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



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the unique elements so that the odds of future similar frauds being undetected would be greatly reduced.

CALL would be a password-protected online Web-based resource for all SEC employees to use and, more important, for them to contribute information concerning their own investigations. The SEC needs to be able to learn at a faster pace than the bad guys they are pursuing, and the only way to increase the SEC’s decision-making ability quickly is to demand that all levels of the organization pitch in and contribute to building this database. The traditional top-down, command-from-above approach, the way the agency does business, just doesn’t work anymore and has to be abandoned if the SEC is to achieve greatness. That’s possible. The SEC currently has a staff of more than 3,500, and every single one of those 3,500 brains needs to be turned on and contributing to this core knowledge base.

Ironically, most banks have set up or are establishing risk databases, putting the SEC investigators in the odd position of expecting to find this level of risk management within the organizations they regulate—but not within their own agency.

Tenth, give staff access to the tools of the trade. Another thing those SEC employees who received my submissions should have done was immediately turn on their Bloomberg terminals and analyze the actual OEX Standard & Poor’s 100 index options trades that Bernie Madoff purported to trade on specific dates. If they had done that, they would have discovered that those trades never took place. But they couldn’t do it, because they don’t have easy access to Bloomberg machines and they have not been trained in how to operate them. That’s like trying to prevent online identity theft without having access to a computer or knowing how to use one. If the staff had had this equipment, this case would have quickly been cracked open.

The Bloomberg machine is the key knowledge tool used in the finance industry, but admittedly it is expensive. Each machine costs more than $20,000 a year. Industry allocates one Bloomberg machine per trader, analyst, and portfolio manager so that they can efficiently and professionally conduct the business of finance. The SEC is lucky to have a single Bloomberg terminal in a regional office. Sending SEC teams into exams and enforcement actions without a Bloomberg terminal is like sending unarmed teams to the O.K. Corral and then wondering why they straggle back to the office in defeat each time.

When financial analysts are trying to determine whether to invest in a certain corporate stock, the first thing they do is go to a Bloomberg terminal and analyze the firm’s capital structure, its financial statements, and its financial ratios. They look up the firm’s weighted cost of capital and then start running a horizontal and vertical analysis of that firm’s financial statements. A well-trained analyst will also use the Bloomberg machine to read all the news stories available on that company, look at the firm’s SEC filings, and use the information collected to make a list of questions that have to be answered before committing funds to that company. The analyst will also obtain Wall Street’s research reports on the company to see how those analysts interpreted all this data to make sure there was nothing they might have missed. Doing it correctly is a long process, made possible only by access to a Bloomberg.

The SEC staff examiners can rarely do any of this, either because they don’t have access to a Bloomberg or because they don’t know how to use it. I don’t see how SEC compliance staff can function effectively without at least one Bloomberg available to each exam team for every exam it conducts. They just can’t do a passable job without it. Bloomberg machines have become the lifeblood of the industry, and they make readily available almost all of the data an SEC staffer needs for conducting a basic fraud analysis. Not funding these machines saves money but costs a fortune.

Eleventh, as a policy, encourage whistleblowers. This is nearest and dearest to my heart and is the bottom line if the SEC intends to recover its reputation from this debacle. It has to open up an active Office of the Whistleblower to provide a central clearinghouse for complaints, which currently are handled ad hoc by 11 regional offices. According to the Association of Certified Fraud Examiners’ 2008 Report to the Nation, whistleblower tips detected 54.1 percent of uncovered fraud schemes in public companies. External auditors (and the SEC exam teams would certainly be considered external auditors) detected a mere 4.1 percent of the uncovered fraud schemes. Let’s examine that: 54.1 percent versus 4.1 percent. Whistleblower tips were 13 times more effective than external audits, which is why I believe the SEC should do more to encourage people to submit tips. There needs to be a single place to which people can submit those tips, anonymously if they choose to for protection.

Another interesting statistic from that ACFE report is that 57.7 percent of all whistleblower tips received come from employees. How easy would it be for the new and more efficient SEC enforcement teams to uncover a fraud after an internal whistleblower presented them with hidden books and records or information as to where they could be found? This would be sort of like informing the SEC that Bernie was keeping a second set on books—and kept the second set on his person! Customers provided 17.6 percent of whistleblower tips, vendors 12.3 percent, and shareholders 9.2 percent.

Whistleblower programs work. Among the most effective market watchdogs is the New York attorney general’s office, which relies on whistleblowers. When a tip comes in they vigorously pursue it, unlike the SEC, which receives a tip and vigorously ignores it.

The best way to encourage people to become whistleblowers is to offer a reward, a bounty. The SEC needs to authorize a viable whistleblower bounty program similar to those at the Department of Justice and the Internal Revenue Service. The IRS opened its Office of the Whistleblower

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