When Bernie (Madoff) met Harry

When Bernie (Madoff) met Harry

Harry Markopolos has his own Wikipedia page with more than 40 references, which places him somewhere between SEC Chairman Mary Schapiro…

Harry Markopolos has his own Wikipedia page with more than 40 references, which places him somewhere between SEC Chairman Mary Schapiro and the Fed’s Ben Bernanke; these days he makes his living as a fraud investigator. Such is the result of steady diligence applied to a major but long, undetected legal issue—the Bernard Madoff fraud. Markopolos is the accidental investigator, finding himself in a new career when he, in effect, stumbled upon the country’s greatest fraud and tried to bring it to the attention of regulators. The author of the bestseller, No One Would Listen, Markopolos spoke withNACD Directorship’s Jeffrey M. Cunningham before an audience of directors at the NACD Directorship 100 Forum, addressing the current state of the SEC, fraud in the C-suite and how boards can hone their anti-corruption radar.

Harry Markopolos with Jeff Cunningham

How did you end up going after Bernie Madoff?

I was chief investment manager of a multi-billion dollar firm in Boston and Bernie Madoff was stealing my clients. I also happen to be Greek. You don’t steal from a Greek without us coming after you. And then my bosses said, “We want you to figure out what Bernie is doing, so we can duplicate it.” I looked at the results and said, “This is a fraud.” And they said, “Oh no, he’s a better mathematician than you.” And that got me on his trail.

But as your book, No One Would Listen, details, you did not catch Madoff.

My team and I did not succeed in taking down Bernie Madoff, but we did succeed in taking down the SEC. This led to regime change, with Mary Schapiro the most visible part of that, who I predict will go down as the best chair in SEC history. Today, it’s a totally different agency than it was 23 months ago. The SEC has made a conscious decision—if it’s between your company’s reputation and theirs, theirs is going to survive. They will come after you.

If the SEC missed frauds, can boards find public company frauds that occur in the C-suite?

Be aware of the potential for fraud. I do billion dollar and up fraud cases that involve the C-level suite. They’re big, they’re unbelievable, but that’s what I do for a living. If I get involved in a case against a target company, it’s going to be publicly held, it’s going to have a board that’s unaware that their CEO, CFO, general counsel or chief compliance officer are totally co-opted, engaged in a collusive scheme, committing criminal acts and defrauding not only the shareholders, but probably the United States government.

What can boards do to make sure they ask the right questions?

The nominating committee has to own the process and take it away from management. The board needs to be completely independent of management in nominating board members. As far as the compensation committee, make sure you go to the outside experts to ensure you have the right compensation scheme in place. Don’t take the numbers from management. You owe it to your shareholders and your stakeholders to seek expert advice.

Where should the board begin?

Compliance. Too many compliance officers are compliant officers. They’re chosen for their lack of aggression; their passivity is considered a plus. What boards need to do is take control of the compliance function and hire—and have the ability to fire. Don’t let management do it. And if a compliance officer in your organization is about to get fired, make sure that the board speaks with him or her before they get fired.

What will Dodd-Frank do that SOX did not?

That’s a great question. Sarbanes-Oxley was supposed to have a great whistleblower program. Yet only 2 to 3 percent of the Sarbanes-Oxley whistleblowers were successful, because the law was improperly written. And so they came out with Dodd-Frank, specifically Section 922. It gives whistleblowers a lot more protection as well as incentives. The government doesn’t want to create a disincentive, or perverse incentives, and so, what they’ve done is, if you reported up through compliance and you gave the company first shot, you will get paid a higher reward.

How should boards think about compliance?

You have to go back and make sure you have robust compliance programs, robust ethics programs, that your compliance function has not been co-opted by management, that these whistleblowers are heard.

And, if they don’t?

The disincentive is that if boards do not do their jobs, the government is going to come in, and you know what it’s like dealing with a government investigation.

You’re saying a culture of integrity is the best guard against fraud. But we all know companies that have such a culture, yet fraud existed.

It’s going to exist in every company. Roughly five percent of revenues in the United States are affected by fraud. Usually, it’s where employees are stealing from the company, but it’s not at the boardroom level. It’s not often in the C-suite. It’s low level. It’s your first-line supervisor, your mid-level executive, or maybe a regional CEO stealing a few million dollars.

Are there any telltale signs that a board director should look for?

When you see another company in your sector with ethical violations, especially if they’re criminal, take a look at the government’s charging documents and ask, “Could this also be happening here?”

Where is the investigative media?

Unfortunately, what’s happened with the Internet, print media does not have a business model, so you basically have a profession—journalism—without an industry. Investigative journalism is a casualty, because it’s the most expensive type of journalism. Too many of them are trained as journalists. Madoff was a finance case, involving structured products, a derivatives hedge fund, if you will. How many journalists are trained in that?

Don’t investors look carefully enough at companies to detect financial fraud?

Too often, investors are sheep. Too many mutual funds have the attitude, “If I don’t like the company or the board, I sell.” You don’t have that choice at CalSTRS or Fidelity, because you own every company. And let’s take a look at whom the shareholders are, because I have some beefs with them, too. The average shareholding in America now is about seven months and many could care less about ownership rights.

What’s the bottom line?

Boards are guardians not just of the shareholders’ assets, but also of the very culture of integrity that drives a company to do the right thing. Making sure that each decision is held up to that lens and passes the test is not only critical, but also basic to board leadership.