Harry Markopolos Submits 'The World's Largest Hedge Fund Is a Fraud' to SEC, Agency Ignores Detailed Evidence for Third Time

On November 7, 2005, financial analyst Harry Markopolos submitted his third and most detailed complaint to the SEC, a report entitled ‘The World’s Largest Hedge Fund is a Fraud,’ outlining approximately 30 red flags indicating that Bernie Madoff was operating a Ponzi scheme, which he described as ‘highly likely.’ This submission followed previous warnings to the SEC’s Boston office in May 2000 (an eight-page analysis) and March 2001 (showing Madoff had only 3 down months compared to the market’s 26). Markopolos stated it took him ‘five minutes to conclude that Madoff was a fraud’ and ‘four hours of actual number-crunching analysis to confirm’ his suspicions after analyzing 87 months of Madoff trades showing only three losing months—a statistical impossibility. Despite the detailed mathematical evidence and specific red flags, the SEC conducted only cursory reviews and never performed a thorough Ponzi scheme investigation. According to Markopolos’s later Congressional testimony on February 4, 2009, an SEC branch chief took an ‘instant dislike’ of him and declined even to pick up the ‘several inch thick file folder on Madoff’ he offered. The SEC’s failure was not due to lack of information but willful negligence: from 2000 to 2008, Markopolos submitted evidence five times, but the agency never actually conducted a Ponzi scheme examination of Madoff. This regulatory capture allowed Madoff’s fraud to continue for three more years, growing to $65 billion and devastating 37,000 investors. Markopolos later testified that SEC officials were focused on bringing easy cases to boost their statistics rather than pursuing complex, time-consuming investigations.