SEC pummeled as Madoff tipster testifies

By Rachelle Younglai and Karey Wutkowski

WASHINGTON (Reuters) - Harry Markopolos, a former investment manager who tried to warn U.S. regulators about Bernard Madoff, joined lawmakers in blasting the Securities and Exchange Commission but said he was forwarding more tips to the agency.

Markopolos told a congressional hearing on Wednesday that SEC staff were neither willing nor able to uncover Madoff, arrested in December and charged with a record-shattering $50-billion fraud.

Calling SEC staff "too slow, too young and too undereducated," Markopolos said the regulator was hindered by lawyers, did not understand red flags, could not do the math and was captive to the financial industry.

"They looked at the size of Madoff and he's a big firm and we don't attack big firms," said Markopolos, who became aware of Madoff when the firm he worked for tried to pursue the same kind of strategy Madoff did but never got the same steady, strong returns.

Members of the House Financial Services subcommittee hailed Markopolos but excoriated five SEC officials who declined to answer specific questions about the Madoff case, citing ongoing investigations.

"You couldn't find your backside with two hands if the lights were on... You have totally and thoroughly failed in your mission," said New York Democratic Rep. Gary Ackerman.

SEC Chairman Mary Schapiro, who did not testify, later sent a letter to the senior members of the subcommittee, offering to meet to explore ways to get the panel information without impeding the civil and criminal investigations of Madoff.

Markopolos said he knows the names of a dozen so-called feeder funds that helped Madoff raise money from pension funds and wealthy investors and that he would turn these over to regulators this week.

Markopolos, now a fraud investigator, said Madoff could not have acted alone, citing accountants and people helping convey money to his scheme. Madoff was arrested after his sons went to authorities saying their father had confessed to them.

LOW POINT FOR THE SEC

Madoff, a former chairman of the Nasdaq stock market, has been accused of running a massive Ponzi scheme in which he paid off earlier investors with money from later investors.

Asked if there were other Madoffs waiting to be discovered, Markopolos said he was forwarding information to the SEC about a Ponzi scheme of around $1 billion.

For the SEC, Wednesday's testimony marked what some insiders called the worst day in the agency's history, further tarnishing its reputation and sending morale to a new low.

Lawmakers angrily questioned the SEC's head of enforcement, Linda Chatman Thomsen; the agency's top examiner Lori Richards; Erik Sirri, the SEC's trading and markets chief; Andrew Donohue, who is in charge of investment management and the SEC's acting general counsel, Andrew Vollmer.

Capital markets subcommittee chairman, Paul Kanjorski, a Democrat from Pennsylvania, threatened to reform the SEC out of existence.

And Ackerman, who personally escorted Markopolos out of the hearing room, told the SEC officials: "We thought the enemy was Mr. Madoff, I think it was you. You were the shield."

Schapiro's letter to Kanjorski and Rep. Scott Garrett of New Jersey, the subcommittee's ranking Republican, said Wednesday's hearing "cannot have been satisfactory for you."

"There needs to be a full accounting, both of Mr. Madoff's activities and why we did not detect the fraud, which we truly regret," wrote Schapiro, sworn in last week as SEC chairman.

GIFT-WRAPPED TIP

Markopolos described his failed efforts to get regulators to probe Madoff from 2000 on. "I gift-wrapped and delivered the largest Ponzi scheme to them," he told the lawmakers.

Markopolos became suspicious of Madoff's ways in 1996 after he and a friend pored over mathematical models that might recreate Madoff's returns only to determine that there was no way Madoff could consistently outperform the markets.

Harsh words were lobbed at former SEC employees including Meaghan Cheung, the agency's New York branch chief whom Markopolos contacted in 2005. Cheung, Markopolos said, was arrogant, never grasped the concepts in his report or asked him any questions. Cheung left the SEC in fall of 2008.

The SEC division heads told the panel that the agency was considering a number of changes in light of the Madoff case, including how frequently investment advisers are examined.

Thomsen, who appeared visibly shaken during the hearing, responded to charges that her enforcement division had too many lawyers. "Within enforcement we have lots of accountants, lots of market specialists and investigators."

Republican Rep. Spencer Bachus, of Alabama, was the only lawmaker who praised the agency. "We don't mean to convey that there hasn't been good work by the SEC," he said.

Kanjorski said he was going to introduce legislation that would give the Public Company Accounting Oversight Board, the authority to examine the auditors of broker-dealers.

Madoff's auditor was a small, unknown firm that was not registered with the PCAOB.

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