Madoff Witness Talks of Other Possible Ponzi Schemes

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Madoff Witness Talks of Other Possible Ponzi Schemes
FEBRUARY 4, 2009, 3:20 PM


The private fraud investigator who tried for years to ignite a federal investigation of Bernard L. Madoff told lawmakers on Wednesday that he had discovered another possible fraud he will report to regulators on Thursday, The New York Times’s Diana B. Henriques reports from Washington.

The witness, Harry Markopolos of Boston, said at a House subcommittee hearing that he would alert the Securities and Exchange Commission to the fraud, a $1 billion Ponzi scheme he has uncovered. Neither he nor his lawyers would provide any additional details.

Mr. Markopolos also said he would tell regulators about a dozen private foreign funds — which he said were “hiding in the weeds” in Europe — that raised money for Mr. Madoff and have sustained major losses.

These funds have not yet been publicly identified, he said. And their silent victims most likely include investors of “dirty money,” including Russian mobsters and Latin American drug cartels, he said.

A lawyer for Mr. Markopolos said later that his client would meet with the agency’s inspector general and detail his concerns at that meeting and “through other channels.”

But the revelations were almost lost amid the torrent of criticism that Mr. Markopolos and lawmakers heaped on the S.E.C. and its senior staff members — several of whom were seated several rows behind the star witness.

Some complaints were serious — that the agency lacked the expertise to tackle major frauds by big players and had no systemic way of dealing with whistle-blowers. Others were sarcastic, with Mr. Markopolos saying regulators seated in Fenway Park in Boston would have trouble finding first base.

Wednesday’s session was the second held by a House Financial Services subcommittee, led by Representative Paul E. Kanjorski, Democrat of Pennsylvania, aimed at exploring the lessons that the Madoff scandal offers for the redesign of the nation’s financial regulatory system.

DealBook live-blogged the House hearing.

Mr. Madoff was arrested Dec. 11 at his New York apartment and charged with operating a Ponzi scheme whose losses could be as high as $50 billion. The case is still under investigation by federal prosecutors and the S.E.C., which the agency witnesses said restricted what they could say about the case at the hearing.

Mr. Kanjorski, the hearing chairman, condemned that argument as an expression of arrogance that was at the root of the agency’s regulatory failures.

Congress is in the midst of creating regulatory changes that could change the agency’s fate, the congressman warned the panel of official witnesses. Lawmakers want immediate candor about the handling of the Madoff matter, not an “oatmeal” of generalities, he said.

“We didn’t call you up here to hear a traveler’s guide of the S.E.C.,” Mr. Kanjorski added.

Linda Chatman Thomsen, the S.E.C. enforcement director, told lawmakers that the agency staff had demonstrated its willingness and ability to pursue major fraud cases, including 70 Ponzi schemes.

Ms. Thomsen said the agency, under its new chairwoman, Mary L, Schapiro, would work hard to improve its receptiveness and responsiveness to whistle-blowers like Mr. Markopolos.

Her responses did not satisfy any of the half-dozen lawmakers who stayed at the hearing after Mr. Markopolos left. Their attacks were fierce and strident, with Representative Gary L. Ackerman saying at one point: “We thought the enemy was Mr. Madoff. I think it is you.”

The hearing at times seemed to enter verbal territory more often explored at organized crime hearings.

Mr. Markopolos repeatedly referred to his fear that he would be killed if Mr. Madoff learned of his investigation. At one point, noting his experience in military intelligence, he described an offer he made to “go undercover” for the S.E.C. — a proposal that was rebuffed.

And he recalled wearing gloves as he assembled a package of information he planned to slip to Eliot Spitzer, when he was New York’s attorney general, so he would leave no fingerprints.

While one lawmaker asked whether this all wasn’t “a little paranoid,” others agreed that Mr. Markopolos was wise to be cautious given the scale of the fraud he was trying to bring to light.