or became bank holding companies propped up by the Federal Reserve and 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 scandal. 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, Mr. Chairman.

REP. KANJORSKI: Thank you very much, Mr. Markopolos.

And now we'll open it to questioning. I'll 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 that's existed from 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 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 that came from -- 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's what led to his dismissal in 2006.

REP. KANJORSKI: If you had to look at the need for reform and how it should be done, do you feel there's 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's unity of effort and to eliminate expensive duplication of effort.

And you also want to make clear the reporting line to industry. They deserve to have better regulation, fewer regulators, 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 that can take apart and put back together again the complex instruments of the 21st century.

REP. KANJORSKI: Do you think it's time to shoot the lawyers? (Scattered laughter.)

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 fraud. But you need to keep them separate because if you have them in the mix it becomes toxic.

REP. KANJORSKI: The revolving door problem that we all hear about, that is people that 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's being carried from one entity to the other?

MR. MARKOPOLOS: That's a great point, Mr. Chairman. There is an infection if the people coming to SEC are too young and looking to make their bones and looking at it as a stepping stone. And that's why I have a recommendation that you hire senior people from industry that have been there for a long time, that have gray hair or no hair. (Laughter.) You'd be perfect. (Laughter.) You want them coming in. And this is the cap stone to an already spectacular career, they've made lots of money in industry, they don't need any more money, they're not going to go back to industry. So I guess you want to have reverse age discrimination where you're looking to hire the old foxes to come in and police up the hen house. And that's what we really need.

REP. KANJORKSI: 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 recommended to the Congress that certain fees be reduced or no charges made on those fees because there was an overabundance of revenue coming into the SEC. And 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 a billion-and-a-half (dollars) a year that was anticipated that wasn't necessary.

Do you think that that was a misjudgment and 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. And when you only slap then 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.

REP. 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's 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, he got caught in 1992 and no one apparently knew that in the new millennium.

REP. KANJORSKI: Very good. Thank you very much for coming forward.

And now we'll here from our ranking member, Mr. Garrett.

REP. GARRETT: And thank you -- and again, thank you for your work in this area.

I'll begin where I -- 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 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've easily gone to 100 billion (dollars) if we hadn't had the financial crisis last year and he ran out of money to pay off existing investors.

REP. GARRETT: So that's basically the end game for, I guess, for any Ponzi scheme, right, is that you can keep on running until you've run out of investors and had the market actually been continuing up on the uptick -- bubbles that we had, we might be seeing him be 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.

REP. GARRETT: All right. You indicated on the second or third page of your testimony and your statement that you had here how you were able to collect various pieces of information along the line you indicated to three or four other people that worked along side of you in doing this. Is there anything that you were doing -- I assume I know the answer to this but I'll ask it -- is there anything that you were doing that really was outside the purview or parameters or the authority of the SEC that they -- had they committed the time, attention, resources if you will to it -- could've 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 it was 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 emails, 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.

REP. GARRETT: Is part of the problem from your testimony that the euphemism that we used here is stove pipe conduct by an agency as far as the sharing of information alike? I mean, I referenced it in part as far as whether -- I guess every aspect here, every port of Madoff's business was regulated by someone. Investment advisory arm, they're being regulated over here, FINRA is taking care of the broker/dealer section over here, and there is -- to use the euphemism of 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 a -- counterfactual as the other chairman would say sometime, to show that even though when you're within one organization, the information's not always being shared?

MR. MARKOPOLOS: I agree. I think you need the 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 markets 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 regulations 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.

REP. GARRETT: And part of the argument goes is that well, until Madoff registered as an investment advisor, he really didn't appear on anybody's screen. Can you give us a 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 broker dealer. 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.

REP. GARRETT: I only have but 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 piece -- get that piecemeal information as to the size of it? Because we're still trying to get that question as is it really $50 billion today, but you seem to know that it was 7 billion here (dollars), 20 billion (dollars) there, and so on.

MR. MARKOPOLOS: My team was out there in the field talking to the Madoff feeder funds and identifying who they were. We were tracking them very closely through Europe, we identified 14 feeder funds, only of which two 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 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.

REP. GARRETT: I appreciate your -- thank you.

REP. KANJORSKI: The gentleman from New York, Mr. Ackerman.

REP. GARY ACKERMAN (D-NY): 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 five minutes to figure out that he was a fraud -- so it took extensive time and research. (Laughter.) I basically read his strategy description, and I knew that wasn't the source of his returns because then I looked at his -- I knew right away by looking at his performance chart -- and I wish I had a whiteboard and easel here but I don't, so I'm going to give you a hand signal and I'm going to show you what his performance return line looked like. It was a 45 degree angle, without any variation. It went in only one direction, up. It never had variation like the market does, like this. And that was the key tip off because there's no such performance line as Bernie Madoff's that has existed throughout --

REP. ACKERMAN: Let the record show the witness said this. (Laughter.)

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.

REP. ACKERMAN: How were you compensated and how much time has this taken out of your week, your year?

MR. MARKOPOLOS: There was no compensation. You know, we did it for the flag, the flag of the United States of America. And we saw him as a clear and present danger to the capital market system, and to our reputation in the capital markets. And we were from the industry. I actually was at a competing firm, and when you have a bad player on the field, a dirty player, you want him removed from the playing field, and I tried to remove him from the playing field, but the referee wasn't listening.

REP. ACKERMAN: So how much time -- I'm 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're not lawyers, we don't do the billable hour thing, but I can tell you that this stack of evidence -- you know you see over 311 pages of documents and exhibits that we provided to the Congress, and we were missing -- the only -- we were missing the emails from 1999 through the third quarter of 2005 but I assure you that if we had access to those emails, which we do not, then the stack of evidence would have been this high. So it's how ever many hundreds of hours to do that, I'm not sure.

REP. ACKERMAN: Several hundred hours?

MR. MARKOPOLOS: Yes.

REP. ACKERMAN: So in several hundred hours, the SEC could have investigated this and come up with what you came up with?

MR. MARKOPOLOS: Took me five minutes, but I then I did about four hours of modeling just to prove the math, and come out with the math proofs. So in total it took me four hours of work to prove that he was a fraud.

REP. ACKERMAN: So this is just because of the straight-up graphic of his success that led you to suspect. That's not evidence or proof of anything. That could be, you know, that could be just good luck for a long time, one would suppose. (Laughter.) But it's not evidence. Did you have any hard evidence that this was a corrupt scheme, besides 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 investing section, and just looking how many option contracts were in existence. And you can clearly tell that Mr. Madoff was several times the size of the entire marketplace for those indexed options. And so clearly, he was a fraud. That took about 20 minutes, though.

REP. ACKERMAN: The few statements that I've 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.

REP. 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 year-end financial statements for the 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.

REP. ACKERMAN: I've only seen a couple of these statements and came to that conclusion pretty quickly that something -- but that's not hard evidence. But it's 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're not holding any financial instruments that are reportable at year-end marking periods or quarter-end marking periods, essentially if you're in Treasury bills which are book-entry form only, there's no physical securities there, there was nothing there for the auditors ever to inspect. And what Greenwich Sentry was doing was they used three different year-end auditors in 2004, 2005 and 2006. That made me very suspicious that there was auditor shopping going on. Why would you have three different regulators in three different countries?

REP. 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 are 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.

REP. ACKERMAN: Thank you, Mr. Chairman.

REP. KANJORSKI: Thank you very much, Mr. Ackerman.

Mr. Royce of California.

REP. ROYCE (R-CA): Yes, thank you.

You pointed out that pretty early, by analyzing this 45-degree return on investment, the absurdity of the consistency of it, the unfailing nature of it, that it was clear to you. I'm wondering if there were some other flags there to the SEC besides what you brought them. 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's secrecy. I saw a piece in Investor's Business Daily, which early on, you know, raised this issue that has been passed around. So there was some reporting in the financial press that, too, that the SEC didn't pick up.

The critical managerial compliance positions held by Madoff and people in his family that were in that position, any number of these probably could have triggered an investigation. What's your reflection on the totality of all of this on top of your analysis that you provided some nine 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 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 that understand complex derivative instruments of the 21st century. If you send in a team of lawyers to look at derivatives transactions, you're not going to be able to find them. You need to have the experienced finance team in there that's highly compensated, highly trained, highly incentivized to find fraud. There are no incentives at the SEC to find fraud. That's why they shy away from the big cases.

REP. ROYCE: As you speak of the over-lawyering at the SEC and you reflect back on the years in 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 that can do that math. And the other part was they're a captive regulator. Mr. Madoff was certainly one of the most powerful individuals on Wall Street. He had a respected broker dealer arm. He traded a substantial percentage of the over-the- counter and New York Stock Exchange listed stock volume every day. And they just looked at his size and said he was a big firm, and we don't attack big firms.

REP. 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 nine years, what do you think needs to be changed to (grapple with ?) the systemic risk problem here, to make certain that in the future, if there are entities as large 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 have been people pushing for these types of changes for some time. But 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. I think they have the wrong senior staff right now. And then I would go to the bottom of the organization. And you need to change who the people on those teams are. They can't be young twentysomethings without industry experience. You need to hire senior, seasoned professionals.

And the third thing you need to do is you need an office of a whistle-blower to centralize these thousands of complaints that they get so they're not handled ad hoc by 11 different regional offices. You need one centralized location, an office of a whistle-blower. And you also need to compensate those whistle-blowers for the risks that they're taking. Because once you turn a case in, you're blacklisted from industries and you better make it worth their while.

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

REP. ROYCE: Well, I hope that 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. And 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.

REP. KANJORSKI: Thank you, Mr. Royce.

The gentleman from Massachusetts Mr. Capuano.

REP. MICHAEL E. CAPUANO (D-MA): Thank you, Mr. Chairman.

Mr. Markopolos, first of all, thank you for being a good citizen. It's not often that we get too many people at that table who I would consider necessarily good citizens.

And second of all, more importantly before my time is up, I only have five minutes here, if you were offered a job at the SEC in charge of this whistle-blower 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 two years.

REP. CAPUANO: So in two years if you were offered the job, would you take it? (Laughter.) We'll talk.

All right. Mr. Markopolos, my concern is a couple of things. I mean, the Madoff situation is one thing and it's one item. But I'm just curious. I know how I feel, I want to hear your opinion. Do you think that the problems you have encountered with this particular case are isolated in 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're too slow. They're too young. They're too undereducated.

REP. CAPUANO: So it's not just this case.

MR. MARKOPOLOS: No. And it's 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.

REP. CAPUANO: I agree with you, and I like your concept about a (older type ?) of regulator with some substance below it. But I think, I just want to make sure. Are you talking about fraud regulators because there's also regulators or an aspect of regulation that doesn't just deal with fraud? It also deals with regular, ordinary, everyday capitalization requirements, et cetera, et cetera. And we're 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 had considered or not?

MR. MARKOPOLOS: I wouldn't say a more complicated, I would say a more simplified, more streamlined. Because remember, American business wants as few regulators as possible. They're 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.

REP. CAPUANO: Well, that's the other thing I want to talk about. I mean, the one good thing -- for years, I have never thought that regulation was a swear word. I don't think you would feel that way either. However, this country over the last 20 years has conceded the word "regulation" as some sort of swear word.

And I particularly want to talk about this case. As 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. MARKOPOLIS: It is. They were high net-worth individuals that received no protection from the SEC. They're considered sophisticated investors. And I would argue that they deserve protection as well.

REP. CAPUANO: I would agree with you on that. And thus far, all I've heard for the last several years 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 $1 billion, why should we worry about it. And I think this particular case -- even what this case indicates beyond it, would argue just the opposite. And I'm just -- I'm hoping that's something you would agree with.

MR. MARKOPOLIS: Because of the people that were involved, and their wealth, a lot of charities were wiped out. Medical services are not being provided today to people in the community. Community services, scholarships, people have no retirement income left. They're wiped out. So I would sort of -- I think those wealthy people deserve protection as well.

REP. CAPUANO: Good. I agree with you. Again, I just want to make sure that this is not -- I've had my problems with the SEC in the last couple of years because I think they have been asleep at the switch. And again, not just in 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's 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 -- I mean, you're always going to have criminals -- but 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. MARKOPOLIS: To fleece up the capital markets, you have to increase the risk of detection of the fraud. And right now, it's such high reward, low risk to commit fraud, the markets feel green-lighted to do anything they want because they've 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.

REP. CAPUANO: Do you think that the current -- again, absent the structure of it -- and absent the adequacy of the individuals, of the pay of the individuals, the laws relative to what's legal and what's not legal, if they were adequate, if they were fairly interpreted, do you think the laws we have now are currently adequate, or are they totally inadequate? Again, -- you can always -- I'm not talking about fine-tuning. I'm talking about major adequacy.

MR. MARKOPOLIS: You need a lot more laws because you're always going to be out-dated as soon as you pass a new set of laws, because there'll be new financial instruments created to avoid whatever existing regulatory scheme there is. So you're always going to be behind the eight-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, a 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's willing to attack bad ethics, you'll get somewhere.

REP. CAPUANO: Thanks, Mr. Markopolis. And think about that job, will you?

REP. KANJORSKI?: Thank you very much, Mr. Capuano. The gentleman for Alabama -- (inaudible)

REP. SPENCER BACHUS (R-AL): Thank you. Mr. Markopolis, 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 plead with them. You badgered them. There's four pages of contacts with them. I mean, probably over a hundred 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 on a silver platter a case. Was it incompetence? I'm 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 Madoff on?

MR. MARKOPOLIS: 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.

REP. 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're not using the resources they have. Do you get any ideas on that? There were all kinds of regulations. You laid out regulations, laws -- I mean there were all sorts of violations.

MR. MARKOPOLIS: There were turf battles. You had regional rivalries between New York and Boston. And by the way, neither New York or Boston likes Washington very much.

REP. BACHUS: So dumping more money on that doesn't solve those problems, does it?

MR. MARKOPOLIS: 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 they --

REP. BACHUS: Now that is -- they've already been authorized to do that, I believe.

MR. MARKOPOLIS: They need to add incentive compensation, just like Wall Street. It's base salary, plus incentive, for what you bring in. So you are incentivized to bring --

REP. BACHUS: In other words if you catch people, if your job is to catch people, you catch them, you're rewarded. If you don't, you're not.

MR. MARKOPOLIS: Right. And what I like about that is, if someone tries to stop you from bringing a big case, and you are incentivised to bring a big case, you'll run over them with a bulldozer if you have to to get that big case in the door. And right now there's no incentive, no reward, for bringing those big cases in the door.

REP. BACHUS: So it's not just throwing more money at it, it's doing it the right, smart way, and incentives are a way to do that. How do you address those turf fights and how do address sort of the sacred cows out there that they just won't take on?

MR. MARKOPOLIS: I think that if you're Boston 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.

REP. BACHUS: Thank you. What would you ask us to do? What could we do differently?

MR. MARKOPOLIS: As Congress?

REP. BACHUS: Yes. And I would tell you this. You've heard the so-called pay-for-play in municipal bonds.

MR. MARKOPOLIS: Yes.

REP. BACHUS: Well, actually 10 years ago, we laid out a case to the SEC on what was going on. Again, two 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 forward on something else and was caught. So, I mean, your experience, you know, is very similar experience that some of us on the hill have had.

MR. MARKOPOLIS: Congressman, I know what happened in Birmingham, Alabama. And it happened in my home town of Erie, Pennsylvania, the same thing with the municipal securities fraud. It happened in Massachusetts as well. The Massachusetts Turnpike Authority lost $450 million on some over-the-counter floptions that they never understood, that they were deceived into entering in a transaction with several Wall Street investment banks. And the SEC has been nowhere to be found, regulating there, enforcing actions for the crimes that occurred. As a result, Massachusetts plans on doubling our toll. And we're going to pay for that out of our own pockets.

REP. BACHUS: And, you know, that happened under the Clinton administration, it happened under the Bush administration. It was -- my letter was actually to the Clinton administration. But I'd like to, with permission of the committee, with unanimous consent, to introduce my letter to the SEC. Similar experience that you had. 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.

MR. MARKOPOLIS: I think that what you'll see is, that the SEC is busy protecting the big financial predators from investors. And that's they're modus operandi right now.

REP. BACHUS: Well, I appreciate that. And I want to, again, just tell you how truly grateful we are to you. Unfortunately, if you're 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 that wouldn't be suffering today from losing their entire retirement. So thank you.

REP. KANJORSKI: Thank you very much. And without objection the letter of the gentleman from Alabama will be entered into the record. Chair hearing none, so ordered. Mr. Sherman of California.

REP. BRAD SHERMAN (D-CA): Thank you. And I'd 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 two 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 four hours, if not four minutes, to convince yourself that there was probably fraud going on here. I'm 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 billion to $17 billion. Is that right?

MR. MARKOPOLIS: Yes. Let me explain. I think there is going to be two numbers that the press will start reporting. Fifty billion dollars is what Madoff himself reported. And that was the notional amount of loss from all the investor statements combined. What they thought they had earned, over many decades, of investment returns, with Mr. Madoff. And then there is a different number, probably a truer number, much lower. And that number is probably between $15 billion and $25 billion, which was actually cash received by Mr. Madoff.

REP. SHERMAN: I'm focusing on a different number. And that is if you just looked at the financial statements filed by Mr. Madoff, they would show numbers in the 10 -- 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 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, he's 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've got a fraudulent financial statement in your hand, not to mention your professional expertise focused on the fact that you cannot earn those kind 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 '80s with the NASD. What I found them to be was a very corrupt, self-regulatory organization that if you took the fraud to them, they would ignore it as soon as they received it. They were there to assist industry by avoiding stricter regulations from the SEC.

REP. SHERMAN: Sir, you're using some strong terms. And from anybody else, you know, we'd say, oh, that's the wild-eyed populist. But you've 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've talked about some circumstance 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. As you know, the False Claims Act already gives the right of private action on behalf of the government.

The SEC has Section 21AE of the '34 act, which does provide for a whistleblower bounty, but it's only for insider trading theory cases. I'd 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 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.

REP. SHERMAN: And finally, I don't think there's another $50 billion Madoff out there, but are there some mini -- in your estimation, are there some mini-Madoffs and medium-sized Madoffs? And 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.

REP. SHERMAN: Oh, I think they will.

REP. KANJORSKI: Thank you very much, Mr. Sherman.

The gentleman from Delaware, Mr. Castle.

REP. MICHAEL CASTLE (R-DE): 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 would 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'm living proof here today that they are not, but FINRA definitely is in bed with industry.

REP. CASTLE: And the NASD you sort of condemned in your previous answer. I assume that hasn't changed.

MR. MARKOPOLOS: They're more like RICO.

REP. CASTLE: Okay.

I may have this wrong, but I believe that the rules as far as the officials at the SEC are that senior officials there can go to work for a firm, but for one 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 three years or something of that nature? In following up on your concept of trying to give people adequate compensation with senior experience, my concern is that we have a lot of people at the SEC who are thinking, gee, at some point I'm 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. And I'd just be interested in your thoughts about that.

MR. MARKOPOLOS: That's why I'd like to see incentive compensation. So when you bring a big case, you get a big bonus. Because that way they can make their bone, punch their ticket and go to industry. If you prevent them from going to industry, you'll never get them in the first place.

REP. CASTLE: But I was thinking in terms of those who've been in industry -- with the gray hair or no hair, whatever it may be -- coming to work for the SEC in their '50s, perhaps or whatever with the experience.

I mean, they may not be going back to Wall Street is my point.

MR. MARKOPOLOS: Yes, I'd like to see a lot of gray hair in those senior positions to tackle the big cases, because they've already made all the money on Wall Street that they ever need. They're not going to be able to spend what they've already made. But you want them on your team and you want them as your best public servants. You want them leading the charge.

REP. CASTLE: Mr. Capuano, who's here, and I introduced legislation called the Hedge Fund Adviser Register Act to require all 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 systematically 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 the Congress definitely needs to pass regulation regarding is the regulation of over-the-counter derivatives, because there is no light and only darkness, that's where the financial criminals will tend to congregate. And 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.

REP. CASTLE: The accounting firm's been brought up here. And I don't know much about this, but I remember reading about it at the time. And that is that this accounting firm was apparently not of national note; was apparently doing just about this and seemed to have disappeared when all of 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 Century 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 was Treasury bills at the end- year 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-"custodianed".

So one thing you could do is make sure that there's independent custodians, and I think that would go a long way towards solving this problem.

REP. CASTLE: Thank you very much and thanks for all your work in the area.

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

REP. KANJORKSI: Thank you very much, Mr. Castle.

Now we'll have Mr. Hinojosa from Texas.

REP. RUBEN HINOJOSA (D-TX): Thank you, Mr. Chairman.

Mr. Markopolos, I am very impressed with the evidence and the presentation that you've 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.

Considering all that has transpired, would you support transferring the jurisdiction over derivatives to this full Committee of Financial Services as one centralized location? And I might add to that question that I have no problem with leaving the commodities for the Ag Committee.

MR. MARKOPOLOS: I would actually be against leaving the commodities and futures for the Ag 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 enforcing agencies.

REP. : Okay. What changes, if any, would you recommend to FINRA, the Financial Industry Regulatory Authority, based on 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. It's just -- 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.

REP. 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's not my decision to make.

REP. HINOJOSA: Mr. Chair, I yield back.

REP. KANJORSKI: Thank you very much.

The gentlelady from West Virginia, Mrs. Capito.

REP. SHELLEY MOORE CAPITO (R-WV): Thank you, Mr. Chairman.

Thank you, Mr. Markopolos, for your contribution and your insight into -- in today's hearing.

I noticed over the course of 10 years you've conducted this investigation and reported -- and with much frustration, as well. I'm wondering -- and obviously a lot of the folks that invested with Mr. Madoff were sophisticated fund managers and sophisticated investors. And certainly they --

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, and were you -- did you become sort of a -- 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 U.S., they were big consulting firms, they were big private client offices, they were big fund-to-funds.

And they all avoided Mr. Madoff because they knew me, and I warned them. And there were people at the feeder funds --

REP. CAPITO: Could you explain to me what's -- the theater funds -- what that entails?

MR. MARKOPOLOS: A feeder fund is --

REP. CAPITO: Oh, feeder fund. I thought you were saying theater funds. I'm sorry.

MR. MARKOPOLOS: Oh. Feeder. A feeder fund.

REP. CAPITO: I understand feeder fund. Thank you. (Chuckles.)

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 had become 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 was -- in your book, happened that caused them to change their mind, and others? Right at the time that it became public -- right, yeah, before.

MR. MARKOPOLOS: When this became public, anybody that had anything to do with Mr. Madoff went into hiding. And you could ask people that were at the feeder fund staff what their dealings with Mr. Madoff were, and they would run for the hills.

Nobody wants to answer to the victims from the feeder fund. I think they feel that they'll be answering in court very soon.

REP. 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 many -- in my view, I think some of the problem is the complex instruments that developed 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're tasked with overseeing.

Would you agree with that statement?

MR. MARKOPOLOS: Oh, most definitely. I don't think the SEC had anyone that understood a split strike conversion, except Mr. Manion (sp), the boss in the SEC regional office. I don't know how many people they have with 25 years of industry experience. I would say rather few.

REP. CAPITO: Thank you.

I yield back.

REP. KANJORSKI: Thank you very much.

The next member is Ms. McCarthy of New York.

REP. CAROLYN MCCARTHY (D-NY): Thank you, Mr. Chairman, and thank you, Mr. Markopolos.

One of the things that I want to touch on is the Ponzi schemes. When we had a hearing a couple of weeks ago, I asked the witnesses how many more of these schemes possibly could be out there. And obviously we did have one in Long Island, where I come from.

And 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's probably not good. We keep saying that, but unfortunately people go -- keep going through it.

And I -- 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 -- one of the problems we're obviously going to be facing for probably a very long future is the confidence in the American public, whether it's in banking, whether it's 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 in 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 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'd have to make full disclosure. And if I told them I gave this to the SEC multiples 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, and I was --

I knew through the grapevine that he was a big hedge fund investor, through his family trust. 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 the packet, and I made copies such that my fingerprints were never on that package. I handled it only with gloves because I though 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 don't know that-- I never saw him receive it, so I don't know what happened.

REP. 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. 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.

REP. 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'll 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 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.

REP. MCCARTHY: I think what makes me nervous is obviously you never gave up on this, and there's probably many other people out there that are watching this testimony and saying, well, I know something but what's the sense of me going forward if no one's going to pay any attention to me? Especially when you tried so many different avenues.

I thank you for your service. I'm sorry that -- the government failed you and everybody else failed you.

With that, I yield back the balance of my time.

REP. KANJORSKI: The gentleman from Texas, Mr. Neugebauer -- Ms. Biggert. Not the gentleman, but the gentlelady.

REP. JUDY BIGGERT (R-IL): Thank you. Thank you, Mr. Chairman. Thank you, Mr. Markopolos, everybody seems to be pronouncing it differently but I'm not sure of the correct pronunciation. And thank you for all that you've accomplished, it's almost like reading a good book, I think that all that you've gone through, I hope that sometime 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. And this is such a story that I think it's taken its toll on everyone. And I think what we're seeking really are what measures should Congress, you know, take to reform the regulations or the laws related to the case, what loopholes are left open that somebody is going to, you know, discover and how can we close those to prevent something like this happening again?

But on the other hand, you know, this market has always been innovative, creative, and we brought you know, 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 are we looking, should we be looking at the regulations and the laws on the books and trying to decide whether they're adequate enough to have address this issue? Or is this more of a failure of really enforcement? Go ahead.

MR. MARKOPOLOS: It's both, Congresswoman. We need a few more regulations, we can need 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're 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 staff, especially at the senior levels.

REP. BIGGERT: I know. Being a lawyer, I can understand that you need somebody that really is in the industry and yet this is difficult is that as you said, and that concerns when you talked about being a whistle blower 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's fraud against the government in Medicaid, Medicare, the Department of Defense fraud, and IRS tax fraud.

REP. BIGGERT: That's great. Is this as an independent or is it with a regulator?

MR. MARKOPOLOS: I am independent. I do work with attorneys, most of whom are former assistant U.S. attorneys, federal prosecutors that prosecute high level white collar cases. Those are the people that I tend to work with most closely.

REP. BIGGERT: Thank you. Well I'm sure as this moves along that we'll be in touch with you for more specifics and I think that you've given some of those in you 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's really been delved into this so much and I thank you.

And with that, I would yield back.

REP. KANJORSKI: Thank you very much, Ms. Biggert.

The gentleman from Massachusetts, Mr. Lynch.

REP. STEVEN LYNCH (D-MA): 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'm sure it must have been frustrating.

I also want to thank you for the power of your example. I know in my office we've 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've said here this morning. I think, you know, first of all, the former SEC chairman Harvey Pitt had written an article, an editorial I believe entitled, "Overlawyered at the SEC". So I'm not giving up his confidence in saying that he early on pointed to the same deficiency in not having enough economists and accountants in play to be able to just analyze a lot of the data that was coming in and recognizing the problems. So that's 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've questioned at the SEC about the inability to discover this early on, they said that they way that Mr. Madoff had this structured was somewhat unusual in that he was executing the trades, 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 triple -- (inaudible) -- 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?

MR. MARKOPOLOS: Yes, you need separate custodians, they can't be one in the same organization, which 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 operations, take the road map I gave them, take those 29 red flags, and say let me talk to your derivatives training 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's all a fraud, there's nothing underneath it. The emperor wears no clothes.

REP. LYNCH: Right.

MR. MARKOPOLOS: The other thing they could have done was go to the Chicago Board Options Exchange, where these -- (inaudible) -- 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.

REP. LYNCH: Right. But you still think the custodial bank, the separate custodial bank idea is a good idea?

MR. MARKOPOLOS: It's a must have.

REP. LYNCH: All right.

MR. MARKOPOLOS: You really need to do this.

REP. LYNCH: All right. That's what I wanted to get out of you.

The other thing that I keep hearing from some current SEC and former is that well, that there's a whistle -- well let me rephrase that, there's a hotline. I was told that senior SEC management had actually gone to a financial services industry conference and basically said to the firms out there if you feel that you're being too aggressively investigated, then I want you to call this office and that was a senior person, two senior people at the SEC. And I know that these employees took that message as meaning, you know, we've got to back off a little bit and 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've 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, whistle blower tips. Only four percent by external auditors, which the SEC is an external auditor; therefore whistle blower tips are 13 times more effective than external auditing. So why wouldn't want the SEC to be 13 times more effective? Lord knows, this agency needs to be more effective.

REP. LYNCH: Right. It just struck me that there was 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 admission of the agency itself.

Again, I want to, my time is short and I've run out actually, I want to thank you again for your willingness to come here and to help this committee with its work. Thank you. I yield back.

MR. MARKOPOLOS: Thank you.

REP. KANJORSKI: Thank you very much. Now the gentleman from Illinois, Mr. Manzullo.

REP. DONALD MANZULLO (R-IL): Thank you, Mr. Chairman.

Mr. Markopolos, could you draw any parallels between what happened in Madoff's case and those that hedge fund operator Arthur Nadel and also whether or not you're familiar with any rules of distribution as to in the event that money is recovered, whether or not those investors could receive distribution to the preferred over those, no, those investors who had not received distributions would be preferred over those who had received distributions, i.e., callback?

MR. MARKOPOLOS: If it got off on this with the callbacks, I know only what I've read, I'm not a lawyer to make legal interpretations so I prefer not to.

REP. MANZULLO: The first part of 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 the experienced staff at the junior levels, and they're even worse off at the senior levels. One of the things about a ponzi scheme is it's a cash eating monster, has a veracious appetite for cash, you need new cash to pay off the existing old investors, so that's always, that's 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 were the two main ones for the Ponzi scheme, but they're so easy to recognize on the surface. If someone has advertising returns that are too good to be true and too smooth, you don't have enough down months -- it's always up, up, up and away -- how can you not see these if you're the SEC? And that's the question that you're probably going to be asking the next panel.

REP. MANZULLO: Are you familiar with the hedge fund registration law that's 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's not going to really lead to a better result because the SEC already has jurisdiction over Ponz PAGE 41 02/04/2002 .STX

REP. MANZULLO: Are you familiar with the hedge fund registration law that's 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's not going to really lead to a better result because the SEC already has jurisdiction over Ponz PAGE 41 HSE-CAP-MKTS-PNL-Ii schemes. If there is fraud out there -- it doesn't matter if you're registered or unregistered -- the SEC has the authority to attack it. They just don't have the ability or the willingness.

REP. MANZULLO: In the Nadel case he was disbarred as an attorney from the New York Bar, and there's some thought that if the investor into his hedge funds had had some knowledge of that, that obviously that could've 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're a registered investment advisor you would make disclosure there, but I don't know how you're going to get these people to register if they're 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 to the map, I think they're going to remain hidden below the surface or underneath the rocks, so I don't know that registration is the end-all and be-all. .ETX

x x x are.

And -- there were other red flags but those were the two main ones for the Ponzi scheme, but they're so easy to recognize on the surface. If someone has advertising returns that are too good to be true and too smooth, you don't have enough down months -- it's always up, up, up and away -- how can you not see these if you're the SEC? And that's the question that you're probably going to be asking the next panel. P

You certainly want them to register and if they're not registered, and the SEC receives a tip on them, well that's a glaring red flag that fraud is taking place here. So it's an immediate red flag to the SEC that there's something here, they're not registered, we're getting a complaint about someone who's not registered. And they can go in expecting to find fraud and chances are they will find it, so I just think it's a great idea to make them register.

REP. MANZULLO: I have a last question. That is you have obviously brought this to the attention of the SEC. Do you have any idea how many other funds' characters have 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 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.

REP. MANZULLO: Thank you.

REP. KANJORSKI: Thank you very much. Mr. Manzullo. Now Mr. Perlmutter of Colorado.

REP. ED PERLMUTTER (D-CO): Thank you Mr. chair and Mr. Markopolos, thank you for your testimony today and your persistence in this. And I really appreciate sort of the forensic approach you took to this. But I -- first, I've got to make a statement because you talked about it -- it starts at the top down.

When -- 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's my statement for the record. .ETX

x x x are.

And -- there were other red flags but those were the two main ones for the Ponzi scheme, but they're so easy to recognize on the surface. If someone has advertising returns that are too good to be true and too smooth, you don't have enough down months -- it's always up, up, up and away -- how can you not see these if you're the SEC? And that's the question that you're probably going to be asking the next panel. P

Now let's just talk about a couple of things. I think you're right on the money with young people, inexperienced, ultimately wanting to go into the business -- you know, to go to investment bankers et cetera, being the regulators in the first place. They're going to be nervous and you're right about, you know, picking some people who've seen this stuff before. This is not rocket science, finding a Ponzi scheme. You found it in four 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's 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 are 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's 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 U.S. but they're 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 in and investigate them. So there are reasons for this failure.

REP. PERLMUTTER: But shouldn't -- here's 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,bit's 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.

REP. PERLMUTTER: Please, thank you.

MR. MARKOPOLOS: Mr. Madoff was reporting 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 .ETX

x x x are.

And -- there were other red flags but those were the two main ones for the Ponzi scheme, but they're so easy to recognize on the surface. If someone has advertising returns that are too good to be true and too smooth, you don't have enough down months -- it's always up, up, up and away -- how can you not see these if you're the SEC? And that's the question that you're probably going to be asking the next panel. P the profits. He was so generous of 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 smidgeon for himself. And so those feeder funds were incentive-ized not to ask the questions -- to be willfully blind, if you will, and not to get too intrusive into the Madoff scheme.

REP. PERLMUTTER: Okay. What happened -- and I noticed in December of '05 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 WSJ -- I assume that's The Wall Street Journal Washington bureau?

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 of weeks to lose confidence in them, I can see how bumbling they were. And I was worried about 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 up on a plane to Boston several times in 2006 and 2007, but I believe that senior editors at that publication respected and feared Mr. Madoff and they never let him get on the plane no matter how much he wanted to get on that plane.

REP. PERLMUTTER: Thank you for your testimony, thank you for your service on this.

REP. KANJORSKI: Thank you Mr. Perlmutter. Mr. Donnelly of Indiana?

REP. JOE DONNELLY (R-IN): Thank you Mr. Chairman. Mr. Markopolos, thank you for being here.

You talked about respect and fear of Mr. Madoff. In reading your document about 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's 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? .ETX

x x x are.

And -- there were other red flags but those were the two main ones for the Ponzi scheme, but they're so easy to recognize on the surface. If someone has advertising returns that are too good to be true and too smooth, you don't have enough down months -- it's always up, up, up and away -- how can you not see these if you're the SEC? And that's the question that you're probably going to be asking the next panel. P

MR. MARKOPOLOS: I am not privy to all the complaints that the SEC received, 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 teams 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.

REP. DONNELLY: And these very prominent Wall Street organizations that said, hey, Madoff's a fraud, we stay away -- was it, in effect, a club-like atmosphere where, well, we're 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's a code of silence and when you live in a glass house, you do not throw the stone.

REP. DONNELLY: And with that code of silence, that's with the very same people that the American people are looking to trust because they're giving every dollar of retirement savings or the funds they've accumulated working hard every day at the shop -- that they've been placing their trust in?

MR. MARKOPOLOS: It's 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 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 to not find white-collar criminals out and punish them severely.

REP. DONNELLY: And is there -- you mentioned that so many of the companies knew Bernie's a fraud; Bernie Madoff's a fraud. Is there also even today within these organizations, like, a list of other companies that they look at and say, "We steer away from these guys. It doesn't smell right. It's not working right." Is there a whole group that people are staying away from at this time?

MR. MARKOPOLOS: Yes, they are, and they don't come forward. There could be many reasons. I think the main reason is if you're committing fraud yourself, you're not going to tell on somebody else's fraud scheme or 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.

REP. DONNELLY: So one of the things the SEC -- it would be beneficial to do is find out who else the organizations that there are concerns about out there and go through their books and find out how they're running their businesses and find out who has red flags out there.

MR. MARKOPOLOS: But 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. And the only way you can do that is to offer incentives to the staff so that, if anybody gets in their way when they go after a fraud scheme for whatever reason, they run them over with a bulldozer because they've got their own bonus on the line and they want their bonus.

REP. DONNELLY: Well, 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. And 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're going to change that is change the tone at the top, and you need to replace the 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.

REP. DONNELLY: Mr. Markopolos, thank you very much for your time. And Mr. Chairman, thank you for having this hearing.

REP. KANJORSKI: Thank you, Mr. Donnelly.

Now the gentlelady from California, Ms. Speier.

REP. JACKIE SPEIER (D-CA): Thank you, Mr. Chairman.

Maybe we should get it straight. Is it Markopolos or Markopolos?

MR. MARKOPOLOS: I answer to all.

REP. SPEIER: (Laughs.) 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 your 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'd been the SEC's doormat for eight 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 market that 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.

REP. SPEIER: You spoke about not using your name, handing over documents with gloves on. You know, that's a bit of paranoia, one might say. And I wanted 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 -- and let me describe dirty money to you. When you're that big and that secretive, you're going to attract a lot of organized-crime money, and which we now know came from the Russian Mob and the Latin American drug cartels. And when you are zeroing out mobsters, you have a lot to fear. And 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 we had a team tracking him, I didn't think I was long for this world.

REP. SPEIER: All right, in your testimony, you referenced Ms. Chung in New York as the branch chief and you say, "She never grasped any of the concepts in 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 proof, she dismissed me by telling me that she handled the multibillion-dollar Adelphi case. I then replied that Adelphi was a mere few-billion- dollar accounting fraud and that Madoff's 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 needed more information, she would call me."

She should be fired.

MR. MARKOPOLOS: She already left the agency, but otherwise I would agree. Too late.

REP. SPEIER: You referenced that you thought there needed to be house cleaning. And yet there are people that, by your own reference, in the New York attorney general's office and in the Massachusetts Security Division that are doing great work. So it's not a lack of talent out there; it's 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 example set by the New York attorney general's office and the Massachusetts Securities Division. They give great regulations on the big cases that are nationwide fraud cases, and they give full restitution to the victims. They're aggressive, but they're 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're pit bulls against financial fraudsters.

And here we have a (pip squeak ?) of a flea in the SEC. So it's not the size of the dog; it's the size of the fight in the dog. And that's why I commend those two state regulators. They're 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're not protecting us right now, and just fund the New York attorney general's office and the Massachusetts Securities Division.

REP. SPEIER: 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 that 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.

REP. SPEIER: Since I have the 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'm not privy to the SEC's investigation.

REP. SPEIER: Thank you.

REP. KANJORSKI: The gentleman from Ohio, Mr. Wilson.

REP. CHARLES WILSON (D-OH): Thank you, Mr. Chairman.

Thank you, Mr. Markopolos, for coming forward today and for what you've done to this point to point out the greed and what's 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's just hard to understand.

Do you think that the size of the SEC is -- you said 3,500 people -- is it 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 have -- 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 to 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 of Wall Street uses the Bloomberg machine. In the SEC, they're lucky if they have one per regional office. So if you're not equipped with the tools to do the fight, you're showing up at the gunfight without a gun. You're going to lose every time. And that's why they lose every time.

REP. WILSON: So, in other words, the quality of what they're doing, the equipment to work with, and the ability to move forward and actually make change --

MR. MARKOPOLOS: Yes.

REP. WILSON: -- is what really needs to be done.

Second question has to do with auditing, which I would think is one of the things that primary would focus of when there's wrong things being done. Could it be random assigned auditors 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, but you want a fresh set of trained eyes, and right now those eyes are not trained.

They're 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're fed controlled pieces of paper. That's what they do. They inspect pieces of paper because they're too untrained to realize what to look for on the financial end. All they're looking for is the pieces of paper. If they see the pieces of paper, you're 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 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 organizations that your firm deals with or that you know about? And you hand them your business card and say, if there is, if you ever discover fraud, please let me know, and hand them the card. And I think if you do that, you'll increase audit effectiveness.

REP. WILSON: That 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 page is changed 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 you're concerned about? And yes, here is my card and contact me as soon as possible if there's anything you can help us with.

MR. MARKOPOLOS: The SEC staffs are afraid to ask those questions because they fear the answer will be yes, there is fraud.

REP. WILSON: That's tough. What about the bounty hunter situation that's 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 that work at these firms that are committing fraud and you incentivize them enough, they will come forward with the books and records to solve the case quickly, easily, at low or no expense to the government. They would be your best source.

REP. WILSON: That's good to hear. It sounds like some pretty good commonsense things could correct a lot of what's going on.

Thank you, Mr. Markopolos.

REP. KANJORSKI: Thank you very much, Mr. Wilson.

The gentleman from Florida Mr. Grayson.

REP. ALAN GRAYSON (D-FL): 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 seventh year of the Bush administration, it brought nine. That's 69 versus nine. What's your experience in general with the enforcement of 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've had zero enforcement.

REP. GRAYSON: Zero enforcement for the past eight years.

MR. MARKOPOLOS: Correct.

REP. GRAYSON: Now, you referred to this several times as a Ponzi scheme. Is that some new-fangled thing?

MR. MARKOPOLOS: It's rather old. It's from where I am, Boston, Massachusetts, 133 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.

REP. GRAYSON: So when did Mr. Ponzi actually operate --

MR. MARKOPOLOS: He operated in I believe the early '30s, late '20s.

REP. 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.

REP. GRAYSON: Now, I understand that in 2005, you wrote a letter regarding this scheme. And the title of the letter, as I understand it, was "The World's Largest Hedge Fund is a Fraud." Is that correct?

MR. MARKOPOLOS: It is.

REP. 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 road map and a flashlight to find the 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.

REP. GRAYSON: Who did you address that letter to?

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, knew my credentials, vouched for me. He investigated on his own, found several irregularities. In a week's time, he did more than the entire New York regional office. And he said, there's something here. I'm going to put you in touch with that New York regional office, and he did. But they refused to follow up.

REP. GRAYSON: Now, 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 have our client's interests coming first." Do you know who made that statement?

MR. MARKOPOLOS: No.

REP. GRAYSON: Mr. Madoff made that statement. Are you familiar with the concept of capture when you're talking about regulation? What is that? Do you know that concept?

MR. MARKOPOLOS: Yes. 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 as a client not a public citizen.

REP. GRAYSON: And have you seen that in action?

MR. MARKOPOLOS: Yes, at the Food and Drug Administration and at the SEC.

REP. GRAYSON: Now, right now, Mr. Madoff was arrested, and he's confined. Correct?

MR. MARKOPOLOS: He's under penthouse arrest.

REP. GRAYSON: Penthouse arrest, right. (Laughs.) Can you explain that further?

MR. MARKOPOLOS: He's living a life of luxury. And he does have serious complaints. He's not able to go out for his nosh.

REP. GRAYSON: I understand that his luxury apartment cost $7 million. Does that sound right?

MR. MARKOPOLOS: It does.

REP. GRAYSON: Where did he get that $7 million from?

MR. MARKOPOLOS: From the victims.

REP. GRAYSON: Now, I also understand that he's confined and his confinement is regulated and guaranteed by security guards. Is that correct?

MR. MARKOPOLOS: Yes.

REP. GRAYSON: And who hired those security guards?

MR. MARKOPOLOS: I'm not aware of who hired them.

REP. GRAYSON: Actually, he hired them. Isn't that correct?

MR. MARKOPOLOS: I'm not sure.

REP. GRAYSON: Okay. I yield the rest of my time. Thank you, Mr. Chairman.

REP. KANJORSKI: The gentleman from Illinois Mr. Foster.

REP. BILL FOSTER (D-IL): Yeah. Let's see, you had mentioned that actually you're blacklisted from industry if you, you know, bring forth one of these cases. Are there more specifics that you can give us on that or examples from where that's happened?

MR. MARKOPOLOS: Yes, myself. I've crossed the Rubicon. I can never go back.

REP. FOSTER: Are you aware of other similar cases where people are basically, you know, not allowed to participate or informally blacklisted?

MR. MARKOPOLOS: Yes, many.

REP. FOSTER: Okay. I guess it's reasonable not to ask you for details, but I'm going to ask you privately about that. I'm very interested in this issue of the principles for right-sizing the SEC, that there be some sort of balance between the losses that are suffered from securities fraud and the amount of money put in. I guess that may have been handled recently, but I think that's the fundamental question that this committee has to deal with is 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, confidence and manpower for these.

One of the things that troubled me was the whole issue of secrecy. I guess there's something that's absolutely necessary that these things have to be handled secretly because, if nothing else, for the possibilities of market manipulation. And I was wondering your experience whether the necessity of secrecy during these investigations is something that, you know, you view as just an essential thing or something you've been frustrated with when you see it not operating properly, but not operating properly in secret.

MR. MARKOPOLOS: For me, I had to remain secret. We 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.

REP. FOSTER: And another thing that struck me was the business of segmenting and compartmentalizing what the regulator is looking at. And I was just wondering if it would be easier for the SEC to be overseeing a more compartmentalized interest. You know, if there were not things like dual registration and the business would self- custodian, if you had people who's job it was just to look at custodianship issues, and they would just go through everyone that claimed to be a custodian, and they'd have a very simple set of things to look at. If you understand what I'm saying, that just putting up firewalls and very clear separations in the segments of the industry, that might solve part of the problem with sort of the competence issue, that it's easier. I mean, you know, that one of the young kids that you referred to that aren't real well trained could be taught here's 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 that are very familiar with specific areas. But you need to have combined enforcement teams where that's just one person on your team. You also have the investment manager guy or gal that came from industry and knows exactly what to look for. You also need the accountants on the team that 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 this truly big fraud.

REP. FOSTER: Okay. Well, I just thought I'd probably reiterate my respect for what you've done. We need thousands more like you out there.

MR. MARKOPOLOS: Thank you.

REP. FOSTER: Yield back.

REP. KANJORSKI: Gentleman from Texas, Mr. Greene.

REP. GREENE: Thank you, Mr. Chairman. And I especially thank you because I'm an interloper today and I'm grateful that you've allowed me the opportunity to have the opportunity to ask Mr. Markopolos a few questions.

Mr. Markopolos, or Markopolos, by any name you've done your country a great service. By any name, your country owes you a debt of gratitude. 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. And when you deal with the kind 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 that are near and dear to you.

I'm 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're 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'd 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'm a chartered financial analyst. I'm a certified fraud examiner. I have an undergraduate degree in Business administration from Loyola College of Baltimore, Maryland. I have a master's in finance and finance degree from Boston College. I used to manage billions and billions of dollars in equity derivatives and (trade B ?) securities as Chief Investment Officer for a rather midsized 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 seven years were in Army Special Operations where I -- my unit that I commanded had teams overseas. This was a reserve unit, this was part-time. I had people overseas 24/7, every day of the year serving this nation.

REP. GREENE: Thank you. And two other points and I will yield back the balance of my time.

The first is, do you agree that the tone and tenor, that 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 confident the organization cannot succeed. Everything comes from the top.

REP. GREENE: 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 get them incentives, we need get the right people. I don't think it's a matter of right sizing. It's a matter of right staffing. And right now we have the wrong staff, particularly at the senior level.

REP. GREENE: 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 or communication to the Inspector General's office? And I'm 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.

REP. GREENE: 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. Kotz if he had been the Inspector General back then when I was doing this investigation I would've gladly gone to him and trusted him to do the right thing. But the prior occupants of that office, I would've never gone to them.

REP. GREENE: Thank you, Mr. Chairman. I yield back the balance of my time.

REP. KANJORSKI: Thank you very much, Mr. Greene. Now we've had a non-member of the committee waiting an awful long time, Mr. Arcuri. And Mr. Maffei is a member of the committee but he has kindly consented to passing over his right under the rules to be heard now to give it to you. So Mr. Arcuri, your five minutes.

REP. MICHAEL ARCURI (D-NY): Thank you, Mr. Chairman and Mr. Ranking Member for allowing me to sit in on this hearing. It's very interesting and thank you for holding the hearing.

Mr. Makopolos, thank you very much for what you've done.

You know, I think many people look at the Madoff scandal and they think that it's just the wealthy and the sophisticated investors that have been hit by this. But I'm here today to talk a little bit about some of the other people that have been hit by it. And 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 -- second group of journeymen, Local 267, 73, and 112 of New York, the Carpenters Local 747 out of Syracuse, and United Union of Roofers.

All of these groups are from upstate New York. They were hit for pension and healthcare benefits between 3 (hundred million dollars) and $400 million. These are not very wealthy people. These are hard working people who have lost not only their healthcare benefits but also their entire retirement. And they've 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.

But, obviously, my concern is this; many of these investors are not the sophisticated investors. They are -- they manage small pension funds, the small voice. What can the small investors do to keep an eye out for the sharks that are out there like Mr. Madoff?

MR. MARKOPOLOS: I'm afraid that they may be on their own unless they hire a consultant and trust the consultant and hire only competent consultants because clearly the SEC is not out there guarding the hen house.

REP. ARCURI: Well, you know, in the point that you make when you hold your arm out and show that the 45 degree angle curve, and, you know, you can't help but think, you know, if it looks too good to be true it probably is. Is the -- 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'm afraid not. They missed subprime. They missed the collateralized debt obligations to collateralized leverage loan obligations. They missed so much. It's hard to just trust in the professionals. You need competent regulators as well. And you also need a common sense.

REP. ARCURI: Well my concern is this; if I'm an investor and I'm looking at two prospective groups to invest my money in and one is doing everything legally and their giving, let's say, 5 (percent), 6 percent and then you're looking at a Madoff who is giving a return of 10 (percent) or 12 percent. The person who is giving the 5 (percent) or 6 percent has to be looking at Madoff saying something's got to be wrong here, someone needs to look at that. Isn't there more pressure from the, you know, from the actual private sector itself to look into these?

MR. MARKOPOLOS: I'm afraid that the private sector would look at the Madoff returns and say, he's 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.

REP. ARCURI: Now, do you think there's a way to strike a balance between the SEC type of oversight and oversight from the private sector itself?

MR. MARKOPOLOS: I'm sorry?

REP. ARCURI: Yeah, 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?

REP. ARCURI: Private sector, yes.

MR. MARKOPOLOS: Well that's why I recommended a whistleblower program to compensate people from within the industry who know about the fraud but fear of blacklisting to step forward anonymously, well the government would know who they are, so that an investigation can be conducted immediately and put a quick halt to these frauds before they lure in too many victims.

REP. ARCURI: And the last question I have for you is this; you talked about we need, in the way of the SEC, to be looking for bringing the people who have been in the private sector for a while, who are the fox as you call it, and putting them in charge. But then you make reference to the New York Attorney General, to the, I think it was the Massachusetts Securities Division, thank you. And yet they don't have that type of people in their office. They have small, you know, lean offices. How do they do it and the SEC is not able to do it?

MR. MARKOPOLOS: Oh it's easy. They rely on whistleblowers to come in with tips which they vigorously pursue. When the SEC gets a tip it vigorously ignores it.

REP. ARCURI: Well, I want to thank you, again, very much and thank you on behalf of the hundreds and, in fact, the 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've done.

MR. MARKOPOLOS: Thank you.

REP. ARCURI: Thank you, and I yield back, Mr. Chairman.

REP. KANJORSKI: Thank you, Mr. Arcuri.

And now our final member, Mr. Maffei, of New York.

REP. DAN MAFFEI (D-NY): Thank you, Mr. Markopolos. Thank you, Mr. Chairman.

I too am -- not on this subcommittee, though I am a member of the full Financial Services committee, and, as Mr. Arcuri pointed out, I do have a neighboring district to his, 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's interesting that you said that you worked for a competitor of the firm that Madoff had. And I actually worked -- until coming to the Congress, for a small, locally-owned broker-dealer that was actually a competitor of some of these feeding broker-dealers.

And I guess we weren't quite as smart as you. We always -- we couldn't figure out how in the world they, you know, 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'd like to know is, do you think -- given that it took you, you know, five minutes, and then four 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 the majority of the fees, and this is where Madoff was very cleaver, he left them 3 to 4 percent of the fees and took just a tiny bit for himself -- and so they became blinded by greed, or, willfully blind, if you will, and assidiously (sic) looked the other way.

REP. MAFFEI: Thank you.

Given the fact that the, 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 some of the other areas that we've -- 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, some sort of a program?

MR. MARKOPOLOS: I'll 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 -- I think the victims would like some justice. I think they want heads to roll at the SEC. They want someone to clean house with a very wide broom.

REP. MAFFEI: Okay, good.

And then I guess my last question is, who do you want to play you in the movie? (Laughter.)

MR. MARKOPOLOS: Well, it better be someone for the -- that's a Red Sox fan. That's all I ask. (Laughter.)

REP. MAFFEI: I will avoid commenting on that -- (laughter) -- but I do appreciate your service to our country, Mr. Markopolos. Thank you very much.

MR. MARKOPOLOS: Thank you.

REP. KANJORSKI: You want somebody with hair? (Laughter.)

MR. MARKOPOLOS: Not necessarily. Michael Chiklis is Greek, and from Massachusetts, so I think he'd be perfect. (Laughter.)

REP. KANJORSKI: Let me follow up one little question there regarding the SEC. They have to -- feeder funds have to disclose their fees and commissions paid to the SEC in some audit form. Is that correct?

MR. MARKOPOLOS: The feeder funds?

REP. KANJORSKI: Yes.

MR. MARKOPOLOS: The feeder funds that are registered with the SEC do make disclosures about fees on their ADV form, yes.

REP. KANJORSKI: Okay. Well, then, examining this thing of 'appealing to the greed of the feeder funds,' somebody at the SEC, if they're going over this, were passing over it. But, if you think about a $7 billion fund -- that was being operated by Madoff from a feeder fund, and you're saying, rather than a 1 percent fee going to them, he was allowing them to get 4 percent --

MR. MARKOPOLOS: Mm hmm. (In affirmation.)

REP. KANJORSKI: -- which was huge. That is huge. It's $280 million. And somebody sitting down in the SEC should have looked at that, it seems to me, and said, damn, that's quite a fee for just placing money -- getting it from the client and placing with the actual investment company. And so obviously they weren't checking these audits or these reports; or, is that passed over and no one considers the difference in fees, it doesn't 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 "assets under management" fee just to be charged, plus the 20 override on 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 under-qualified.

What's 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, the New York City branch chief, on June 29, 2007, with more glaring red flags. And, again, they ignored the evidence.

REP. 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. Is that correct?

MR. MARKOPOLOS: That is correct.

REP. KANJORSKI: Which is better to be, corrupt or incompetent?

MR. MARKOPOLOS: I would say I'd give A+ to the SEC for incompetence, and I'd give the same grade for FINRA for corruption. And, fortunately, the SEC was not corrupt, as far as I could determine, in this case. I think I'm living proof of that.

REP. KANJORSKI: In what regard? They saved your life some way?

MR. MARKOPOLOS: I'm 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, this is the SEC submissions he's been giving us over these years. I don't think I would be here today.

REP. KANJORSKI: Very good. Well, we're going to have the SEC's representatives testifying on the next panel, so looking forward to some of their responses.

Mr. Garrett, do you have any further questions?

Mr. Ackerman?

REP. 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 referenced I think seven or eight 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're 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 the question by one of our colleagues, that we now know that organized crime and the Russian mob were involved as investors. I'm afraid we don't know that, or at least I don't know that, and neither does any of the people that I've checked with on this side of the table, could you explain the involvement of the Russian mob, and organized crime in 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 off-shore feeder funds, and just the locations --

REP. ACKERMAN: The off-shore feeder funds --

MR. MARKOPOLOS: The feeder funds that were off-shore, in tax- haven nations, attract dirty money. A very high, in fact, almost all of that -- the only reason you go off-shore is if it's dirty money, and we knew a very high percentage of that was from organized crime in various locales.

REP. ACKERMAN: How much of it is from organized crime?

MR. MARKOPOLOS: When you're dealing with off-shore, anywhere from 5 to 50 percent would be --

REP. ACKERMAN: How much of Madoff, in dollars or percent, was off-shore?

MR. MARKOPOLOS: I would say --

REP. 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 off-shore. And, just given the size, it's 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's just common sense.

But, because it's a hedge fund, it was so secretive 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.

REP. ACKERMAN: So, you're talking about all foreign investors from foreign countries?

MR. MARKOPOLOS: Not all. I'm just saying a substantial --

REP. ACKERMAN: -- (inaudible) -- I'm talking about, when you, when you talk about the Russian mob, and all, 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 --

REP. ACKERMAN: You're talking directly to them.

MR. MARKOPOLOS: Okay. I was on your -- acting on your behalf, trying to stop him from zeroing out your accounts. I'm the good guy here. Make that clear.

REP. ACKERMAN: Yeah. 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 had 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?

MR. MARKOPOLOS: Even --

REP. ACKERMAN: What could they have done?

MR. MARKOPOLOS: The reason they didn't pick it up, they looked at their friends at the country club --

REP. ACKERMAN: Yeah, we know what happened. It was fabled. And you looked pretty stupid if you didn't --

MR. MARKOPOLOS: Correct.

REP. 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? I mean, they all, as you say, got their statements. They figured it out. It was to the penny.

MR. MARKOPOLOS: I don't think --

REP. ACKERMAN: Could anybody have figured it out?

MR. MARKOPOLOS: If you did not have a derivative and quantitative finance background, it would have been very difficult to figure this out on your own as an individual investor.

REP. 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 that they were getting a highly diversified portfolio. And this is the beauty of Mr. Madoff's scheme. He was reporting to own 30 to 35 of the bluest chip stock -- the largest companies in America -- and they'd 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 diversified basket.

REP. 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 that stock did not trade 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 OEF options traded at those prices that day. That's what you could've done and no one did that.

REP. ACKERMAN: And the SEC could have done that too.

MR. MARKOPOLOS: If they knew how to do it, they could've done it. And if they had the willingness to do it, they could've done it, but they did not.

REP. ACKERMAN: Thank you very much.

REP. KANJORSKI: If they knew -- are you suggesting they don't know how to do that?

MR. MARKOPOLOS: I'm suggesting that if you flew the entire SEC staff to Boston, sat them in Fenway Park for an afternoon that they would not be able to find first base.

REP. KANJORSKI: Well, one of the questions that struck me -- after they were forced to register in 2006, it's usual custom that there's an audit performed within that first year after registration and that wasn't done for whatever reason.

But further, it didn't have to be an extensive audit. If somebody just walked in and asked to see the securities, physically, that would have set off the alarm that there aren't any. Isn't that correct?

MR. MARKOPOLOS: That was basic auditing 101 and the SEC staff was incapable of even that level of due diligence.

REP. KANJORSKI: Would you like to change place with us when we get the SEC up here next so you could ask them some questions?

MR. MARKOPOLOS: I would like that, yeah. (Laughter.)

REP. KANJORSKI: Thank you very much, Mr. Markopolos.

We're delighted with your willingness to come forward. It's a compliment to the committee that you chose this committee to make this public disclosure of your long-term investigation. 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 of your testimony and the interest of the membership that we have a long road to haul, but certainly you've aided us in significant ways here in shining light on this particular problem.

Of course, as you know, we're using the Madoff scandal as a platform to set the basis for the regulatory reform -- long-term regulatory reform. And 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 Russia mafia on, maybe he should stay in that $7 million apartment.

MR. MARKOPOLOS: Thank you, Mr. Chairman. It's been an honor.

REP. KANJORSKI: Thank you very much.

Okay, we'll have the second panel if we will. And if they will step to the desk, we'll start the introduction thereof.

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