Madoff Tipster Blasts SEC, Says He Feared for His Safety

WASHINGTON -- Harry Markopolos, a whistleblower who struggled for a decade to get regulators to stop the operations of disgraced money manager Bernie Madoff, slammed the Securities and Exchange Commission in his first appearance before Congress.

After the SEC ignored his attempts to alert the agency to Madoff's apparent fraud, Markopolos said he feared for his physical safety after his attempts to alert the SEC to Madoff's apparent fraud were ignored.

Markopolos told a House hearing Wednesday that there were no incentives for the SEC to find fraud and that the agency failed to understand the red flags he raised, describing the SEC's failure as "a combination of incompetence and unwillingness to take on someone like Mr. Madoff.".

"That's why they shy away from the big cases," he said, adding later, "What you'll see is the SEC is busy protecting the big financial predators from investors and that's their modus operandi right now."

Asked by lawmakers if his warnings to the SEC could have been more explicit, Markopolos said, "I even drew pictures so I don't know how I could've been more explicit."

He added the agency "roars like a lion and bites like a flea."

He spoke as several top-level SEC officials, including the agency's enforcement director, sat three rows back in the packed hearing room, awaiting their turn to testify before the panel.

When their turn came later in the day, a key House lawmaker accused them of impeding the panel's investigation.

Pennsylvania Democrat Paul Kanjorski, chairman of the House subcommittee, vented frustration after an SEC office said they can't answer lawmakers' questions about the Madoff case because it's under investigation.

The officials say the SEC is looking at possible changes in the wake of the scandal, including more frequent examinations of investment advisers and improving its process of assessing risk.

While the SEC is incompetent, the securities industry's self-policing organization, the Financial Industry Regulatory Authority, is "very corrupt," Markopolos charged. That organization was headed until December by Mary Schapiro, President Obama's new SEC chief.

Madoff, a prominent Wall Street figure and money manager, was arrested in December after confessing to his sons that he had lost more than $50 billion of investors' money in a Ponzi scheme, according to federal authorities.

"The SEC was never capable of catching Mr. Madoff. He could have gone to $100 billion" without being discovered, Markopolos testified. "It took me about five minutes to figure out he was a fraud."

Markopolos, a securities industry executive and fraud investigator, brought his allegations to the SEC about improprieties in Madoff's business starting in 2000 or earlier. He fruitlessly pursued the quest through this decade with agency staff from Boston to New York to Washington, but the regulators never acted.

Now thousands of victims who lost money investing in Madoff's fund, which was separate from his securities brokerage business, have been identified. Among them are ordinary people and Hollywood celebrities, as well as big hedge funds, international banks and charities in the U.S., Europe and Asia. Life savings have evaporated, foundations have been wiped out and at least one investor apparently was pushed to commit suicide.

And the SEC has been sustaining volleys of criticism from lawmakers and investor advocates over its failure to discover Madoff's alleged fraud, which could be the biggest Ponzi scheme ever, despite the credible allegations brought to it over years.

Markopolos has said he determined there was no way Madoff could have been making the consistent returns he claimed using the trading strategy he said he used.

Markopolos recommended ways to revamp the SEC, including replacing its senior staff and establishing a central office to receive complaints from whistleblowers.

In December, Christopher Cox, then the SEC chairman, pinned the blame on the agency's career staff for the failure over a decade to detect what Madoff was doing. He ordered the SEC's inspector general, H. David Kotz, to determine what went wrong. Kotz has expanded his inquiry to examine the operations of the divisions led by Thomsen, who has been the enforcement chief since mid-2005, and Richards, who has held that position since mid-1995.

Thomsen and Richards were put on the defensive at a Senate hearing last week over the SEC's failure to uncover Madoff's alleged fraud scheme. Members of the Senate Banking Committee were scarcely satisfied with explanations given by the two officials and by Stephen Luparello, the interim chief executive of the brokerage industry's self-policing organization.

Also due to appear Wednesday before the House Financial Services subcommittee were five top SEC officials, including the agency's enforcement director, Linda Thomsen and the head of its inspections division, Lori Richards.

The Associated Press contributed to this report.