URBANA – A fraud investigator who tracked Bernie Madoff's dealings for years said he believes the Ponzi scheme perpetrator had more victims outside than United States than in, and more non-Jewish victims than Jewish.
Harry Markopolos, who repeatedly tried to warn the Securities & Exchange Commission about Madoff, called the rogue investor "a monster," but saved some of his toughest invective for the federal agency that failed to stop Madoff.
Speaking at Loomis Lab on the University of Illinois campus Monday night, Markopolos estimated the size of Madoff's fraud at $65 billion – many times greater than anyone had imagined it could be.
The Boston-based investigator, who expects book and movie deals to stem from his whistle-blower experiences, said he believes European banks, hedge funds and investors were affected to a greater degree than the New York investment community.
And despite spending 8 1/2 years investigating Madoff, Markopolos said he failed to notice that Madoff used his ties to bilk the American Jewish community.
"We never saw what he was doing to Jewish communities in the United States," he said.
Markopolos, who worked in the derivatives industry, said in the late 1990s, his then-employer asked him to "reverse-engineer" Madoff's results. When Markopolos couldn't, he became suspicious of Madoff and began privately researching his operation.
At that point, Markopolos figured Madoff was either "front running" (where returns are real but gained illegally) or operating a Ponzi scheme.
Markopolos said he enlisted the help of three acquaintances – two marketing experts and a math whiz, like himself. They worked as a team, following special-operations and counterintelligence strategies Markopolos learned in the military.
According to Markopolos, he approached the SEC's Boston office as early as 2000 with dozens of "red flags" he had detected. He found a sympathetic ear there, but for jurisdictional reasons, the case was transferred to New York, where it languished.
Markopolos said he was frustrated by regulators – particularly lawyers – who either didn't understand his mathematical explanations or failed to contact the list of financial professionals he provided.
He said he was also frustrated by Wall Street Journal editors who didn't let a reporter go to Boston to pursue Markopolos' leads.
He said Madoff, though secretive, was effective in handling the press.
"He always takes press calls, he's always good for a quote," Markopolos said. "Most CEOs would not. ... He was smart."
After financial markets collapsed last fall, Madoff confessed the fraud to his sons and was taken into custody Dec. 11. He claimed he acted alone in deceiving investors and pleaded guilty to 11 fraud-related charges in March.
Markopolos said he believes the SEC would never have acknowledged the information he provided had not he furnished 375 pages of testimony to a congressional committee in February.
That testimony spotlighted the SEC's failures and prompted an inspector general's report due out this summer.
In March, Markopolos was featured on "60 Minutes." A week later, he met with new SEC Chair Mary L. Schapiro.
Despite the years of work and risks he took, Markopolos said he and his team were a failure when it came to the Madoff case.
When told he must feel vindicated and happy, he said, "No, this is the biggest failure in history, and I didn't prevent anything. I didn't save any souls."
As to where Madoff's money went, Markopolos said most was used to pay off old investors who were getting 12 percent interest a year. About 4 percent was used to attract new investors, and probably less than 1 percent – still a lot of money – went to Madoff, Markopolos said.
Markopolos accused the SEC of being "fast asleep ... not even in the fight, not functional, not even dysfunctional."
To correct the situation, he suggested that SEC compensation be restructured, with regulators paid salaries plus bonuses – just like the Wall Street financiers they're regulating.
Wall Street types "run over 'em with a bulldozer to get their bonus," and Markopolos figures regulators with the right incentives would do the same.
"We have chickens chasing foxes," he said. "You need foxes chasing foxes."
Markopolos' speech, "Bernie Madoff and Beyond: A Whistleblower's Take on The SEC," was sponsored by the Hillel Foundation, the UI business and law colleges and the Center for Professional Responsibility in Business and Society.
One man's take on process of reporting fraud
— Fraud investigator Harry Markopolos said the Securities & Exchange Commission was "fast asleep" in investigating Bernard Madoff. Even when problems came to light, state regulators in New York and Massachusetts were faster to act than the SEC was.
— Markopolos attributes the lethargy to the abundance of attorneys.
"The SEC is infested with lawyers, like cockroaches," he said. But in fairness, he added, European regulators were also ineffective.
— Once the fraud became evident, Madoff needed protection from those he defrauded, Markopolos said.
"I think that's why he didn't fight, didn't flee," he said.
— Regulators need to heed whistleblowers when they come forward.
"If you have a whistleblower, squeeze him until he's dry, like a lemon," Markopolos said.
— Industry self-regulation, in Markopolos' opinion, is "a waste of time." So is college ethics training, he said. But colleges should teach students how to report fraud and equip them with tools to do so.
— Despite his scathing criticisms of the SEC, Markopolos said the Federal Reserve's failures were "at least 100 times worse" – not for responsibility in the Madoff case, but for what it allowed to happen to the banking system.
Former Fed Chairman Alan Greenspan was "an absolute failure," Markopolos said. "It's not a crime to be an idiot; otherwise, he'd be a big criminal."