Witness: Dirty Money Might Have Funded Madoff Scheme

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In testimony that could have been scripted by a thriller-movie screenwriter, the investigator who first blew the whistle on Bernard Madoff said today that drug dealers and Russian mobsters might have pumped some money into Madoff's alleged $50 billion Ponzi scheme. Harry Markopolos, a former Boston hedge-fund manager who has spent the last nine years tracking Madoff's financial machinations, told the House Financial Services Capital Markets Subcommittee that he once feared for his own life and that of his associates because of the "dirty money" allegedly flowing into Madoff's investment scam. The subcommittee is holding a series of hearings on whether to beef up regulation of the securities industry in the wake of Madoff's activities, as well as the collapse of public confidence in banking and investments.


Markopolos first fired a warning shot about Madoff's investment management in 2000, but failed to spur the SEC to launch an effective investigation despite repeated entreaties. "I gave them a roadmap and a flashlight to show them where to go" in uncovering Madoff's scheme, Markopolos said. But the agency, then under the thrall of a light-handed regulatory regime, apparently dismissed the rather voluminous case that Markopolos had assembled. His written testimony today, summarized in a 73-page report submitted to the panel, incited scores of questions from subcommittee members who seemed to concur that some legislation may be required to help investors decipher and keep track of the increasingly complex financial instruments that contributed to the economy's plight.


Some Republicans, however, including House Financial Services Capital Markets Subcommittee ranking member Scott Garrett of New Jersey said existing law governing the SEC actually covered Madoff's alleged offenses and that the purported scam he carried off was due mainly to a lack of enforcement. "If Mr. Madoff had not come out and confessed [to his sons] this fraud might still have been going on today," Garrett said. Most of the committee Democrats led by Capital Markets Subcommittee Chairman Paul Kanjorski, D-Pa., seemed more strongly committed to strengthening laws and regulations governing the industry. "The motor is broken beyond repair," Kanjorski said. "We need to invent a new engine to ensure the securities regulatory system reflects today's realities and can respond to tomorrow's innovations."


Markopolos recommended the creation of a "super" agency to oversee the various elements of the financial industry -- securities, investment banks, mortgage lenders, hedge funds, over-the-counter derivatives, commodities -- in a manner to ensure that ongoing communications and cooperation among them would provide investors with a seamless regulatory regime that was transparent. "Wherever there is no light and only darkness," he said, "that's where the criminals gather."

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Cyra Master

Cyra Master is a W.E.B. Du Bois fellow at the Atlantic. Previously, she was an editor at the nonprofit Center for Law and Social Policy and was a reporter for the New Hampshire Eagle Tribune. She is a graduate of Emerson College.
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