I was finally scheduled to testify on February 4. I’d written a 12-minute opening statement in which I just ripped into the SEC. The military had taught me that you open an attack with massive fire. You deliver the most devastating volume of fire possible to destroy and demoralize your enemy. And I wanted to put down the SEC quick and hard. Oh, writing that statement felt so good. I was able to let loose and I did. In fact, my attorneys felt it was too aggressive and edited it for me. Their version was politically correct; if there is one thing about myself in which I do take pride, it is the fact that I am not politically correct. I’m Greek, so by nature I’m going to be blunt and tell people exactly how I feel. I’m not going to be gentle. I read their version and said, “I’ll never give that.”
“You should,” they advised.
I was pretty insistent. “I’ll always regret it if I’m not brutally honest. These people deserve it.”
Witnesses are required to give Congress an advance copy of their written testimony for review. Gaytri warned me that as soon as we handed it in it would be leaked to the media. Being naive, I didn’t think the government of the United States would hand over documents to the media that casually. But we waited until the last possible minute, until Monday night, February 2, at 10 P.M., before submitting it. And rather than submitting my opening 12 minutes of blistering oral testimony, I submitted my attorneys’ politically correct version. I kept the testimony I intended to give in my hip pocket.
By 7 A.M. the following morning my written testimony was on the Internet. By 9 A.M. I was getting phone calls from reporters asking for a statement. The hearing was scheduled to be carried on CSPAN3, which is about as low down the dial as it is possible to go and still have a picture. Congress leaked it, Gaytri suggested, because the members wanted more people to watch CSPAN3. I felt I was going to speak to four audiences: The most important audience was going to be the victims around the world. They deserved an explanation of what had gone so terribly wrong, and I was going to give it to them. Someone owed them the truth, and I knew that the SEC wasn’t going to tell it. I was also speaking to both domestic and international investors, because I wanted them to know that no one was protecting them. They were on their own. The SEC is useless, and it was my opinion that the Financial Industry Regulatory Authority (FINRA) was equally incompetent, if not corrupt. The third audience was the American public, especially people who might one day intend to invest in our markets. And finally, my fourth audience was the government, both this subcommittee and the SEC itself.
Officially, I was going to appear before the House Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises for a hearing entitled “Assessing the Madoff Ponzi Scheme and Regulatory Failures”—which was the polite way of saying “How the SEC Screwed Millions of People.” My only concern was that I would be asked about those cases I had under seal; to prevent that, Phil Michael was going to be there with me to represent the interests of the government in those cases as well as members of my whistleblower teams. Gaytri was going to be sitting on my other side. And right in front of me 60 Minutes was going to be shooting my testimony in high definition.
The night before I was to appear, we got a copy of the SEC’s testimony. It was ridiculous, nothing more than a smokescreen. The SEC admitted it had no defense, but also refused to admit culpability and didn’t have the courtesy to offer an apology to the victims. Reading it made me very confident that they had no idea what was about to hit them. Clearly they were not prepared for this battle. They hadn’t had weeks of nights with little or no sleep; they hadn’t spent 100 hours preparing. Basically, they had copied their web site. Their entire defense appeared to be, we don’t have to defend ourselves because we’re the good guys.
At dinner that night I sat with my lawyers, along with Jeb White and Pat Burns of Taxpayers Against Fraud, as they read the SEC’s testimony. I knew we were in good shape when they started laughing at it. “I can’t believe they’re going to go with this,” Phil Michael said. “This is like no-testimony testimony or the no-defense defense.”
When Gaytri added, “It looks like they’re going to rely on their reputation,” everybody laughed again. When we returned to the hotel, Gaytri and I had a final discussion about the statement I would make the next morning. Until that time she had strongly advocated giving the milder presentation, but reading the SEC’s arrogant nontestimony had completely changed her mind. “You should go with your original,” she said. “Get ’em, Harry.”
On the morning of the 4th I woke up early and excited. I ironed my suit to make sure the creases were sharp. When we got to the Capitol building we found a long line of people waiting to get in. We actually got held up briefly at security because Phil Michael’s knee replacement set off the alarms. I felt like an athlete in the locker room before the biggest game of his career. I went into the men’s room and called my cousin, Pam, and gave myself my own pep talk. “I’m really going to let them have it,” I told her. “I’ve spent eight and a half years being treated like the SEC’s doormat. These people have put me through hell and now it’s my turn and I’m going to let them have it with both barrels. I’m going to put them down in my opening statement and I’m never going to let them get back up. I’ve got lots of ammo and I’m going to keep shooting until the chairman tells me to stop. I’m going to kick ass and name names.”
My goal was to make this the worst day in the entire history of the SEC, not just because it had earned it, but because the only way it was ever going to improve was to hit rock bottom. I really did want it to be better; I wanted it to rebuild. But that wouldn’t happen if it continued to believe it was a functioning agency with only minor problems.
The hearing room was considerably smaller than it appears on television, and when I walked in, it was almost completely full. A group of SEC staff members was sitting together, and right next to them was a large number of reporters. I’d brought with me hand-outs about whistleblowers from the Certified Fraud Examiners’ 2008 Report to the Nation that I wanted to distribute to the media so that they would learn about the tremendous value that whistleblowers bring to law enforcement. I walked across the room, right past the SEC employees, and started chatting with those journalists. As I handed out the Certified Fraud Examiners report, I told them, just loudly enough to make sure the SEC staffers heard me, “You should read this. It’s not in my written testimony but I’m going to refer to it. There are a lot of important statistics about whistleblowers in here.”
Bill Zucker, another McCarter & English attorney, was sitting with Pat Burns and Jeb White of Taxpayers Against Fraud near the SEC staff section. I stopped in front of them and told a few bad jokes, hoping to send a message to the SEC that I wasn’t the slightest bit nervous and that they were about to have a very bad day. I remember asking Pat Burns, “Do I have any blood on my lips? I had raw meat for breakfast. I’m in a bloodthirsty mood.” The SEC staffers were listening intently, and several of them started texting—but none of them were laughing.
Just before we began the session, the ranking Republican member, Scott Garrett from New Jersey, walked up to the witness table and introduced himself to me and then said the most astonishing thing: “I just wanted to shake your hand and thank you for appearing before this subcommittee. I realize that no one would listen to you, but I want to assure you that we’re here to listen and learn. Maybe the Democrats are right; maybe we do need to change the regulations.”
Maybe the Democrats were right? Who knew that Bernie Madoff was so awful he could even bring the Democrats and Republicans together?
In Chairman Paul Kanjorski’s opening statement, he explained, “We are using the largest known instance of securities fraud as a case study to guide the work of the Financial Services Committee in reshaping and reforming our nation’s financial services regulatory system. We preside in a crucial moment in our history, and our work ... will influence the securities industry for generations to come.
“Congress last u
ndertook a wholesale rewrite of these laws in the wake of the Great Depression.... The world, however, has now changed and the motor is broken beyond repair. We therefore need to invent a new engine ....”
I began my opening statement by offering my sympathy to Bernie Madoff’s victims. For the first time I acknowledged Neil, Frank, and Mike, identifying them as “my eyes and ears out in the hedge fund world,” and Ed Manion, who “kept getting ignored because he was not a securities lawyer, only a Chartered Financial Analyst with 25 years of trading and portfolio management experience in the industry.... The SEC to this day holds against him the fact that he kept bringing this case to their attention, and I believe he would be fired if he ever went public.”
I was really pleased to be able to make sure Ed Manion got the credit he had earned—and the public protection he probably needed. I made sure Mike Garrity, the Boston office branch chief who had given his best efforts to convince the New York office to investigate Madoff, also received credit for his support.
And then I went big agency hunting. “The SEC is also captive to the industry it regulates, and it is afraid of bringing big cases against the largest, most powerful firms.” In their previous testimony, top SEC officials had complained that a lack of staff and resources meant they could respond to only the highest-priority matters—which of course was their attempt to excuse their failures. “If a $50 billion Ponzi scheme doesn’t make the SEC’s priority list,” I responded, “then I want to know who sets their priorities.”
I was just getting started, and while my voice was controlled, my anger was real. “You have no excuses,” I said, speaking for the victims. “But you darn well have a lot of explaining to do to the American taxpayers....
“The incoming SEC chairwoman needs to come in and clean house with a wide broom. The SEC needs a new senior staff because the current staff has led our nation’s financial system to the brink of collapse.... They haven’t earned their paychecks and they need to be replaced.”
As I was speaking I could actually hear the SEC staff behind me sucking in their breaths when I landed a body blow. I think they were very surprised I went after their senior leadership so strongly. They weren’t used to hearing these people attacked.
I was thoroughly enjoying every single minute of my testimony. I loved it. Anytime I had the slightest thought of holding back, I thought about the victims. What I did not know was that the interest in my testimony was so high that several cable stations broadcast it live. In addition to my family and team members, just about everybody on Wall Street and in the extended financial industry was watching. I suspect it wasn’t a popular program inside the SEC’s building, though. It also wasn’t very popular with my kids. Faith explained to them, “Mr. Madoff was trying to steal money from people, and Daddy caught him.” They misunderstood—they thought I had physically apprehended him. But the fact that Daddy was on TV didn’t really interest them. They watched for about 10 minutes, then wanted to play with their toys.
I had been well prepared to respond to the committee members’ questions. I certainly was no kinder to the SEC in my answers. “The SEC was never capable of catching Mr. Madoff,” I said flatly. “He could have easily gone to $100 billion if we hadn’t had the financial crisis last year and he hadn’t run out of money to pay off existing investors.”
When asked whether I felt the SEC had failed to catch Madoff because it didn’t understand my red flags or it just had a lack of desire, I replied that it probably was a mix of the two: “They were totally incapable of doing that math. They have no one on their staff probably systemwide that could do the math.... And they just looked at his size and said, ‘He is big firm and we don’t attack big firms.”’
I didn’t limit my criticism to the SEC. When asked by California Democratic Congressman Brad Sherman, who was a CPA, if the National Association of Securities Dealers (NASD), which had become FINRA, might have investigated Madoff, I replied that I would never have taken this case to those industry-created organizations. “I had a lot of bad experiences as an over-the-counter trader in the late 1980s with the NASD,” I said. “What I found them to be was a very corrupt self-regulatory organization, that if you took a fraud to them they would ignore it as soon as they received it. They were there to assist industry in avoiding stricter regulation from the SEC.”
Representative Sherman got it. “You have basically said that our two main securities regulatory agencies see their role as protecting the major institutions on Wall Street rather than protecting investors.”
That wasn’t precisely accurate. I never said, “basically.” And then I added, “I would say that FINRA is even less competent than the SEC.”
I had long ago burned any bridges that might one day lead me back to the financial industry, and I felt it was my duty to report to the American people what I had learned in my career—not just about the government, but also about Wall Street. And it wasn’t pretty. For example, Indiana Democrat Joe Donnelly wondered why all those people on Wall Street who knew something was wrong with Madoff kept silent, pointing out that these were the same people Americans trusted with their retirement savings. I agreed: “It is misplaced trust in fraudsters, especially the white-collar variety. These people are much more dangerous than any bank robber or armed robber, because these people, the white-collar fraudsters, are the most prestigious citizens. They live in the biggest and best houses and have the most impressive resumes. So when they commit a fraud scheme, they destroy companies and throw thousands of people out of work, and they destroy confidence in the American system such that capital becomes unavailable at any price. »
At times as I was responding to these questions I would glance down in front of me at the 60 Minutes cameraman. He was looking directly at the people behind me, and when I struck a particularly telling blow he’d smile and give me a thumbs-up.
Although my testimony was serious, there certainly were a few humorous moments. When I told West Virginia Republican Congress-woman Shelly Capito about some of the firms that my team had warned, she asked me, “Could you explain to me what the theater funds, what that entails?”
I began, “A feeder fund ...”
“Oh feeder fund,” she interrupted. “I thought you were saying ‘theater fund.’ ”
During this hearing several members took time to compliment me, using terms that would have made me blush if I hadn’t been so focused. But I did appreciate the fact that a number of those people also acknowledged the real danger my whole team faced. As Texas Democrat Al Green said, “I and many others can understand why you were in fear for your life. And I believe that fear to have been well-founded because you were dealing with a ruthless person who was in bed with other ruthless people. And when you deal with the kind of characters that you were trying to bring to the bar of justice, you have to be concerned not only about yourself but about other family members that are near and dear to you.”
And as I had told the reporters before the hearing began, I used this opportunity to emphasize the importance of whistleblowers. Among the changes that I said had to be made if the SEC was to become an effective organization was the creation of a program that rewarded whistleblowers for reporting illegal or unethical practices. The government has to make it worthwhile for people who are risking their careers, and sometimes their personal safety, by putting the public good before their employers. Good wishes and congratulatory letters aren’t enough. I got the opportunity to make that point when my own Congressman, Massachusetts Democrat Stephen Lynch, related a conversation he’d had recently about a hotline the SEC had set up—for industry use. As he said, “I was told that senior management had actually gone to an industry—a financial services industry conference and basically said to the firms out there, ‘If you feel that you are being too aggressively investigated, then I want you to call this office.’ And that was a senior person, two senior people at the SEC.”
Imagine that. The SEC actually had set up a whistleblowers’ hotline—so companies
being investigated could stop or slow down that investigation! That was incredible—although not really surprising. We already knew that the SEC was a captive of the industry. The point that I wanted to make was that whistleblowers in this country generally have a very difficult time, but they perform a tremendous service. As I told Congressman Lynch, “I brought with me the Association of Certified Fraud Examiners’ 2008 Report to the Nation, and it lists in here the best way to find fraud. Fifty-four percent of the frauds get discovered by tips, whistleblower tips; only 4 percent by external auditors, which—the SEC is an external auditor. Therefore, whistleblower tips are 13 times more effective than external auditing. So why wouldn’t we want the SEC to be 13 times more effective? Lord knows, this agency needs to be more effective.”
When I concluded my testimony, I was satisfied that I’d made all the points I’d intended to make. The only question I was asked that I hadn’t been prepared for was, “Who’s going to play you in the movie?”
No One Would Listen: A True Financial Thriller Page 29