Madoff whistleblower says SEC still too timid

Harry Markopolos, a former financial executive, testifies before a House Financial Services Subcommittee on ''Assessing the Madoff Ponzi Scheme and Regulatory Failures'' in Washington in this February 4, 2009 file photo.

BOSTON (Reuters) - Financial regulators have not fully learned their lessons despite missing the massive fraud engineered by Bernard Madoff, said the man who tried for years to raise the alarm about Madoff's scheme.

The warning from Harry Markopolos carries the weight of the fame he gained a year ago, including an appearance before Congress to blast the Securities and Exchange Commission for ignoring his tips that something was amiss with Madoff's investment management business and its years of amazingly consistent profits.

Madoff eventually pleaded guilty to what the government called a $65 billion Ponzi scheme, the largest in history.

SEC leadership appointed by the Obama administration, including the agency's chair, Mary Schapiro, vowed reforms.

Yet even now, "The SEC is nowhere near aggressive enough," Markopolos, 53, told Reuters. "It still has the mind-set where it will only enforce securities law instead of enforcing ethics."

Markopolos, the financial investigator who lives in Whitman, Massachusetts, south of Boston, spoke as part of a series of interviews to promote a book about his quest, "No One Would Listen: A True Financial Thriller," which is set for release on March 1.

His book calls for sweeping changes at the SEC such as firing half the agency's staff and doubling the pay of many positions to attract the best talent. Markopolos would also move the agency out of Washington.

Asked about Markopolos' ideas, an agency spokesman referred to a speech that Schapiro gave on February 5, in which she reviewed changes at the agency and said that "We have achieved quite a great deal in the past year."

LIFE-LONG INVESTIGATOR

Markopolos' investigative instincts run deep. In the book, he recounts one of his first coups: sniffing out an employee who was stealing food from a seafood restaurant the Markopolos family owned near Baltimore.

Decades later, Madoff came onto his radar when Markopolos worked at a Boston money manager and was asked to design a math program to replicate Madoff's eerie string of returns.

Unable to do so, Markopolos concluded that Madoff was up to no good and debated with colleagues over whether Madoff was running a Ponzi scheme -- one where early investors are paid with money from new clients -- or was illegally "front-running" orders from clients.

Markopolos reported Madoff to the SEC several times over a number of years. But the agency famously passed up the tips, leading to a public flogging before Congress and a devastating follow-up report by the agency's inspector general.

All this emerged as Obama's choice to lead the agency, the veteran regulator Schapiro, was taking over. She responded by replacing senior staff and urged them to become more aggressive against fraud.

As Markopolos notes, the SEC stepped up its training, sought more money to reward whistle-blowers, and increased the pace at which it filed restraining orders against schemes it suspected of fraud.

As a whole, the agency has rebounded since last winter, Markopolos said, but he added that the SEC remains mired in slow-moving legal processes.

Much of the SEC's staff is too inexperienced to catch sophisticated financial wrongdoing, and too often the agency settles cases without getting defendants to admit guilt, he writes.

In a wide-ranging interview, Markopolos also said he was pleased that Madoff, 71, received a 150-year sentence after pleading guilty to the massive fraud.

"The death penalty was too good for him. I wanted him to suffer," Markopolos said.

Markopolos once preferred to avoid the limelight, but no more. He now welcomes the many handshakes he gets from strangers on travels to New York and Washington.

Another group that has been friendly, Markopolos said, are Madoff's victims, many of whom lost their life savings.

Markopolos said he initially worried that they would blame him for trying to pull the plug on the pyramid scheme. But he said victims often approach him and tell him they are grateful for his efforts.

"Universally, it has been to thank me or say, 'You were trying to help us and the SEC was not,'" Markopolos said.

(Reporting by Ross Kerber, editing by Ros Krasny; Editing by Gary Hill)