Boston SCIP Member Among First to Question Madoff

Harry Markopolos has attended a number of SCIP Boston chapter meetings and provided an excellent presentation on the difference between espionage and competitive intelligence. Here’s one article from the Boston Business Journal—including a quote from me.

Madoff had early skeptic in Boston gumshoe Boston Business Journal - by Craig M. Douglas Tuesday, December 16, 2008

Over his brief career as an investment gumshoe, Harry Markopolos has perfected the art of unearthing information about financial scofflaws.

These days Markopolos is the subject of some serious digging — both on the part of regulators and journalists wanting to know more about the man who was among the first to raise red flags over disgraced Wall Street money manager Bernard Madoff.

In an email, Markopolos declined an interview this week, adding that the media swarm that has resulted from his initial accusations concerning Madoff’s billion-dollar alleged Ponzi scheme has been overwhelming. “I’m ethically not in a position (for an interview) at this moment,” Markopolos wrote Monday.

While Markopolos’ name has repeatedly been cited in news reports about the unearthing of Madoff’s swindle, his role as a financial-services sleuth and the lucrative incentives that drive his work have gone largely unreported.

A fixture in Boston’s financial-services community and a past president of the Boston Security Analysts Society Inc., Markopolos worked from 1991 through 2004 at Rampart Investment Management Co. He ultimately assumed the title of chief investment officer at the Boston firm, which boasted roughly $10.8 billion in assets as recently as Sept. 30.

Markopolos has since worked as an independent financial fraud investigator, tracking cases on his own and working as a hired gun for institutional investors and others seeking forensic-accounting expertise. The payoff for those services can be huge, although it’s unclear to what degree Markopolos has personally benefited from the various incentive plans offered by government regulators and other fraud victims. Nonetheless, those payoffs can reach the millions of dollars if a regulator, such as the Securities and Exchange Commission or Internal Revenue Service, successfully recovers financial penalties or back taxes linked to a fraud investigation triggered by a whistleblower.

For example, the IRS recently said it paid $13 million in rewards to “informants” in fiscal year 2007. Those payouts should increase substantially in the years ahead, since the agency recently doubled the awards available to up to 30 percent of the government’s recovery, the IRS said.

The SEC offers similar incentives linked to penalties and recoveries tied to financial fraud, namely insider trading violations.

While potentially lucrative, those payouts are often slow to materialize, said Paul D. Scott, a former lawyer with the U.S. Department of Justice’s civil fraud division. “It does take years,” said Scott, who now represents whistleblowers full-time in his San Francisco-based private practice. “But plenty of whistleblowers have retired after having the guts to step forward.”

Unlike typical whistleblowers working inside a company accused of wrongdoing, Markopolos is a corporate outsider with a penchant for tracking big game. A graduate of Loyola College of Maryland and Boston College’s master of finance program, his presentations are often fast-paced, as is his style of speaking; Markopolos can be quick to reach into his weathered briefcase to unveil detailed charts and timelines that outline allegedly improper and occasionally illegal behavior.

“I’ve always been very impressed with Harry. He always asks some very good questions and can draw on some very interesting experiences,” said Parmelee Eastman, the president of Eastside Consulting and the local chapter head of the Society of Competitive Information Professionals. She said Markopolos has spoken to the group about economic espionage and legal means in acquiring information on companies and individuals.

Markopolos appears to have put that expertise to work in 1999, when he was assigned to research a new investment product on behalf of Rampart. Among the competitors he studied was Bernard L. Madoff Investment Securities LLC.

Markopolos soon dispatched a letter to the SEC accusing Madoff of using his clients assets to, among other things, support a giant Ponzi scheme.

In a prepared statement to the BBJ, Rampart said it had no knowledge of Markopolos’ letter and first learned about it in a Dec. 12 Wall Street Journal article. Rampart said it has no affiliation with Markopolos or Madoff.

The SEC has said it launched two investigations on Madoff that never materialized into any serious charges against him or his investment affiliates. The agency has declined to comment on whether Markopolos prompted those investigations.

Comments

[John from Jersey]

I liked Harry's unpretentious and clear language. He found the crooks. He gave the SEC a flashlight. Everyone ignored him. He's a courageous guy. I hope these execs go to prison.