How a Blog Might Have Stopped Madoff

By: Ray Pellecchia: File Under: Miscellaneous

12 Comments
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Perhaps the biggest irony of the Bernard Madoff case is that Harry Markopolos, the investor-turned-investigator who for years warned other investors and the Securities and Exchange Commission that Mr. Madoff was running a Ponzi scheme, today is haunted by regrets that he was not more effective in getting others to heed his whistle blowing, according to today's Wall Street Journal.

Mr. Markopolos shouldn't fault himself; rather, he deserves immense credit and appreciation. He did more than anyone else to sound the alarm. According to the article, he did manage to warn off some prospective Madoff investors. The SEC inspector general is investigating how the agency missed the alleged fraud, but surely Mr. Markopolos bears no blame. He sent the SEC and investors a detailed 19-page analysis, listing 25 red flags about Mr. Madoff's supposed investment results.

Certainly, any failure to convince others was not due to lack of effort. Perhaps Mr. Markopolos lacked only an effective medium to communicate his warning. Here's a thought experiment: What would have happened if Mr. Markopolos had blogged his analysis? That is, what if he had posted the entire piece on a blog, under his name or a pseudonym?

We'll never know the answer, but here's what I think might have followed:

• The post would have quickly spread far and wide among traders and investors. It's a small Street, as the saying goes, and an analysis raising questions about the investment results of a prominent name such as Madoff would have sent e-mails flying.

• Those who had money invested with Mr. Madoff -- or who were thinking of investing -- would have done the same math that Mr. Markopolos had done, undoubtedly reaching the same conclusion. The resulting rush to pull money out and the avoidance of adding new money would have meant a faster end to the alleged Ponzi scheme.

• If indeed there were some fund managers who had invested with Madoff suspecting that something was amiss but going along for the lucrative ride, as Paul Kedrosky has suggested, they would have been forced to confront the newly unveiled facts.

• Would Mr. Madoff have initiated some sort of "retribution" against Mr. Markopolos, as the Journal says that Mr. Markopolos feared? Even an anonymous blogger can be identified. Again, it's impossible to know. We do know that Mr. Madoff was chairman of Nasdaq, head of one of its largest market-making firms, and that he and others at his firm had advisory roles with regulators. Could Mr. Markopolos have been blackballed by the Street or subjected to greater regulatory scrutiny because he was taking on an industry leader? Mr. Markopolos also could have been sued for libel, and even if his analysis ultimately would have been proven factual and not libelous, defending a lawsuit is an expensive proposition. But it would seem unlikely that Mr. Madoff would risk exposing his alleged scheme by bringing a lawsuit. All in all, however, it's easy to see how the possibility of regulatory retribution or a lawsuit would have had a chilling effect on a decision to go public. A whistle blower would need some wherewithal to blog his allegations.

That's a lot of might haves and would haves, I know, but personally, I believe that blogging's fast, viral distribution would have been highly effective in this case, and brought down the alleged Ponzi scheme in a hurry. I wonder if future whistle blowers will use blogs if they believe their information is not getting through on official channels.

What do you think?

Comments

Ray,

I am very disappointed to see the dot now completely hides orders. Just another way to keep this market fragmented and run by algos. Pretty soon we will be trading with no quotes and just prints.

Josh

by josh on February 4, 2009 12:43 PM

I agree that a blog or other viral electronic communication would have spread the skepticism about Madoff...a least it would have been picked up by the press sooner. As we know, rumors spread fast...

Some of Madoff's private investment clients were a little older, so I don't know if news would have permeated that client base as quickly. However, I do believe that advances in instant communications/technology will significantly enhance transparency and dialogue among the financial community.

by Karen Genicola on February 4, 2009 1:32 PM

Josh -- DOT customers have the ability to send two types of reserve orders -- one partially displayed, one completely dark -- as described here: http://www.nyse.com/pdfs/nyse_equities_QRG.pdf

We began offering these order types in response to customers who had long been able to use them in other markets. For a long time, orders held in a Trading Floor Broker's hands were seen by customers as "dark," and customers also wanted some non-displayed capability of their own. Now we're making it easier for more folks to leverage displayed and non-displayed orders in a continuous, regulated market.

Think of the alternative: if NYSE did not offer these orders, they would go to other markets, and that liquidity would be absent from NYSE. Wouldn't that be more fragmented than having both displayed and non-displayed orders at the NYSE?

Having both types here increases your ability to find the other side at a price you want, and decreases the likelihood your order would be routed away.

Also consider that many customers use a combination of displayed and non-displayed orders, and our offering both types is an incentive for them to do all their business here.

Thanks for writing, Josh.

by Ray Pellecchia on February 4, 2009 1:39 PM

I agree that a blog could have helped spread the doubts or concerns about Madoff. He also preyed upon high income people who thought they were getting into some exclusive club by investing with this human garbage can named Madoff. I actually know a older lady from Westchester county who is a widow and now lost everything because of him. She is now sending out fliers trying to get work cleaning houses in the area. She lost over 7 million. I also believe that had the NYSE started your blog Ray years ago the exchange would have gotten a much better feel for what their customers really wanted or needed and could have responded earlier and produced a better overall product. Ray, your blog is the best thing to come out of the exchange so far. We ALL appreciate your work here. Thank you.

by tony dey on February 4, 2009 8:36 PM

Scam busting is not a popular activity. Been there, done that (and still doing it, but much more anonymously).

Some years ago I was an investigative journalist for a small, subscription supported analysis. I covered penny-stock scams. and there was no shortage of material.

Subsequent to a piece on a rather obvious $20 million scam, I got sued. My publisher backed me and the suit was eventually dismissed, but only after $100,000 in legal fees. There are many stories like this. The scammers, BTW, never faced an SEC investigation, even when one was called for by a US Senator, and went on to run yet another scam.

If that kind of intimidation can be brought to bear on the expose of "only" a $20 million scam, imagine what a blog dealing with the rich and famous could face.

And why put up with the [expletive deleted]? The SEC clearly doesn't give a flip, and they tolerate the theft of tens of millions of dollars a day by the unholy trinity of corrupt CEO's, financiers, and paid stock promoters. Nobody goes to jail, and the uncollected SEC fines in the rare cases in which they get off their ass and do something are simply a cost of doing business, like the drug lord's payoff to the cops.

Yeah, I still bust scams, but my blog entries are from a cash-bought laptop posted in a hot-spot. My MAC is spoofed, and any telephone interviews are from an anonymous cellphone paid for by cash.

It is frustrating beyond belief that the SEC sits and does nothing.

by Star the Wonder Pup on February 5, 2009 11:51 AM

I am not a financial wizard and only a small savings investor, but I wonder how Bernard Madoff thought he could get away with it indefinitely and what he intended (intends ) to do. Did he stash $ millions away and hope to disappear with it. Of course he was paying out millions to "old" investors, so eventually it would all come crashing down and he would have known that !

by Bryan Hills on February 7, 2009 8:28 AM

Hmm, very cognitive post.
Is this theme good unough for the Digg?

by Angellaa on February 24, 2009 12:31 AM

I cannot believe this will work!

by Sabrina-Biering on July 23, 2009 5:04 PM

Excellent site, keep up the good work

by Bill Bartmann on September 2, 2009 10:41 AM

Generally I do not post on blogs, but I would like to say that this post really forced me to do so, Excellent post!

by Online Stock Trading on September 29, 2009 6:00 PM

I still can't get over the fact that Ponzi scheme and con jobs still go on. It seems technology still has a way to go...

by Purchasing Stocks on November 7, 2009 5:02 AM

How can I reach Mr Markopolos? I would like him to write a thousand words for our forthcoming book on the financial crisis.