pageok
pageok
pageok
Would a Blog have Stopped Madoff?

Here's a nice little essay by Ray Pellechia, on the "official" NY Stock Exchange blog, suggesting that Harry Markopolos, who had figured out the Madoff scam a long time ago, would have been a lot more effective had he blogged about what he found, instead of doing what he actually did in 2005 (i.e., sending a detailed, 19-page memo to the SEC. Pellechia writes:

Certainly, any failure to convince others was not due to lack of effort. Perhaps Mr. Markopolos lacked only an effective medium to communicate his warning. Here's a thought experiment: What would have happened if Mr. Markopolos had blogged his analysis? That is, what if he had posted the entire piece on a blog, under his name or a pseudonym?

We'll never know the answer, but here's what I think might have followed:

• The post would have quickly spread far and wide among traders and investors. It's a small Street, as the saying goes, and an analysis raising questions about the investment results of a prominent name such as Madoff would have sent e-mails flying.

• Those who had money invested with Mr. Madoff -- or who were thinking of investing -- would have done the same math that Mr. Markopolos had done, undoubtedly reaching the same conclusion. The resulting rush to pull money out and the avoidance of adding new money would have meant a faster end to the alleged Ponzi scheme.

VincentPaul (mail):
"I am worried about the personal safety of myself and my family."
2.8.2009 9:53am
taney71:
I think so. Reminds me of the Dan Rather letters on Bush that several bloggers determined were fake. That wouldn't have happened 10 years ago.
2.8.2009 10:03am
Bob Leibowitz (mail) (www):
This illustrates two negative consequences of governmental regulation of markets.

First, it soaks up information that might otherwise become more widely available. Potential informers see one only one route, act on it and look no further.

Second, the public presumes protection, that the lack of regulatory action provides an imprimatur.

The results: information that could have made a difference didn't and action that could have been taken wasn't.

The outcome: increased resources for, and dependence upon, governmental regulation.
2.8.2009 10:07am
Dan Simon (mail) (www):
Who, exactly, would be reading this guy's blog, how would they find it, why would they believe its claims, and why would they forward them? I can say from personal experience that even incredibly deep, insightful posts about vitally important topics on a tiny, little-read blog end up having precious little effect on a world sorely in need of its wisdom...
2.8.2009 10:10am
Jon Roland (mail) (www):
Depends on whether Markopolos had a following of the right readers who would propagate the message. There are millions of blogs. Most of them don't have very many readers, or the right readers. To be effective he would have had to post enough good articles on subjects that would attract readers like Madoff investors or prospective investors, or Wall Street traders. One posting wouldn't do that, unless it was vigorously and effectively promoted in a lot of relevant forums.

Incidentally, Markopolos would have been functioning like my proposed grand jury investigations of organizations too large or well connected to fail, or playing the same strategies. But in that system he would take his evidence and analysis to the grand jury, who after investigating would issue a presentment (report) that would be more likely to get the attention of the right people.
2.8.2009 10:14am
taney71:
Dan Simon:

Are you saying that if someone posts on Volokh that the world doesn't hear it?
2.8.2009 10:17am
Roger Schlafly (www):
I thought that the guy published an article in Barron's on the subject. Barron's is widely read.
2.8.2009 10:34am
wm13:
Dan Simon: I like your blog, but I have to say, I have never made any money from reading it. Incredibly deep, insightful posts about the financial markets would attract more readers than incredibly deep, insightful posts about the role that the Orthodox might play in the Jewish community.
2.8.2009 11:09am
bikeguy (mail):
Let's ask Dan Rather what he thinks.
2.8.2009 11:16am
methodact:
Conspiracy theory?
2.8.2009 11:17am
Sagar:
I too doubt a different outcome, simply because there is so much info on the Internet and the readers may not have believed what this guys said, even if a lot of people read it.

Come to think of it, there is a much larger ponzi scheme perpetrated by the fed govt. It has been extensively written about and widely read. Some people in power even tried to do something about it ... and social security scheme is still around in the same form.
2.8.2009 11:26am
Loyola2L (mail):
He shoulda done what I did.
2.8.2009 12:52pm
bertram (mail):
There were a number of blogs on the housing bubble in 2005 and 2006. Heck David Bernstein was blogging about high housing prices right here.
2.8.2009 1:06pm
TerrencePhilip:
I echo the concerns of Dan Simon: had Harry Markopolos started a blog, few would ever likely read it. Had he posted his theories in the comments section of Volokh or the WSJ Law Blog, he'd have been dismissed as a crank trying to generate traffic for his own "crazy" site by piggybacking on the sites of others.

He was apparently an established investor and respected person in his community. I'm not sure how hard he worked to get his information in the right hands because I haven't read the whole article. If all he did was mail in a big pile of calculations it might be dismissed as crank mail; though apparently, someone did glance at it, as they forced Madoff to register as an investment adviser. It thus appears that someone skimmed his cover letter and said to hell with getting behind all the detailed analysis.

So short of perhaps insisting on a personal meeting with someone higher up in enforcement, or- better- calling in connections with a congressman or senator- I don't know how much more he could have done. Maybe that wouldn't have worked either (certainly Fannie Mae/Freddie Mac knew what politicians cared about more than concerned-citizen complaints).

Sounds like Mr. Markopolos is a really good guy; I hope he doesn't torture himself second-guessing.
2.8.2009 2:19pm
Pauldom:
How sad. I'm not a finance guy but the document seems reasonable and compelling to me. Of course I have the benefit of hindsight, but still, there are no signs of "crank" in that document except perhaps its length. And the length is leavened by specific details, including contact info for other reputable experts.

I don't know that a blog would have solved the problem, but it's hard to look at the Markopolis complaint, knowing what we know now, without thinking there must have been some way to warn people.
2.8.2009 3:59pm
Elliot123 (mail):
How much would Markopolos have had to pay in legal costs if Maffoff decided to sue him?
2.8.2009 4:09pm
Oren:
Elliot, a lawsuit would open Madoff to discovery, which is anathema to schemers.
2.8.2009 4:40pm
hedge fun:
Read the memo dudes. The Barron's article was written by someone else (and is cited in the memo).

And Markopolos concludes strongly in favor of regulatory action. See p. 16 of the memo:

"The SEC's critics who say the SEC shouldn't be regulating private partnerships will be forever silenced. Hopefully this leads to expanded powers and increased funding for the SEC. Parties that opposed SEC entry into hedge fund regulation will fall silent. The SEC will gain political strength in Washington from this episode but only if the SEC is proactive and launches an immediate, full scale investigation into all of the Red Flags surrounding Madoff Investment Securities, LLC. Otherwise, it is almost certain that NYAG Elliot Spitzer will launch his investigation first and once again beat the SEC to the punch causing the SEC further public embarrassment."

GIven the memo's position, teasing the opposite conclusion out from Markopolos's inability to get his message out is a tad ironic.
2.8.2009 6:14pm
Dan Simon (mail) (www):
I like your blog, but I have to say, I have never made any money from reading it.

Well, don't blame me for that. Every word of it is gold, pure gold--or at least, just as actionably profitable as, say, the rantings of some guy with proof that a particular investment advisor you don't use, is ripping off his investors.
2.8.2009 6:31pm
PC:
The post would have quickly spread far and wide among traders and investors. It's a small Street, as the saying goes, and an analysis raising questions about the investment results of a prominent name such as Madoff would have sent e-mails flying.

The people on Wall Street knew Madoff was doing something illegal. They may have not known what exactly, but they knew he was pulling something (front running was the best guess).

Those who had money invested with Mr. Madoff -- or who were thinking of investing -- would have done the same math that Mr. Markopolos had done, undoubtedly reaching the same conclusion. The resulting rush to pull money out and the avoidance of adding new money would have meant a faster end to the alleged Ponzi scheme.

Who are people going to believe, some random blogger or a Wall St. titan and former chairman of NASDAQ?

Mr. Markopolos' testimony was some of the most fascinating I've seen on CSPAN. Remember there were at least two oversight authorities that were supposed to prevent this, the SEC and FINRA. The government organization was described as incompetent by Mr. Markopolos; the free market organization was described as corrupt.
2.8.2009 7:24pm
Stephen C. Carlson (www):
Depends on the blog. All we know is that the approach he took wasn't effective.
2.8.2009 7:36pm
DNL (mail):
There's little doubt in my mind that having a blog would have helped Markopolis' cause. Why? Because memes like this spread like wildfire. No fewer than three of the blogs I regularly read, plus one person in my Google Reader shared group, has posted something about Pellechia's post, for example.

But the better example is the garbage thrown around by the 9/11 Truthers -- those who believe 9/11 was a US gov't conspiracy. I'm sure the community here at Volokh Conspiracy, like me, has little interest in hearing their madness. And I'm sure, like me, many of us have heard a detail or two anyway.

Going solely to the SEC and WSJ was a mistake. Employees at both are trained, rightfully, to have a certain degree of skepticism whenever a person seemingly from the tin-foil brigade comes knocking. It would have taken exceptional tact, connections, and argumentative skills for Markopolos to get either to answer; and, in fact, he failed at both outlets. On the other hand, the Web is rife with craziness, a lot of which goes many different directions and ends up seemingly everywhere.

And truly, this is not a binary issue. The question is *not* whether a blog (or something similiar, e.g. a mass email) would have alerted the Feds and caused Madoff's downfall a decade earlier and $billions sooner. Rather, the question is whether such a media strategy would have prevented some investors and would-be investors in Madoff's scheme to think twice, and avoid further issues with the con man. If so, the benefit would have been geometrically better by 2008.
2.8.2009 7:46pm
cognitis:
Should a blogger have exposed Madoff, Madoff would've just SLAPPed the blogger with an injunction. All now are cognizant of Madoff's influence over judges, regulators, Media.
2.8.2009 8:30pm
neurodoc:
What would have happened if Mr. Markopolos had blogged his analysis? That is, what if he had posted the entire piece on a blog, under his name or a pseudonym?
One of the things that likely would have happened is that Madoff would have sued for libel, forcing the ISP to disclose Markopolos' name if he was blogging under a pseudonym.

Oren: Elliot, a lawsuit would open Madoff to discovery, which is anathema to schemers.
Sometimes the bad guys back down at the prospect of discovery, e.g., CAIR dropped its libel lawsuit against Whitehead of Anti-CAIR when he fought back with the help of a Greenberg Trurig lawyer doing it pro bono. But it takes money and balls to fight back like that, especially when there is no great upside to it all other than doing the right thing.
2.8.2009 8:54pm
neurodoc:
I meant to say Greenberg <b>Traurig</b>, but now I'm not sure it might not have been a lawyer at another DC law firm.
2.8.2009 8:56pm
NickM (mail) (www):
The SEC was corrupted by Madoff, in the oldest way known to man: sex.

Nick
2.8.2009 9:06pm
PC:
The SEC was corrupted by Madoff, in the oldest way known to man: sex.

What happened to FINRA, money?
2.8.2009 9:15pm
CB55 (mail):
The Cassandra metaphor (variously labelled the Cassandra 'syndrome', 'complex', 'phenomenon', 'predicament', 'dilemma', or 'curse'), is a term applied in situations in which valid warnings or concerns are dismissed or disbelieved. Cassandra Complex can be associated with past blunders including and not limited to Madoff, DDT and the current world wide economic depression.
2.8.2009 9:47pm
Math_Mage (mail) (www):
If he wanted to get it done through the blogosphere, he'd establish connections with influential bloggers and blog reporters (think Drudge) to draw attention to the problem. It wouldn't be enough just to post on his blog and expect people to come flocking in for insights, but few people are dumb enough to have that kind of expectation (certainly Markopolos isn't).

Two hitches, though. One is the lawsuit possibility, which everyone's talked about already. The other possible hitch is something I can't decide one way or the other, because I've only been reading blogs for a few years: even if Markopolos had gotten the blogosphere all exercised, did it have enough influence in 2000 to make any real difference? By 2004 it obviously did, but harping on the same subject for 4 years in the blogosphere would seriously dilute the impact of the message.
2.8.2009 10:50pm
Math_Mage (mail) (www):
Oops, didn't notice that we were talking 2005 here. I was listening to TV accounts of Markopolos' history that discussed action he took way back in 2000. Never mind that hitch, then.
2.8.2009 10:52pm
resh (mail):
Ok. Dumb question. Why didn't Marko' just send his bitch to Fitzgerald(?), the prosecutor dude who brought down Blago and Libby?

Let's face it: there'd have been a three-ring circus in Manhattan by high noon.
2.8.2009 11:22pm
Elliot123 (mail):
"Elliot, a lawsuit would open Madoff to discovery, which is anathema to schemers."

I realize that, and think it makes sense in most cases. But Maddoff was a Ponzi schemer. Everyday he flirted with discovery and disaster. Markopolos proves the information was all available. The volume of puts and calls in certain stocks exposed Maddoff. Does a guy like Maddoff really evaluate things like most people? What would it have cost Markopolos to get that discovery? The legal system is as much a cash commodity as chewing tobacco. You get nothing unless you pay.
2.8.2009 11:51pm
PC:
Ok. Dumb question. Why didn't Marko' just send his bitch to Fitzgerald(?), the prosecutor dude who brought down Blago and Libby?

Let's face it: there'd have been a three-ring circus in Manhattan by high noon.


Spitzer was invested with Madoff.
2.9.2009 12:01am
PC:
Bah, disregard. I have no idea how I confused Spitzer with Fitzgerald. (Spitzer would have had jurisdiction, I'm not sure Fitzgerald could have unless he was a special prosecutor)

I still highly recommend watching the Markopolos testimony. Beyond the congresscritter grandstanding, it was really powerful stuff. Give it a year or two before we see a book and movie deal.
2.9.2009 12:07am
Randy R. (mail):
neurodoc:"Sometimes the bad guys back down at the prospect of discovery, e.g., CAIR dropped its libel lawsuit against Whitehead of Anti-CAIR when he fought back with the help of a Greenberg Trurig lawyer doing it pro bono. But it takes money and balls to fight back like that, especially when there is no great upside to it all other than doing the right thing."

Absolutely. As it is, Marko's did much beyond the call of duty. There is no quesiton that Madoff would have threatened Marko. With that much money and influence, you think it would have ended with threats of lawsuits? I'm sure there would be harassement, 'anonymous' blogs calling Marko's a pedophile, adulterer, communist, etc.. They would stop at nothing to ruin his reputation if he really hit hard. Doesn't cost much to hire a PI to dig up something about his past and post that on friendly blogs.

I just don't think that a guy who has a billion dollars is going to let someone little guy bring him down without a fight.
2.9.2009 12:25pm
resh (mail):
PC-

No problem. Actually, I was thinking Spitzer as I wrote the question, only to go with Fitzgerald since he's more theatrical and, well, relevant. Jurisdictional matters wouldnt concern me, as the publicity itself would overshadow legal detail.

I agree Marko's testimony, opening statement, really, was Hollywood-esque (in a positve sense).
2.9.2009 12:39pm
methodact:
Too bad this ugly and sordid affair is likely not an isolated aberration. Rather, it appears emblematic of the larger putrefaction of the System as a whole. Perhaps that is why alarm bells failed to resonate. I reiterate, highly cognizable taggants abound consistent with massive systemic looting and plundering underway that drastically dwarfs Madoff's swindles.
2.9.2009 12:56pm
Black Ops:
Madoff is but the tip of an iceberg of covert operations, inclusive of money laundering &black operations financing, yet having to keep a handsome [then ongoing] $fee for himself and his family. Spitzer tried to take him down, but, most conveniently, Spitzer was taken down.

There are alleged "national security" considerations that have been invoked, as Obama is being given misinformation by, let's just call it, "The Shadow Government" re Madoff.

Much of the Madoff timetable of pre-orchestrated takedown, on 11 Dec., is a direct result of the 7,000 UK safety lockboxes raided last 2 June and contents within, and the Sept freezing of upwards of $14 trillion in Europe that were earmarked for international distribution.
2.9.2009 4:56pm
Randy R. (mail):
a friend made the prediction that Madoff is fairly old, so he probably won't get any actual jail time, especially if he can drag out appeals for ten years or so. He supposedly kept his sons in the dark so that they can claim they didn't know anything, so they will probably escape much jail time. There is no doubt some money socked away in Swiss bank accounts, enough to keep the family living in clover for the rest of their lives.

Life is good when you are an expert swindler.
2.9.2009 8:30pm
neurodoc:
Randy R.: With that much money and influence, you think it would have ended with threats of lawsuits? I'm sure there would be harassement, 'anonymous' blogs calling Marko's a pedophile, adulterer, communist, etc.. They would stop at nothing to ruin his reputation if he really hit hard.
Markopolos' fears went beyond attacks on his reputation; he says he feared for his personal safety. Sounds a bit over the top, but with such astronomical sums of money in play, maybe not beyond imagination that someone(s) would have tried to take Markopolos out if he threatened to bring the whole scheme down. Look at how many Madoff "feeders" there were making huge sums by bringing investors to him and living fabulously off the commissions they earned.

If Madoff doesn't spend the rest of his life in jail, starting in the not so distant future, there will be outrage and anger beyond imagination.
2.10.2009 3:41am
epeeist:
I'm not up on all the intricacies of defamation and qualified immunity (for reporting allegations to SEC or other government agencies/law enforcement) and whether in 2005 Madoff was a "public figure" (for purposes of blog reporting).

I do know that if I suspect someone of illegality and in good faith report that person to the SEC or another appropriate agency, that whether or not I'm correct, I have done my part and that if I was wrong to suspect the person that I haven't publicly "outed" either him or myself.

If I blog about it, I run the risk that I was mistaken and could get sued for libel, and even if in the end I am not liable because e.g. the person was a public figure or something, why would I want to expose myself to that sort of risk? I would also imagine (don't know) that making public false allegations like this about investments would run afoul of the SEC...

If I blog anonymously/pseudonymously, I'm better off, but then (1) will people take it seriously? (2) if taken seriously what is the current law about an allegedly defamed party getting a court order forcing disclosure of my identity from the relevant service provider(s)?

Long story short, reporting to the SEC should have been enough, and was the appropriate thing to do, and to expect him to have done more is unfair, especially given the risk there would have been if he was wrong in his allegations.
2.10.2009 11:22am

Post as: [Register] [Log In]

Account:
Password:
Remember info?

If you have a comment about spelling, typos, or format errors, please e-mail the poster directly rather than posting a comment.

Comment Policy: We reserve the right to edit or delete comments, and in extreme cases to ban commenters, at our discretion. Comments must be relevant and civil (and, especially, free of name-calling). We think of comment threads like dinner parties at our homes. If you make the party unpleasant for us or for others, we'd rather you went elsewhere. We're happy to see a wide range of viewpoints, but we want all of them to be expressed as politely as possible.

We realize that such a comment policy can never be evenly enforced, because we can't possibly monitor every comment equally well. Hundreds of comments are posted every day here, and we don't read them all. Those we read, we read with different degrees of attention, and in different moods. We try to be fair, but we make no promises.

And remember, it's a big Internet. If you think we were mistaken in removing your post (or, in extreme cases, in removing you) -- or if you prefer a more free-for-all approach -- there are surely plenty of ways you can still get your views out.