Madoff Whistleblower Urges SEC Revamp

When Harry Markopolos testified before Congress last week about his investigation of Bernie Madoff’s alleged Ponzi scheme, it came as a welcome relief after the prevarications of regulators struggling to explain away how they had missed an apparent a $50 billion fraud. His straightforward account minced no words.

Whistleblower Markopolos is the real thing. An accountant and “certified investigator” with military training in special operations, he was geeky and passionate at the same time. His testimony was a blend of righteous anger that his warnings about Madoff had been ignored for nearly a decade and sound insights into how the SEC should do its job. Subcommittee members offered him a job at the SEC — he declined due to “family commitments” in Boston — and insisted that he consider it when he was free to do so.

It’s doubtful that Markopolos will actually end up at the SEC, but some of his suggestions for fixing it make sense. First and foremost, he suggests kicking out many of the lawyers, arguing that they don’t really understand the complex financial instruments being used in markets today. When the SEC was primarily concerned with stocks, it might have been all right for non-professionals to supervise the markets, but in a world of derivatives, collateralized debt obligations and credit default swaps, lawyers might well lose the trail. Markopolos recommends hiring seasoned industry professionals at the end of their Wall Street careers. They don’t need to make a lot of money, though they should be paid enough not to be insulting, and can use their experience in public service.

The problem with the traditional hiring practices at the SEC, where young and hungry lawyers pay their dues for a few years to get the experience and contacts that will make them valuable in private practice afterward, is that most of these up-and-comers don’t want to offend people or institutions that might be hiring them in a few years.

Markopolos still sees a place for lawyers in the SEC — in the enforcement division. Mary Schapiro, the newly confirmed chairman of the SEC, who is as quick on the uptake as anyone, is in fact moving quickly to beef up that division. She reportedly is ready to name Robert Khuzami, a high-powered former prosecutor who tried the “blind sheikh” (Omar Ahmed Ali Abdel Rahman) responsible for the 1993 bombings at the World Trade Center, as the new head of the division. Also, she took off the shackles imposed by her Republican predecessor, Christopher Cox, which required permission of the entire commission to set penalties or issue subpoenas.

It’s likely to be the first of many changes as the SEC tries to respond to the backlash from Congress and the public for its failures to police excessive risk-taking and fraud at securities firms. Schapiro would be smart to comb through Markopolos’s testimony for further tips on revamping the agency.