Markopolos' Testimony Inspires Teachers and Students

As educators, we can learn from Harry Markopolos’ testimony before the U.S. House of Representatives about the Madoff fraud case. Are we doing everything possible to prepare our students to be the best future fraud fighters? Let’s look at the lessons from Markopolos’ journey for justice.

When a Certified Fraud Examiner makes the news in a big way, it presents the perfect opportunity for an educator like me to use that CFE as an inspiring example for my students. I assigned my financial accounting students to watch and analyze the Feb. 4 testimony of Harry Markopolos, CFE, CFA, before the U.S. House of Representatives Financial Subcommittee on Central Markets about the Madoff Ponzi scheme. (Also see the cover story on page 36.) Markopolos’ testimony was ideal for demonstrating to my students how a real fraud examination might work – from suspicion, to investigation, and finally to litigation. I could only hope it would also encourage a sense of civic duty.

FOREWARNED IS FOREARMED 

As we watched Markopolos testify, this line hit me: “Because nothing was done, I became fearful for the safety of my family.” As an educator, I’d never really considered that my students could encounter danger and personal risk as they investigated suspected fraudsters. It dawned on me that they’re only as prepared as we equip them to be, and the educational focus is usually on tools and techniques of detecting and preventing fraud. It doesn’t typically include risk assessment of family safety.

I suddenly felt I’d been negligent by not addressing some real dangers my students might face as they pursue careers in fraud fighting. I listened intently as Markopolos further testified, “My team and I surmised that if Mr. Madoff gained knowledge of our activities, he may feel threatened enough to seek to stifle us. If Mr. Madoff was already facing life in prison, there was little to no downside for him to remove any such threat.”

I didn’t want to overstate the threats to my students (most of them won’t have to be overly concerned about the dangers of the profession), but I now knew that I needed to warn them of the inherent risks of becoming fraud examiners.

BUILD A TEAM OF EXPERTS 

During the nine-year Madoff investigation, Markopolos didn’t work alone. He had a group of highly skilled individuals investigating his suspicions with him. That group included:

• Neil Chelo, CFA, CAIA, FRM, former portfolio manager for Rampart Investment Management, where he met Markopolos. He did the mathematical replication of the Madoff modeling.
• Frank Casey, president of the American branch of Fortune Asset Management Ltd., a $5 billion hedge fund advisory firm. Casey is a former U.S. Army Airborne Ranger infantry captain with intelligence-gathering experience.
• Michael Ocrant, a Wall Street financial reporter who was managing editor of Marhedge (a New York-based hedge- und market research publication) at the time.
   

Markopolos has an Army special operations background, which he said helped him to build an intelligence network and collect data from field operatives. When he listed his investigative team, it sounded like “The A-Team” from the ’80s TV show. A team of experts with diverse expertise is often essential in gathering necessary evidence.

Fraud investigative units often need members who understand financial markets, mathematical and financial modeling, and option and derivative trading strategy.

ASK THE RIGHT QUESTIONS 

Anti-fraud educators often provide a limited version of a realistic investigative environment for students. We assign them textbook cases to read and require them to answer the author’s written questions at the end of the reading assignment rather than encouraging them to ask their own questions.

Markopolos, who had developed options-trading strategies for decades, didn’t believe Madoff’s claimed investment strategy could possibly be capable of delivering consistently steady returns for his customers. So he made it his mission to analyze and report his suspicions to the Securities and Exchange Commission (SEC). He couldn’t have known he wouldn’t be vindicated for nine years.

We need to instill in our students the skill of asking the right questions in the right way at the right time. If SEC investigators had followed up on Markopolos’ accusations with the right questions, they might have saved investors billions.

PUBLISH YOUR FINDINGS 

I have to wonder if we’re giving our students the skills to find this type of crime. Markopolos said in his testimony, “Little did I know that over the next several years I would come to understand that financial illiteracy among the SEC’s securities lawyers was pretty much universal with few exceptions.” Was that true? Was the SEC’s lack of interest in Markopolos’ allegations based on ignorance? We’ll never really know. But after they ignored his warnings about Madoff for the third time, Markopolos went to the press.

First, he asked Pat Burns, communications director at Taxpayers Against Fraud (a nonprofit public-interest group dedicated to combating fraud), for ways to convince the media to investigate his case materials. Despite Burns’ advice, the mainstream media never bit.

Eventually, Markopolos met Ocrant. Ocrant investigated his suspicions and even had a private audience with Madoff, who rolled out the red carpet for him and seemed to easily explain away Markopolos’ and others’ concerns.

In May 2001, Ocrant published “Madoff tops charts; skeptics ask how” in the publication, Marhedge. But despite those published warning signs, Madoff continued business as usual for the next seven years.

BE PERSISTENT, BE RIGHTEOUS 

Markopolos said what troubled him most was that a lot of people knew or suspected that Madoff was a fraud and didn’t blow the whistle on him. In his opinion, as expressed in his testimony, they abandoned their civic duty. We should all ponder Markopolos’ closing statement: “White-collar crime is a cancer on this nation’s soul and our tolerance of it speaks volumes about where we need to go as a nation if we are to survive the current economic troubles. … These troubles were of our own making and due solely to unchecked, unregulated greed. We get the government and the regulators that we deserve, so let us be sure to hold not only our government and our regulators accountable but also ourselves for permitting these situations to occur.”

We need a CFE in Congress. Think about it: all the concerns and frustrations that Markopolos faced during the nine years he investigated Madoff Securities might have been eliminated with a phone call to someone in Congress with some clout – someone who understood fraud and who would understand the red flags Markopolos had recorded.

Markopolos’ struggle to find a regulator who would listen, the lack of a forum in which to publish his findings, and his dogged determination to find a pulpit from which to inform the public should be inspiring to us all. It’s our civic duty to bring fraud to light and to prevent it as soon as possible. It shouldn’t matter whether we do that by becoming fraud fighters, running for political office, or educating the next generation of fraud examiners. What matters is that we do what’s in our power to do.

MEET MARKOPOLOS 

Markopolos will be a keynote speaker at the 20th Annual ACFE Fraud Conference & Exhibition, July 12-15, at the Bellagio in Las Vegas. He’ll be speaking during Tuesday’s luncheon, and of course, he’ll be discussing his experiences as the Madoff fraud whistle-blower.

Right before the ACFE annual conference, West Virginia University (WVU) will host the 2009 International Fraud and Forensic Accounting Education Conference at Caesars Palace in Las Vegas, July 9-11. This conference is designed to help academics and practicing professionals develop foundational skills centered on best practices, tools, and techniques. WVU organizers have timed the conference so attendees also can attend the Institute for Fraud Prevention (IFP) meeting, July 11-12, at the ACFE conference.

If you have any questions about the WVU conference and/or the IFP meeting, please contact Richard Riley at Richard.Riley@mail.wvu.edu or call (304) 293-7849.

Visit www.fraudconference.com to learn more about the 20th Annual ACFE Fraud Conference & Exhibition. These conferences provide the perfect opportunity for you to continue your education, step up your skills in the fight against fraud, and pass those skills on to your students.

Richard Hurley, Ph.D., J.D., M.S., CPA, ACFE Educator Associate Member, is an associate professor in the University of Connecticut (Stamford) School of Business. 

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