No One Would Listen: A True Financial Thriller Harry Markopolos (the alpha prince and his bride full story free .TXT) 📖

bank’s chairman and CEO, Ron Logue, announced he would retire the following March. There was no mention of the lawsuit in this announcement, and if anybody had asked about the odd timing, certainly the answer would have been that there was no link between the two events. And clearly that is possible. But it is quite a coincidence.

I have many other cases in the pipeline. There will be a lot more announcements and lawsuits just like this one to come in the future. In fact, I intend to be in this business until I can’t find anymore financial or Medicare frauds—which makes me think I’m going to be in the whistleblower business for a long, long time.

Epilogue

Mr. Pinkslip Goes to Washington

I’ve seen the failures of the Securities and Exchange Commission (SEC) from both inside and outside the industry. I know how the agency was supposed to function, and by this time I certainly knew how it actually worked—or, more accurately, didn’t work. So when I was asked numerous times to suggest ways in which the SEC could improve, I was able to offer a long and fairly detailed list of ideas.

SEC Commissioner Mary Schapiro has begun making the necessary changes. The agency is trying to get better and, for a government agency, it is moving at an enviable pace. But you have to crawl before you can walk, and you have to walk before you can run. The SEC has to learn how to crawl again. It has suffered through decades of sloth, abysmal leadership, underfunding, and benign neglect, and realistically it will take several years for it to begin functioning as the effective, efficient cop on the financial beat that both investors and industry professionals expect.

As I told Congressman Kanjorski’s House subcommittee, the Senate Banking Committee, David Kotz, Mary Schapiro, and reporters for several newspapers and magazines, there are numerous concrete steps that need to be taken as soon as possible if the SEC is to be transformed into a respected agency.

First, banish the lawyers from the land. Currently the SEC, like most Washington agencies, is dominated by lawyers. In 2009 all five SEC Commissioners were lawyers. Now, I have nothing against lawyers. I’m sure they are good to their children, and many of them contribute to charities. But putting them in charge of supervising our capital markets has been an unmitigated disaster. It would be like putting a political appointee in charge of the Federal Emergency Management Agency and expecting him to handle a flood. Very few SEC lawyers understand the complex financial instruments of the twenty-first century, and almost none have ever sat on a trading desk or worked in the industry other than doing legal work. A primary reason the SEC has reached this point is that historically the SEC Commissioners have been lawyers who may know where to find the best power lunches in Washington, D.C., but don’t have a clue as to how the financial industry actually operates on a day-to-day basis.

Maybe lawyers know the difference between a tort and a tortilla, but there is a reason that most firms in the industry are run by businesspeople with capital markets or banking expertise—it’s because they’re experts. Obviously that didn’t prevent the industry from barely surviving the 2008 crisis, but just about anything would be an improvement over lawyers attempting to lead an industry whose complexities they don’t understand.

Of course there is a place for lawyers inside the SEC. They should be in charge of making sure the rules and regulations promulgated by financial experts are followed, and that those people who don’t follow them get penalized. The director of enforcement should be a lawyer, but the other departments should be led by people knowledgeable about what they actually do in those departments. Lawyers need to be removed from most positions of senior leadership and replaced with people who understand the markets and institutions being regulated.

Anyone who doubts this should simply read David Kotz’s report for evidence that the SEC’s enforcement lawyers did not have a clue as to what Bernie Madoff was telling them about his trading strategy. As a basketball coach once scolded a poor shooting guard, “You couldn’t hit the ocean if you were standing in it.” Most lawyers couldn’t recognize a Ponzi scheme if they were having dinner with Charles Ponzi. They couldn’t recognize Madoff’s obvious lies because none of them had the financial expertise to understand the capital markets. The typical SEC attorney would have trouble finding fireworks on the Fourth of July, so asking them to uncover financial frauds was well beyond their pay grade. There were a lot of financial experts who knew that Madoff was doing something illegal—even if they didn’t publicly expose him. But at least we should put those people in position to stop these scams—and then make it worth it for them to do it.

The purpose of laws is to define the lowest form of acceptable behavior between people, but ethics are the higher standard that the SEC’s securities lawyers have successfully ignored. For example, mutual fund market timing isn’t illegal, so the SEC ignored it while individual investors lost billions of dollars to market timers and hedge funds engaged in the practice. But within the industry the professionals with a moral compass knew this activity was unethical, that it cheated investors and needed to be stopped. Lawyers are trained to follow the black-letter law and regulation the way Hansel and Gretel tried to follow the bread crumbs home from the forest. But the SEC has to do more than just follow the technical bar set by the rules; it has to lead in regulating industry behavior so that it embodies the highest standards of transparency and fairness for all.

There certainly is an important role for lawyers to play in the SEC, just not the part they’ve been playing. Securities laws are outdated almost as soon as they go into effect, because new financial instruments are created to skirt these new laws.