Could a Markopolos Blog Have Stopped Madoff?

Perhaps the biggest irony of the Bernard Madoff case is that Harry Markopolos, the investor-turned-investigator who for years warned other investors and the Securities and Exchange Commission that Mr. Madoff was running a Ponzi scheme, today is haunted by regrets that he was not more effective in getting others to heed his whistleblowing, according to yesterday's Wall Street Journal.

Mr. Markopolos shouldn't fault himself; rather, he deserves immense credit and appreciation. He did more than anyone else to sound the alarm. According to the article, he did manage to warn off some prospective Madoff investors. The SEC inspector general is investigating how the agency missed the alleged fraud, but surely Mr. Markopolos bears no blame. He sent the SEC and investors a detailed 19-page analysis, listing 25 red flags about Mr. Madoff's supposed investment results.

Certainly, any failure to convince others was not due to lack of effort. Perhaps Mr. Markopolos lacked only an effective medium to communicate his warning. Here's a thought experiment: What would have happened if Mr. Markopolos had blogged his analysis? That is, what if he had posted the entire piece on a blog, under his name or a pseudonym?

We'll never know the answer, but here's what I think might have followed:

• The post would have quickly spread far and wide among traders and investors. It's a small Street, as the saying goes, and an analysis raising questions about the investment results of a prominent name such as Madoff would have sent e-mails flying.

• Those who had money invested with Mr. Madoff -- or who were thinking of investing -- would have done the same math that Mr. Markopolos had done, undoubtedly reaching the same conclusion. The resulting rush to pull money out and the avoidance of adding new money would have meant a faster end to the alleged Ponzi scheme.

• If indeed there were some fund managers who had invested with Madoff suspecting that something was amiss but going along for the lucrative ride, as Paul Kedrosky has suggested, they would have been forced to confront the newly unveiled facts.

• Would Mr. Madoff have initiated some sort of "retribution" against Mr. Markopolos, as the Journal says that Mr. Markopolos feared? Even an anonymous blogger can be identified. Again, it's impossible to know. We do know that Mr. Madoff was chairman of Nasdaq, head of one of its largest market-making firms, and that he and others at his firm had advisory roles with regulators. Could Mr. Markopolos have been blackballed by the Street or subjected to greater regulatory scrutiny because he was taking on an industry leader? Mr. Markopolos also could have been sued for libel, and even if his analysis ultimately would have been proven factual and not libelous, defending a lawsuit is an expensive proposition. But it would seem unlikely that Mr. Madoff would risk exposing his alleged scheme by bringing a lawsuit. All in all, however, it's easy to see how the possibility of regulatory retribution or a lawsuit would have had a chilling effect on a decision to go public. A whistleblower would need some wherewithal to blog his allegations.

That's a lot of might haves and would haves, I know, but personally, I believe that blogging's fast, viral distribution would have been highly effective in this case, and brought down the alleged Ponzi scheme in a hurry. I wonder if future whistle blowers will use blogs if they believe their information is not getting through on official channels.

What do you think?

Comments

[Tradememe:]

First the blog needs to establish itself as an A-list blog in the business or finance sector. And that is a whole project in itself.

Feb 04 12:43 PM

[User 283977:]

Yes, bogging is an effective way to distribute information. The problem, as alluded to by Tradememe concerns the validity of the information. People can access the blog via search. After that, its up to the reader to validate what they are reading. If the blog is on a must read financial site, it would have more face validity. If the site has a comment rating system, those ratings can provide a rough notion of consensus on what was written. So long as the rating system is not being gamed.

Feb 04 12:59 PM

[H.J. Huneycutt:]

Spectacular thought-provoking article!

if Markopolos had a blog, it is still possible that the SEC would have ignored his analysis. After all, there are bloggers out there right now pin-pointing huge red flags at certain companies, including Sam Antar's articles here on SA about Overstock.com:

seekingalpha.com/autho...


Gary Weiss posted an interesting article regarding alleged retaliation by Overstock against its critics today:

seekingalpha.com/artic...


So my guess is if Markopolos had blogged, word would have gradually filtered out about potential hazards of investing with Madoff. This would have saved some individual investors. However, the majority of people would have remained uninformed and it's quite possible the SEC would have continued to ignore the research and Madoff would have retailiated in some way.

There is some possibility that hypothetical Markopolos blogs could have slowly put more and more pressure on the SEC to act. They still would've moved slowly if this happened, though, and it probably would've only come about after 3-5 years of pressure exerted on them. That's all speculation, but that's my analysis of the current situation at the SEC.

Feb 04 02:07 PM

[Erich Riese...:]

Madoff actually sent out monthly account statements to direct investors. It seems obvious that if doubts were made public a few people would have taken the time to read the statements, possibly forward them to Markopolos, who would have proof.

A scheme like Madoff's is very different and much more definitive than arguing over accounting rules.

Feb 04 02:13 PM

[another.ana...:]

It's easy to say that Mr. Markopolos should have done this or that, but I suspect he was afraid to go too public on Madoff.

Why? For fear of bodily injury or perhaps even his life.

Madoff may resemble a jolly old elf in his photos, but he HAD the power AND the money to act, or have somebody else act, like Chucky in the popular series of horror/slasher movies.

Which of us would be willing to put our lives or the lives of family in jeopardy to warn the SEC? For all he new the SEC's enforcement division is there to protect the Madoff's of the world not to protect the public from them. In fact as evidence comes to light in this case that is exactly what the SEC IS/WAS doing.

Cox was a sucker for those with a buck or two or three.....

Ayuh

Feb 04 02:30 PM

[michaelschn:]

From another article on the matter:

"As he dug deeper, Markopolos said he began to fear for his life, convinced that Russian mobsters and Latin American drug cartels were Madoff clients. When he tried to deliver an investigative file to former New York Attorney General Eliot Spitzer, Markopolos said he wore gloves to ensure his fingerprints would not be on the documents."

It's quite clear. Markopolos had found out that some of Madoff clients are people who kill for $50 thousands, he had all reasons to be afraid.

Feb 04 02:49 PM

[anarchist:]

Markopolos notified the SEC, supposedly the Government watchdog. Why would he go public and expose himself to litigation or worse? Cox and the SEC are the one's who should be under scrutiny for their lack of action but, of course this is pretty much what one would expect from the SEC.

Feb 04 03:04 PM

[Danielle Du...:]

I'm going to second what TradeMeme wrote here: yeah, he could have written something and threw it online; yet then, instead of marauding against everyone's favorite hedge fund audited in a Rockland County strip mall, he would have whittled his time away Stumbling, Digging and SEOing his content into AltaVista oblivion. Where were the established financial journos when Markopolos was notifying the SEC?

Feb 04 04:39 PM

[starfish:]

I'll blog this: the new head of SEC Mary Shapiro's old job FINRA was just given an A plus by the witness for corruption. Good Luck Fellow Investors.

Feb 04 05:29 PM

[Reggie Midd...:]

What in the world is "an A-list blog in the business or finance sector"?

Feb 04 06:36 PM

[purestock:]

fascinating testimony today, with most of the representatives on both sides of the aisle asking him the same questions over and over again. they
were clearly not interested in asking anymore questions that could expose
even more than he was exposing. though some wanted to hire him for a position at the sec. what was most important was what his bottom line perspective was on the role of the sec: to protect the big bankers and investment houses against investors. that is their role, to preserve and protect the criminal rackets operating in and around us financial markets.

Feb 04 08:49 PM

[Andy B.:]

It's obvious to even the most casual observer that key members of the SEC overseeing New York City were bribed by Madoff, the father of the brokerage kickback. Nobody can be that stupid and blind.

It's only a matter of time before some of these people involved start mysteriously disappearing, commit "suicide" or have "accidents". Madoff isn't wearing a bullet-proof vest to and from his court appearances for nothing.

I also don't doubt that Madoff was probably doing a whole lot of tax-avoiding money-laundering for some of his "investor" friends while ripping off the suckers. What a way to launder money. And we've yet to hear exactly where all the money went to. I'm still waiting.

$50 billion dollars vanishing into thin air and not one peep of where it all went to and we're led to believe that one man made $50 billion dollars disappear all by himself with no help from anyone? Moohahahaha.

It took Andrew Carnegie the last 18 years of his life just to give away his paltry $350 million dollar fortune (he died before he could give it all away) and we're led to believe that Madoff got rid of $50 billion all by himself in probably the same amount of time? Hello???

We sure can't expect the current administration or Congress to investigate. Half of them can't even do their own taxes and the other half is too busy ripping off trillions of dollars from the American taxpayer in their own Ponzi scheme! Moohahahaha. All hail Comrade Obama!

Feb 05 01:33 AM

[Moon Kil Woong:]

Clearly going to the SEC wasn't helpful. Apparently, their interests weren't in preventing any such activity but rather making things look like the market was doing just fine. When the regulators can be bullied by any large firm it is the end of a stable and crime free market. The ramifications of that alone justifies a market collapse of several percentage points.

Regarding blogs, I believe there should be a free and open venue for people to present their views, suspicions, etc without legal retribution. Blogging seems to be that venue since other avenues of freedom of expression have been quashed by a truckload of lawyers.

Successful bloggers obviously need to build up credibility over time. The level they can manipulate a given stock or firm is probably dwarfed by securities firms that expunge a vast amount of rose tinted paper every day touting the merits of a company. A company that can't stand up to a few dissenting opinions needs to look honestly at why that is.

In most cases the root cause is probably one or more of the following: it may be the truth, there may be no transparency, management is not engaging the public and/or shareholders correctly, or what they are selling is questionable.

In my book, Harry Markopolos is welcome to blog on seeking alpha any day of the week. Perhaps he is, we may never know, as it should be.

Feb 05 02:06 AM

[PacificGate...:]

THE “MADOFF LETTER”:

THERE IS MUCH TO BE LEARNED FROM BERNIE MADOFF, don’t give up on him.

--
pacificgatepost.blogsp...
-
….in his own words? Now get the subpoena requests out.

Unfortunately, if history in any indication, only little fish will fry. .... ask the SEC.

Feb 05 02:33 AM

[bernie 1:]

If Mr. Markopolos stood on the corner of Nassau & Broad Street,nothing would have changed. His fund didn't go after Joe the Plumber,it was done only to the rich,who feel they all have the inside track. It was done with a wink & a nod,but remember,this is only between you & me. Of course Mr. Madorff knew that someone who makes money in the market CAN'T keep their mouth's closed. Even those who didn't withdraw a cent,they made tons on paper & from ole Bernie they would have bought the Brooklyn Bridge & Madorff would have told them that they could start collecting tolls as soon asa they buy the booths!

Feb 05 08:07 AM

[Nick Gogerty:]

I think a thoughtful blog post would have helped. a google search would have picked up the article. If it was well reasoned, it would have at least raised a few questions or put forth a good argument for consideration. As it stands now no one in the industry has an interest in raising flags even if the discover things publicly. An article with the title, the curious case of Bernie Madoff would have stopped a few people and maybe popped the bubble a little earlier.

Feb 05 09:06 AM

[jsc173:]

Madoff was a pretty powerful guy. Markopolos was in fear of his life, choosing to take on one of the most powerful guys on Wall Street.

If Markopolos would have blogged his concerns, one can only imagine what Madoff might have done. Possibly, nothing. Possibly, an unending rash of legal actions. Possibly, worse.

What I find most amazing is his story about approaching the Wall Street Journal and their unwillingness to pursue what would have been the biggest story they ever blew wide open.

I found that testimony very, very disturbing. I'm sure the WSJ, NYT and the rest get "stories" from hundreds of disgruntled employees, investors and other who want to seek revenge. They are best ignored.

For an independent analyst, as well-researched and well-respected as Markopolos was, to be blown off by the Journal is despicable and I've yet to see the Journal apologize to investors for not airing Markopolos' story.

Are you listening Mr. Murdoch, or do you put the blame the prior owners?

Feb 05 10:17 AM

[WMBANZAI7:]

UNITED STATES HOUSE OF REPRESENTATIVES

FOR IMMEDIATE RELEASE:

FEBRUARY 6, 2009

SUBCOMMITTEE ON FINANCIAL SERVICES ACCEPTS
SURPRISE TESTIMONY BY BERNIE MADOFF

The following are excerpts from today's closed door hearing.

CHAIRMAN JANITORSKI: Ladies and Gentleman, following the commendable testimony of Mr. Marco Polo and the useless drivel obtained from stooges from the SEC and FINRA, the subcommittee has succeeded in arranging special supplemental testimony by Bernard C. Madoff. We are grateful to Mr. Madoff for volunteering to provide his testimony. We understand that there are a plethora of investigations targeting Mr.
Madoff and his asset management and brokerage businesses. Mr. Madoff has indicated that he has nothing to hide and is quite willing to provide his candid observations concerning the United States regulatory apparatus as it pertains to "Global Ponzinomics". I would like to thank the United States Marshall Service for its cooperation in making it possible for Mr. Madoff to attend the Forum. That is a custom designed Cartier bailout bracelet Bernie is wearing. It is designed to explode if he gets within 50 yards of Mr. Marco Polo. At this time I would also like to thank Citigroup for providing a bad jet to bring Mr. Madoff to the Capital on such short notice. Without further delay, I turn the floor over over to Mr. Madoff.

OPENING REMARKS OF MR. MADOFF: Thank you Mr. Chairman. First, I would like to offer Kudos to Mr. Markopolos. He seems to have been the singular individual who was able to divine the complexity and simplicity of Global Ponzinomics. I have read Mr. Markopolos' submissions to the subcommittee keenly. He certainly knows his greek alphabet. Although I agree with many of his conclusions there are a number of clarifications I would like to make at this time. Mr. Markopolos, I tip my hat to you. Further let me assure you that those who are intent on causing grave bodily harm to me, have no interest in injuring you, that is unless you have some special revelations to make about the business models currently employed by the Columbian drug cartels and Russian Mafia.

1. I am not a common fraudster or standard deviant. I am a Wall Street businessman. I make a living the same old fashioned way the rest of my brethren do on the "Street". We all have our own strategies for achieving a fair return for ourselves and sometimes our clients. The common link is the principles of ponzinomics first codified and applied by Charles Ponzi some 100 years ago. In the not too distant future I will be completely exonerated just like Mr. Blagojevich. Ponzinomics is the apparent backbone of global capitalism "Wall Street style". You show me a Wall Street innovation, I'll show you a Ponzi axiom. There is a little bit of Ponzi innovation in all of us. It's in our nature.

2. The Madoff model is essentially the same riskless ponzinomial expansion applied by Wall Street's securitization and derivatives industry. Opacity and incomprehensibility are key. Moreover, my black box contains the same spaghetti and meatballs as the many black boxes employed in the rest of the hedge fund industry with one key difference, I dont pay commissions to prime brokerages.

3. My sons are total canards. Trust me, if I had let them in on the Madoff strategy, we would have been just another brokerage and investment firm struggling to make a dishonest dime.

4. I originally thought Megan Cheung was the television newswoman Connie Chung. Imagine my disappointment when she did not show up for my interview in person. When I later learned that Ms. Cheung was a Branch Chief at the SEC NY Regional Office, I decided to add some excitement to my life. I prepared a detailed 36 page confession (Exhibit A) and delivered to Ms. Cheung clandestinely, inside an order of Moosho Pork from from China Fun, which is right down the block from my Park Avenue Apartment. I thought Ms. Cheung would be a clever adversary. However, her response was disappointing to say the least. She sent a clandestine return message to me, also inside a delivery of China Fun Moosho Pork. There were no fingerprint's on the carton, at least as far as I could tell. The message was short and I quote it here for the Subcommittee.

Dear Mr. Madoff,

Thank you for participating in the SEC's TIPs program. Your TIP will be examined in due course by the staff. If the staff determines that your TIP has merit, we will contact you in due course. However, you should be aware that the SEC is primarily busy pursuing Martha Stewart and other well known celebrities. If you do not hear from us. it is not because we do not care.

Ethically and diligently yours,

Megan Cheung, Esq.
Branch Chief

As the subcommittee can imagine I found this disappointing to say the least. Oh well, you know what they say in Chinatown, "If the Mooshoo fits, wear it."

5. There is no such thing as a "sophisticated investor". My dog "Spreadsheets" (as in he ate my spread sheets) is more sophisticated and market savy than the hundreds of European bottom feeders, golf course day traders, pension funds, celebrities and mobsters and Wall Street banksters who invested in the Madoff funds.

6. Much has been said about my luxurious Park Avenue jail cell. All of it is true.

7. Elliot Spitzer is not as smart as you think.

8. I would like to extend a warm personal invitation to Dick Fuld, Jimmy Cayne, Sandy Weil, Chuck Prince, Stan O'Neal, John Thain, Ken Screwless Lewis and any other Wall Street kleptocrat, to join me for a regular Thursday night poker game.

9. There is one other party that seems to have bested me. The President of Rally Motors in Roslyn NY. He is a worthy nominee for consideration as Chief of Enforcement at the SEC.

10. Mr. Markopolos, in honor of your magnificent but futile efforts with the SEC, I have arranged for custom made Cartier platnum bailout whistle with your name engraved in zirconium.

HEARING RECESS: Members powder session....

Feb 05 11:34 AM

[squeaky wheel:]

Now we praise Markopolos, but who would have stood up for, if as a pre-K boy and in your class was Madoff, a very likeable leader and sneakey cheat or Marcopolos, an independent little tattle-tale on Madoff? Most of you might have supported Markopolos (at least silently), because a lot of kids at 5 have already developed good or bad character. But for most kids the message is not might makes right, but might makes fear and potential pain or favor and gain.

Having worked most of my career in local, state and federal government, I believe most civil servants have as much integrity and intelligence as the general population but less confidence and self-esteem. Thus they are easier to bully and intimidate. Unfortunately, in America whistle blowers and employees, who question or challenge policy/procedure have almost no support and are often isolated and chastized by fellow employees for rocking the boat. I suspect there were a number of average grade SEC employees who knew Madoff was corrupt but were afraid to say anything. Thus many civil servants see corruption and incompetence around them, but fear to speak for losing their jobs.
Ironically, by not confronting corruption, inefficiency and complacency, recent civil servants have seen their ranks thinned or disappeared as their jobs were contracted out.

Until we can figure out how to make government agencies innovative, open, transparent and reward instead of punishing legitimate whistle blowers, we will get not what we pay for but what we deserve.

Feb 05 12:26 PM

[FraudInvest...:]

Blogging would have done nothing.

Zero.


1. Go to google blogs and type in the word "hedge fund" You will get 414,001 hits.

2. Type in "hedge fund" and "fraud" and you will get 57, 183 hits.

3. Let's assume there are 5 people among those bloggers who really know about a large fraud occuring. And they are presenting their analysis for you and other traders to test.

4. You would have to review all of them, then decide independently whether YOU believe the blogger to be knowledgeable and credible.

That's of course assuming you personally know every one of relevance in the industry, which of course, you don't.

What Mr. Markopolos did--correctly--was seek out a reputable publication like the Wall Street Journal, as well as a government watchdog, like the SEC--present his findings to them and hope they would analyze the information and concur.

That did not happen.

Blogging has no controls, no editorial criteria, no full disclose about the background of said bloggers. No internal controls. No validation whatsoever.

Because everyone can do it, NO ONE is an expert. That's the weakness of blogging. It's the journalistic equivalent to spitting in the wind.

End of story.


On Feb 04 12:43 PM Tradememe wrote:

> First the blog needs to establish itself as an A-list blog in the
> business or finance sector. And that is a whole project in itself.

Feb 22 03:28 PM