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Madoff tipster faults SEC, says feared for safet

The man who waged a decade-long campaign to alert regulators to problems in the operations of now-disgraced financier Bernard Madoff is assailing the Securities and Exchange Commission for ignoring his warnings and saying he feared for his physical safety.

world Updated: Feb 04, 2009 13:16 IST

The man who waged a decade-long campaign to alert regulators to problems in the operations of now-disgraced financier Bernard Madoff is assailing the Securities and Exchange Commission for ignoring his warnings and saying he feared for his physical safety.

His repeated warnings to SEC staff that Madoff was running a giant pyramid scheme have cast Harry Markopolos as an unheeded prophet in the scandal. 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.

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 was slated to come before Congress for the first time on Wednesday at a hearing by a House subcommittee. He had canceled planned appearances at two congressional hearings held last month.

"There was an abject failure by the regulatory agencies we entrust as our watchdog," he said in testimony prepared for the hearing that was posted Tuesday night on The Wall Street Journal's Web site.

Despite the detailed evidence he submitted to the SEC between 2000 and 2008, Markopolos said, the regulators did nothing. Because of their inaction, he said, "I became fearful for the safety of my family."

Madoff, who was at one point chairman of the Nasdaq Stock Market, and sat on SEC advisory committees, was "one of the most powerful men on Wall Street and in a position to easily end our careers or worse," Markopolos said in his prepared testimony. He did not respond to a request for comment Tuesday from The Associated Press.

Markopolos also is providing recommendations for revamping the SEC, which he called "nonfunctional" and harmful to the reputation of the U.S. as a global financial leader.

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.

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 her 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.

That organization, the Financial Industry Regulatory Authority, was headed until December by Mary Schapiro, President Barack Obama's new SEC chairman. She has said that because Madoff carried out the scheme through his investment business and FINRA was empowered to inspect only the brokerage operation, it wasn't possible for the organization to discover it.