My error was in believing that the SEC actually was capable of protecting investors. The problem was that I knew a few dedicated men like Ed Manion and Joe Mick, and I made the assumption that there were lots of others just like them. And that was a big mistake. As I was to learn over the next few years, the SEC had been created to monitor the stock market and it really had never evolved with the industry. Its investigators had neither the experience nor the training to understand something fairly complicated like fixed income, for example, an array of investments that yields a specific return on a regular basis but is much more complex than it initially appears. Municipal bonds, for example, is an area in which there is well-known and widespread corruption. And if the SEC couldn’t do the math for fixed income, it certainly could not do it for complicated derivatives or structured products. Structured products are combinations of underlying assets, like stocks and bonds, combined with various types of derivatives. They are incredibly complex. The SEC certainly doesn’t understand them; in fact, a lot of people on Wall Street don’t really understand them, so what chance does an individual investor have? All you really need to know about structured products is this—it’s the 99 percent of structured products that give the good 1 percent a really bad name.
What should have been obvious to me was that there is a tremendous mismatch in skills between the SEC regulators and the people they are supposed to be regulating. The quants who create these financial products understand differential equations and nonnormal statistics; they program in languages the SEC doesn’t speak; they run statistical packages the SEC doesn’t even know exist. The quants are busy data mining with supercomputers while the SEC is still panning by hand. I suspect SEC attorneys like Grant Ward are probably well-intentioned. I’m sure they want to do a good job, but they never should have been put in their positions. Sending lawyers to oversee capital markets professionals is like sending chickens to chase foxes; it just doesn’t work, because there’s an unbridgeable skills gap between the two. It would be akin to asking me to argue a case in front of the Supreme Court.
The only chance the SEC had to even the playing field was the extensive use of whistleblowers. The agency needed people on the inside to expose corruption, but it offered no incentives to encourage those people to come forward. This isn’t true only in the SEC; it’s pervasive throughout government agencies and private industry. People who come forward to expose corruption risk their jobs, their personal relationships, and even their lives. Rather than being celebrated for their honesty and integrity, too often they end up alone and embittered. The sad truth is that in too many cases whistleblowers have gotten badly screwed. In the past few years I’ve come to know several of them well, and this includes people who have received large rewards for exposing frauds that robbed the government of hundreds of millions of dollars, and the truth is that many of them are sorry they ever got involved. The money they eventually received wasn’t worth what they had to go through simply to do the right thing. The SEC whistleblower program was extremely limited in scope—it didn’t apply to Ponzi schemes, for example—as well as in the protections it offered.
Like all whistleblowers, I had taken a risk preparing this submission and showing up at the SEC offices. And then to be so easily dismissed by a powerful senior enforcement executive who had absolutely no understanding of the industry he was supposed to be monitoring was really discouraging.
As Ed and I rode down in the elevator we looked for something positive that had come out of that meeting—we rode all the way down to the bottom floor but we couldn’t find any positive outcome.
I never received a response of any kind from the Boston office of the SEC after that meeting. Not even a “Thank you, and can we validate your parking lot ticket?” Ed really encouraged me to keep going; he kept pushing me. Being smart enough to understand the tremendous damage that Madoff could inflict on the industry, as well as on the SEC, he remained deeply concerned about it. He told me he was going to keep pressing for answers inside the agency, but urged me to continue tracking Madoff and gathering as much additional evidence as possible. At that point I don’t believe I had even told Ed about Frank and Neil. I really wanted to keep them out of it for their own safety.
I believe Ed would have tried to move up the SEC food chain, but as he explained to me, he had run into a jurisdictional problem. The SEC’s New England region extended south only as far as Greenwich, Connecticut. Even if Ward had wanted to, he would not have been permitted to send an investigative team into New York City. Once you crossed into New York State, you had to deal with the New York regional office. And, Ed admitted, the two offices were extremely competitive; there was not a lot of respect in either office for the other one. Although he was going to forward my submission to New York, he pointed out that the chances of the New York office warmly embracing a case handed to them by the Boston office were somewhat limited. “I really don’t have a choice,” he told me. “I’ve got to forward this to New York for action.”
Obviously I was disappointed. I had expected that we would hand over this case to the SEC and watch happily from the sidelines as they closed down Madoff. Then I could get back to my real
