Smoking Guns in the Rear View Mirror: Madoff and the SEC

Experienced bloggers tell me to lead with the headline, as in newspaper stories.

So here it is: read this link. It’s the document sent to the SEC in 2005 accusing Bernie Madoff of running a gigantic Ponzi scheme.

More specifically, it’s the Wall Street Journal’s copy of the letter, separately identified as coming from Harry Markopolos, the Deep Throat of the Madoff scandal. But that’s not the point.

The point is this: take 2 minutes to click on the link and give it a quick look.

Come on, you can afford 2 minutes, this is history we’re talking about. It’s only a 17-page .pdf file, and you don’t have to read all of it.

There, that wasn’t so bad, was it?

Now—what did you think? OK, let me help you out.

It wasn’t all that hard to read, was it? Some jargon, but largely around technical terms whose connotation was clear in context. Markopolos outlined it pretty well, right? You got the sense that something was most definitely fishy, and that this guy sounded like he pretty much knew what he was talking about—right? When he says "Madoff Securities is the world’s largest Ponzi scheme," did you get the sense he was telling the SEC that Madoff was running a Ponzi scheme? Yeah, me too.

Now—if you were a staff member at the SEC and received this letter—what would you do?

My own gut-level instinct—based on nothing more than having worked 6 months for the feds 30 years ago, knowing a whole 2 SEC employees, and having lived on this planet for a few years—is that at least a couple hundred human beings at the SEC are more than capable of of understanding it at least as well as you or I. And I’m sure several got the chance.

Which begs the obvious question: why, oh why, did nothing happen?

There are several really obvious answers, which I won’t belabor. Just now. (Though venality and incompetence generally head the list of usual suspects).

Now, at the risk of losing the bloggers, let’s get past the headline. When something in retrospect is shockingly obvious, it should at least raise the possibility that it might not have been so obvious looking forward. Consider the law of gravity, for example. Or Obama’s election. Not to mention this smoking gun of a document.

What kinds of things get in the way of clear forward perception? High on the list, I think, are beliefs. Not the opacity of data; not a lack of IQ; not a conspiracy of coincidence. Beliefs.

Beliefs: preconceptions, ideologies, inclinations, habits, norms, assumptions, conjectures, presumptions, presuppositions, expectations. A word for "stuff" in the mind that the neurobiologists haven’t yet "explained," but which laymen nonetheless manage to understand quite well.

Business doesn’t believe in beliefs these days. It believes in behavior, results, measurement—these it considers incontrovertible proof.

I have two suggestions. First, go see the movie “Doubt.” It raises questions about the effects of moral certitude.

Second, go back and read that Markopolos’ document again. It does exactly the same thing.

Why did the SEC look so pole-axed? Place your bets. Venality? Incompetence? Or blindness due to moral certitude? What’s your bet?

And by the way, who owns the movie rights?