$65 Billion Ponzi Scheme Happening On Wall Street Now??

by James DiGeorgia | 02/12/2016 09:52 AM
$65 Billion Ponzi Scheme Happening On Wall Street Now??

The ABC docudrama "Madoff" that aired last Thursday and Friday night is a must see for every investor. Bernard Madoff's Ponzi scheme, the biggest in history, grew over four decades, with a combination of sheer luck and masterful execution.

The fraud was so well disguised it managed to escape being discovered even though the U.S. Securities and Exchange (SEC) conducted a comprehensive audit of the firm's records. Madoff and his accomplices were incredibly masterful. They were able to literally fake every document they gave to the SEC auditors without detection.

Madoff's Ponzi had three inescapable flaws...

While Madoff was able to forge 40 years of records, counterfeit computer programs and market trading software. The simple fact was that if the SEC auditors or support staff had just made one phone call to confirm Madoff's fund actually owned the stock positions he claimed it held the scam would have been exposed.

The second flaw was its vulnerability to a global economic collapse. Had the '08-'09 financial crises never taken place Madoff's $65 billion ponzi scheme would be still taking place and growing in size today. The scam relied on its victim's never demanding their money all at once.

The panic from October '08 through February '09 was so intense that investors withdrew $14+ billion so quickly Madoff found himself bankrupted, unable keep the illusion going.

The third flaw was basic simple math and was first discovered in 2000 by Harry Markopolos a financial analyst of Rampart Investment Management. Harry a consummate mathematician knew within 5 minutes of looking over Madoff's investment fund prospectus that Madoff was either “front-running” the order flow or he was running a Ponzi scheme.

It was as simple as recognizing the steady year in and year out 12% return on investment (ROI) given the actual performance of the market was impossible. Markopolos reverse engineered the performance of the fund and realized Madoff was in essence claiming he was winning on a 96% of his trades.

Markopolos described it to a friend working at the SEC by asking him what he would think if he was told there was a baseball player batting .960. It's just not possible.

Markopolos reasoned that Madoff could not possibly win 96% of the time and spent years trying to convince the SEC for almost eight years. He went as far as writing the regulatory agency a 25-page report highlighting 30 “red flags” that went ignored.

It took the publicity generated by an editorial in The Wall Street Journal Markopolos wrote expressing his concerns about Madoff's Investment Fund for the SEC to finally initiate what became a failed, sloppy audit. After which the SEC brass in charge considered Markopolos an obsessive crank and crackpot. He took no pleasure of being proven right when Madoff's fraud finally collapsed.

Today Markopolos runs a company dedicated to rooting out financial scams and ponzi schemes. Now enjoying a reputation as a credible whistleblower, Markopolos is warning the SEC again.

During a recent ABC News interview, Markopolos claims he has recently uncovered three major ongoing multi-billion dollar frauds taking place right now. One of which he insists -- is even larger than Madoff's $65 billion scam.

If Markopolos is right... again, it's absolute proof of the need to dramatically increase enforcement and investigative staffing at the SEC and U.S. Justice Department. The revelation of another three multi-billion dollar investment scams could trigger a collapse of investor confidence that brings down our entire economic system. Remember the Madoff collapse was brought about through the financial crisis of 2008 and 2009. Currently, we are undergoing a China/Oil/Central Bank Crisis that might add Greece to the mix by March.

Everyone in Washington argues we need to enforce existing laws. To do it we must buttress those charged with keeping Wall Street from being exploited by criminals, with more resources. A larger budget and higher pay is needed to maintain the brightest and most diligent auditors and investigators.

We also need to do a better job protecting whistleblowers!

Markopolos isn't disclosing the names of the three multi-billion scams, preferring to wait to do so after he has turned in the information to the SEC and the appropriate law enforcement agencies.

This means that we're going to have to wait to see if this new multi billion fraud is going to be exposed and shut down by the U.S. government -- or if it will it have to be taken down like the Madoff pyramid by panic driven redemptions in the next financial panic.

These frauds could also be taken down by whistleblowers. Consider for a moment a ponzi scheme even larger than Madoff's. There has to be more than handful of employees or contractors working at these companies that suspect or know the fraud is taking place. Why aren't they speaking out?

The answer is easy fear of retribution, retaliation if they speak out. Jobs lost, careers ended. Financial ruin.

There are Federal and State whistleblower laws. Reporting a massive fraud can be rewarded by as much as 30% of money collected by the SEC in fines. Yet, these rewards for honestly are not guaranteed and require a threshold of $1 million to kick in. Meanwhile, once a whistle blower comes forward it is almost impossible for them to get their job back and then even if they do. A whistleblower's chances for advancement are nonexistent.

Whistleblowers often find they are blackballed in trying to get another job because no one wants to hire a whistleblower because employers are afraid that they could also become the target of regulatory action and/or a civil suit for a wrongful or constructive discharge.

To even begin cleaning up Wall Street, whistleblowers have to be treated and protected much better.

Whistle-blowers often find themselves victims of withering David and Goliath battles when they expose and confront a fraud taking place. Wealthy scamsters can run up a whistleblowers legal fees, conduct campaigns of professional and personality assassination even after the SEC and other government regulators and law enforcement are aware the reported fraud - is in fact really a fraud.

Honest people have to be encouraged to step forward when frauds are taking place without fear of financial and reputational reprisals. Expanded whistle blower relief won't solve the mountain of fraud taking place on Wall Street or in the business marketplace here in the United States. But it's a cogent start.

I will be meeting with reform minded Senators and Representatives here in Florida and Washington in the next few months before the 2016 election asking for them to help by better defining the statutory definition of whistleblower in Dodd Frank Act. It's ambiguous and the courts are split on how a whistleblower should be defined.

The minority view undermines the purpose of the Dodd Frank Act. In the very first sentence in the legislation, language on whistleblower rights is the requirement that a whistleblower must first report a violation to the SEC in order to have a private right of action against the public company who fired or constructively terminated that person for reasons relating to their wrongful conduct.

This is bizarre because in the normal course and in compliance with most companies employee handbooks and procedures asset the requirement of initially reporting wrongdoing their superiors. The leading case for the minority view is the Asadi case in the Fifth Circuit.

Meanwhile there is an excellent 2015 decision in the case entitled Dresser v. Lime energy in the United States District Court for the District of New Jersey , which discusses these ambiguities and comes down on the right side. The decision has two excellent footnotes at the end of the opinion that the rationale from a practical point of view of why the Asadi decision and those that follow it are wrong.

The Second Circuit in a recent decision disagreed with the Fifth Circuit but stayed enforcement so that the company could appeal to the Supreme Court and recognized that there was a clear split of authority. It appears likely that the Supreme Court will accept the case and with the present constitution of the court, will side with industry thus effectively emasculating the whistleblower provisions of Dodd Frank. So my lobbying both elected and prospective office holders in the months ahead -- is especially well timed.

Bottom line: White collar criminals will fight tooth and nail to make whistle blowing as un attractive as possible. While the best interests of investors and the public in no small way relies on honest people who are willing to step forward.

Given the political environment..."enough is enough".... perhaps someone at one or more at one of the firm's now drawing attention and ire of Harry Markopolos will blow the whistle and step forward and help the SEC, CFTC and Justice Department. Even with the great personal inherent risk. We can only hope.

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