Intelligence-Led Methodology and Bernie Madoff

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Intelligence-led methodology has been a long-standing tactic for law enforcement on the local, national, and international levels for decades, but with the events of September 11, 2001, this kind of prevention has become more important than ever. Preemptive tactics such as this methodology can prevent crimes before they happen and possibly stop many from bodily or financial injury. In many cases, intelligence-led procedures have stopped multiple crimes before they are employed; however there are some that go unnoticed and are devastating to the victims. One such case was the large scale Ponzi scheme that was masterminded by Bernie Madoff. The Securities Exchange Commission (SEC) could have unearthed the biggest securities fraud in history with intelligence-led methodology by investigating the numerous complaints in the private sector that would have resulted in saving innocent investors from losing their life savings.

In 1997, the concept of intelligence-led policing started in the United Kingdom in response to the need to spend less time-fighting crime and more time preventing it (Ratcliffe, 2008). The terrorist attacks on American soil September 11, 2001, caused law enforcement agencies to consider their methods of intelligence operations. Homeland security became the priority of law enforcement at every level. The intelligence-led methodology allowed law enforcement to be preemptive against crime, foreign and domestic. This type of policing includes surveillance, the use of informants, offender interviews, the analysis of different types of crimes and their similarities, and the tips of those in the community (Ratcliffe, 2008). Community tips can be very important to law enforcement officials as they may become privy to information that the public sector has little access to. Information from members of the community may not always be useful, however, the intelligence-led methodology allows law enforcement to decipher the knowledge and determine potential threats. If the Securities and Exchange Commission would have reacted to the information obtained from the financial community, Bernie Madoff’s Ponzi scheme that cost investors $50 billion would never have happened.

According to court documents dated December 11, 2008, Bernie Madoff had been administering a Ponzi Scheme through his company, Bernie L. Madoff Investment Securities LLC (BMIS), for an “indetermined amount of time” (Securities and Exchange Commission v. Bernard L. Madoff, 2008). Many believe it to have started in the 1960s when Madoff first opened for business, but the first real complaint was submitted to the SEC in 1992 (Kotz, 2009). This initial warning came directly from a group of customers in the private sector who were concerned about the investment strategies. The SEC looked into the firm Madoff was working through, but never investigated the man managing the investments. There were six more complaints to follow. The complaints were all from private citizens that were intertwined with Madoff and had valuable insider information to offer the SEC. Even the media was concerned about Madoff’s practices. Two articles written in the MARHedge and Barron’s journals also publicly questioned Madoff’s ability to provide returns that no one else could (Kotz, 2009). Both called for an investigation by the SEC, but it never happened. The SEC did perform two investigations and three examinations but admitted that the staff was inexperienced at ferreting out the financial details that are evident in fraudulent activity (Carozza, 2010). Two separate investigations were opened at two different SEC locations. Neither investigation knew about the activities of the other. H. David Kotz’s investigation discovered that “There were a couple of brief conference calls between the two offices about their examinations, but relatively little sharing of information” (2009). The fact that the two offices were not in communication was a miss and could have been avoided with the use of intelligence-led practices.

Harry Markopolos was on to Madoff from the beginning and was the author of many of the letters sent to the SEC. In an interview with CBSNews in 2009, Harry Markopolos shared how he determined that Madoff was committing fraud. Markopolos worked for an investment company that was in direct competition with Madoff. His employer asked him to investigate Madoff’s financials to determine how he was obtaining such high returns year over year and to replicate them. After looking at the figures, Markopolos knew Madoff was committing securities fraud after just five minutes and had mathematical proof after four hours (CBSNews, 2009). When 60 Minutes news correspondent, Steve Kroft, asked Markopolos how many times he went to the SEC about Madoff, he stated “May 2000. October 2001. October, November, and December of 2005. Then again June 2007. And finally April 2008. So five separate SEC submissions” (CBSNews, 2009). All of the leads Markopolos provided fell on deaf ears at the SEC.

An official Ponzi scheme investigation was never completed and third parties were never contacted to verify financial information as is SEC policy (Kotz, 2009). The SEC internalized the entire situation without relying on any outside assistance. They could have engaged other law enforcement sources to combine efforts to catch Madoff. The FBI may have been a helpful counterpart, but they were never contacted. An intelligence-led methodology would have invited a collaboration of agencies to share information amongst each other for the common goal of apprehending Bernie Madoff.

Bernie Madoff continued to defraud his investors up until his own admission of guilt in December of 2008. The SEC, through intelligence-led methodology, could have caught Bernie Madoff a decade before had they taken the tips of the Wall Street community seriously. Many lost entire fortunes and retirement funds because of Madoff’s deception. The Madoff Ponzi scheme is a glaring example of where intelligence-led methodology could have helped law enforcement stop the crime before it started.

Madoff was eventually turned over to the authorities by his own sons to whom he had finally confessed. Up until that point, no one knew the veracity of Madoff’s crime. As stated by Robert Lenzner of Forbes magazine, “If Madoff hadn’t faced $7 billion in redemptions, this Ponzi scheme might not have been discovered” (Lenzner, 2008). Many more would have been injured by his scam if the economy would not have crashed in 2008.

The most costly Ponzi scheme in history could have easily been avoided. If the SEC had followed up on the original lead in 1992, this entire fiasco may not have happened. Even if they had investigated the leads received after that, the losses still would not have been as devastating. The intelligence-led methodology becomes a very important element in investigations where private citizens are obtaining intelligence for the authorities. It is crucial for law enforcement to listen to the outcries of its citizens so that they may react and squash injustices before they happen. The Madoff case should be a lesson that everyone in the community is intertwined. Every citizen is a reliable source of information that can assist the law. The intelligence-led methodology can save both lives and bank accounts but the public sector has to first be willing to listen.

References

Carozza, D. (2010). SEC Watchdog Monitors Agency’s Progress after Madoff Case. Retrieved from http://www.fraud-magazine.com/article.aspx?id=4294967550

CBSNews. (2009). The Man who Figured out Madoff’s Scheme. Retrieved from http://www.cbsnews.com/2102-18560_162-4833667.html

Kotz, H.D. (2009). United States Securities and Exchange Commission. Office of theInspector General. Investigation of failure of the SEC to uncover Bernard Madoff’s Ponzi scheme. (Case No. OIG-509). Retrieved fromhttp://www.sec.gov/spotlight/secpotmadoffrefroms/oig-509-exec-summary

Lenzner, R. (2008). Bernie Madoff’s $50 Billion Ponzi Scheme. Retrieved fromhttp://www.forbes.com/2008/12/12/madoff-ponzi-hedge-pf-ii-in_rl_1212croesus_inl.html

Ratcliffe, J.H. (2008). What is intelligence-led policing? Retrieved from http://jratcliffe.net/research/ilp.htm

Securities and Exchange Commission v. Bernard L. Madoff, Bernard L. Madoff InvestmentSecurities LLC. (2008). United States District Court Southern District ofN ew York, U8 CIV 10791. Retrieved fromhttp://www.sec.gov/litigation/complaints/2008/comp-madoff121108.pdf