The real Bernie Madoff story should be called, "Regulatory Capture." Instead, it is called, "The Wizard of Lies." HBO's new film starring Robert De Niro is essentially a character study focusing on Madoff and his family as they struggle to deal with the ramifications of his scheme unravelling, but the real story is simply not told.

The misleading premise of the movie is that Bernie Madoff was an evil man who acted alone in running the single largest Ponzi Scheme ever recorded in U.S. History, undetected for nearly thirty years before getting caught. It is presented as pure luck that he didn't get caught for thirty years, but the reality of the situation is much more sinister than the premise of the fictionalized version of events presented in the movie. The real story is perfectly illustrated by the following quote from Rep. Gary Ackerman, which he made to the representatives of the SEC during the Madoff Hearings:

“We thought the enemy was Mr. Madoff. I think it’s you. You were the shield. You were the protector.” - Rep. Gary Ackerman to SEC

The most intriguing and mysterious part of the Bernie Madoff story is how the SEC - the department of our government created specifically to detect, investigate, and prosecute frauds such as Ponzi Schemes - failed to prosecute Bernie Madoff despite several, repeated, detailed, and adamant complaints to the SEC that Madoff was running a Ponzi scheme, and yet it was left completely out of the movie.

There were six total investigations of Madoff by the SEC since 1992, and every case was closed with the SEC stating they found nothing wrong. In one instance, Genevievette Walker-Lightfoot, a lawyer in the SEC’s Office of Compliance Inspections and Examinations informed her supervisor that her review of Madoff found numerous inconsistencies and she recommended further investigation, but was told by her boss Eric Swanson to stop working on the Madoff case and instead work on the mutual fund industry.

Eric Swanson was the Assistant Director of the SEC’s Office of Compliance Inspections and Examinations, and soon became engaged to Shana Madoff, Bernie Madoff’s Niece, and in 2007 the two were married.

The SEC Director Was Married To Madoff's Niece

And yet, none of this is mentioned in the new movie. There is not a peep about Madoff's entanglements and close relationships with the regulatory body that mysteriously failed to detect his scheme. Instead there is a short scene in which Bernie and his wife watch the congressional hearings, and are listening to Harry Markopolos testify about his failed attempts to get the SEC to investigate Madoff's scheme.

Ruth Madoff: Who is this guy?
Bernie Madoff: He tried to warn the SEC about me.
Ruth Madoff: And what happened?
Bernie Madoff: They ignored his warnings.
Ruth Madoff: So what's the point?
Bernie Madoff: What do mean what's the point?
Ruth Madoff: Well, what's the point of all this?
Bernie Madoff: Well, he's saying that basically, he handed the SEC the evidence and they didn't follow up on it.
Ruth Madoff: Oh, so a government agency is incompetent.
Bernie Madoff: Mm-hmm.
Ruth Madoff: Yeah, and that's news?
Bernie Madoff: No, look, I've been saying that for years.

That is the closest the movie gets to acknowledging the regulatory capture of the SEC, and Madoff comes across as blissfully indifferent to the happy and fortunate coincidence that the SEC just so happens to be incompetent... A government agency is incompetent, what's new? I've been saying that for years.

The SEC Is Corrupt, Not Incompetent

In the movie there is no mention that in real life Madoff refers to Mary Schapiro, the Chairman of the SEC, as his "dear friend." No mention that the General Council of the SEC David Becker’s own mother had money with Bernie Madoff, which was later identified as a conflict of interest. No mention that Madoff's niece is married to the Assistant Director of the SEC’s Office of Compliance Inspections and Examinations. No mention that the SEC Compliance Inspections Director attended the wedding. No, in the movie instead Madoff and his wife brush it off as a fortunate coincidence that the SEC just so happened to look the other way.

There is a second scene in which they get close to addressing the regulatory capture, but again it is brushed away:

Bernie Madoff: One call. All the SEC had to do was make one call and they would've seen that everything was fake, that there was nothing there. But they never called.
Diana Henriques: You just gambled that they wouldn't call?
Bernie Madoff: It was more than a gamble. It was... it was a leap of faith, if you will.
Diana Henriques: You wait, knowing what they will find if they make that call. I can't imagine what that was like.
Bernie Madoff: It was... it was excruciatingly difficult.
Diana Henriques: At some point, you figured...
Bernie Madoff: I figured that they didn't do it. They just didn't follow up on it.
Diana Henriques: If you didn't plan on killing yourself or going into hiding, how did you think it would end?
Bernie Madoff: Well, it was almost like, uh...

In the movie, it is presented as some unexplainable mystery why the SEC never found anything on Madoff, and he is presented as simply taking a blind "leap of faith" in hopes that it would work out that way, and miraculously, it did. What good luck... In reality, the reasons why the SEC did not go after Madoff were much clearer.

Harry Markopolos was one of the (many) people that had complained that Bernie Madoff was running a Ponzi Scheme to the SEC. He was in the same business as Madoff, money management, investing people’s money in ways that provided his clients good returns, so Bernie Madoff was a competitor of his in the field.

When he looked at Madoff’s returns, he says it took him "no more than five minutes" to conclude that this was a fraud, simply because of the fact that the numbers were too good to be true. It was like looking at stats that said a baseball player hit a home run every single time he stepped up to the plate for the last ten years straight. It was simply impossible. He produced some graphs and some mathematics to prove that it was impossible, and informed the SEC for the first time in 1999. He showed mathematically that it was legally impossible for Madoff to achieve the results he was publishing, and they ignored him.

"I gift-wrapped and delivered the largest Ponzi scheme in history to them and somehow they couldn't be bothered to conduct a thorough and proper investigation.."

Markopolos sent a refined report to the Boston SEC in 2000, and was ignored again. And he sent another even more detailed report to the Boston SEC in 2001, and was ignored again. And he presented even more evidence, over 300 pages worth with over twenty “red flags,” to the New York SEC in 2005, and was ignored again. He presented the last time in 2007, and was ignored yet again.

The congressional hearings are publicly available on c-span.org and are very entertaining. The SEC at first refused to show up, and the United States Congress had to ensure them that they were obligated by law to show up or else they would be forced to show up with a subpoena. Even though they did show up after that, they didn’t really show up.

Their opening testimony was simply to read long descriptions of how the SEC was formed and what it’s duties were. They all claimed that they were unable to answer any questions about the Madoff case, and were only there to answer general questions about what the SEC does in general.

In the hearings the Congress men and women are obviously frustrated, as Rep. Gary Ackerman famously blows up shouting, “I am frustrated beyond belief. We are talking to ourselves and you are pretending to be here.” The five minute youtube clip of Ackermans flogging of the SEC is very entertaining, but they didn’t seemed to care at all. I doubt any of them felt any reprecussions or anything in the organization has changed since. It is educational nonetheless, if for no other reason than to shine a small light on the kinds of corruption and captivity our government is in.

It seems that the SEC essentially worked for Madoff and never had any intentions of going after him. Rather than a "blind leap of faith" in the "incompetence of a government agency," it seems more likely that Madoff was confident he would not be properly investigated because the SEC was part of his close-knit network of colleagues, friends, and family.

Markopolos was questioned extensively during the hearings, and his conclusion was crystal clear as to what was going on:

Harry Markopolos: I think what you’ll see is that the SEC is busy protecting the big financial creditors from investors, and that’s their modus operandi right now.
Rep. Brad Sherman: Sir, you are using some strong terms and if they were from anybody else we’d say, ‘Oh that’s the wild eyed populace!,’ but you’ve basically said that our two main securities regulatory agencies see their role as protecting the major institutions on Wall Street, rather than protecting investors.

Mr. Markopolos stared unwaveringly at Brad Sherman to indicate that he was standing by that assessment, and Rep. Sherman simply cleared his throat and continued onto another subject. A little later Rep. Alan Grayson had a few questions for him:

Rep. Alan Grayson: Are you familiar with the concept of ‘capture’ when you’re talking about regulation? What is that? Do you know that concept?
Harry Markopolos: Yes. It’s basically when the regulator is in bed with the industry they purport to regulate, and do not regulate the industry. In fact, they consider the industry the client, not the public citizens.
Rep. Alan Grayson: And have you seen that in action?
Harry Markopolos: Yes, at the Food and Drug Administration, and at the SEC.

It seems obvious to me that the only way an organization who’s sole purpose is to investigate and prosecute fraud would be mysteriously unable to do so with regards to the largest single Ponzi Scheme in history that was happening right under their noses, and after they are getting complaint after complaint and still refusing to look, is if that organization is “captive.”

The problem is not that the SEC didn’t have the tools, or the time, or the people, it is simply that they were more invested in Bernie Madoff’s success, than they were in the public citizen's security. They were colleagues, friends, co-workers, fellow investors, even in-laws to Bernie Madoff and probably dozens of other huge firms and individuals, and their loyalty was with them, not the American people.

This is obvious, and the second half of the hearings were with a panel of representatives from the SEC that made this fact even more obvious. After Ackerman’s famous flogging, and more bobbing and weaving than Muhammed Ali ever did, there were a few moments that were key.

Rep. Bill Posey: It just occurred to me that if someone dropped into my local police department and said, ‘you know there’s a bank robbery going on down the street, can ya’ll do something about it?’ And they said, “Yeah. If we get around to it we will.” Or, “Well we’ve done bigger robberies than that before we’re not going to worry about that.” It’s just. It’s amazing to hear the stories and the testimony that we’ve heard today, truly amazing. A question for miss Richards at this point and then I’d like to reserve some of my time. You stated that you had been recused from the Madoff Investigation and I was just wondering why that was?
Lori Richards, SEC Compliance Inspections Director: Yes. Thank you for the question. I’m not participating in the current examinations or investigations due to the fact that a former employee who was under my chain of command married a member of the Madoff family, and I attended the wedding.
Rep. Jackie Speier: How many of your employees, what percentage of your employees in those two branches, enforcement and compliance, leave the SEC and go to work for a SEC regulated entity?
Lori Richards: I think fewer people leave the SEC than they used to but when they do go they often go to a regulated entity, in the compliance area.
Rep. Jackie Speier: Mr. Swanson was the lead attorney on this case. He leaves the SEC, marries Mr. Madoff’s niece, did you for one minute think that maybe you should go back and look at how he handled that case?
Lori Richards: Yes and that’s exactly what the Inspector General is Investigating, the role of current former SEC employees and their interactions with the Madoff firm, and whether those interactions in any way impacted the conduct of the regulatory oversight of the firm. That’s exactly what the Inspector General is looking at.
Rep. Jackie Speier: Mr. Einhorn complained about Allied, he came to the SEC, the attorney that handled that case Mr. Braswell criticized him instead of Allied. Mr. Braswell left the SEC and went to become a lobbiest for Allied. Do you see any kind of pattern here?
Linda Thomsen, SEC Enforcement Director: I don’t know enough to know whether there is a pattern.

Madoff was sentenced to life in prison for running his Ponzi Scheme that ruined the lives of so many, but the systemic problem of “captive” regulators and government agencies is as bad today as it has ever been. The SEC does go after the little guys however, and they do so pretty efficiently. One of these little guys was a man named Trendon Shavers who created a company called “Bitcoin Savings and Trust.” They decided to investigate him after just one tip, opposed to the 20 or so tips they got for Bernie Madoff, but then again, Trendon Shavers probably can’t call the Chairman of the SEC a “dear friend,” and I think it’s pretty unlikely that anyone at the SEC will be marrying Trendon Shaver’s family members or attending that wedding.

Actually it is unclear whether the SEC actually even received a complaint about Shavers, the investigation may have begun merely because he was transferring over $10,000 at a time into his bank account which automatically flags an investigation. One of his lawyers though has said that there were some complaints made by his clients. Whatever the case is, opposed to the case of Bernie Madoff which was close to a $70 billion Ponzi Scheme that went on for 30 years despite several repeated thorough complaints to the SEC, which they somehow never got around to doing a proper investigation on, for Trendon Shavers’ measly little $4.5 million Ponzi Scheme it took less than one year for the SEC to pounce and shut him down. They were able to quickly freeze all of his accounts and demand trading records that corresponded to the purported earnings, and when he could not, he was arrested and shut down.

I'm not saying that Shavers shouldn't have been prosecuted - absolutely he should have - I'm merely pointing out the difference in how the SEC treats the small guys, and how they treat the big guys.

Why Don't They Make A Movie About The SEC's Role?

It would certainly make for an intriguing and suspenseful story, but it doesn't quite fit the narrative. It is much easier and cleaner to present Madoff as acting alone, one evil person, who lied to everybody and somehow got away with it as a result of a "leap of faith."

But this is a shame because it means the real root of the problem is not being addressed. The revolving door between government regulators and the industries they regulate is a real problem that will eventually need to be addressed. Yet, for some reason, the SEC doesn't even get a slap on the wrist. The only consequence they received in this case was a verbal warning by a few congressman that was recorded and is now online for all to see and nothing more.

"The Whole Government Is a Ponzi Scheme" - Bernie Madoff

In an interview with New York Magazine he did from prison, regarding the 2008 financial crisis among other things, he said:

“The SEC looks terrible in this thing. It’s unbelievable, Goldman … no one has any criminal convictions. The whole new regulatory reform is a joke. The whole government is a Ponzi scheme.”

It may be hard to take seriously anything that comes from the mouth of the world’s biggest con man, but if there’s one thing he knows well, it’s Ponzi Schemes.

• KG

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