Regulators slaughter the sheep while enabling the wolves

In the testimony, Mr. Markopolos also offers explanations for why he did not carry his concerns to other regulators and law enforcement agencies when the S.E.C. did not respond.

He and his colleagues avoided taking their allegations to the industry self-regulatory agency, now called Finra, he said in the statement, because he believed Mr. Madoff and his brother, Peter B. Madoff, wielded too much power with that organization. Peter Madoff worked in his brother’s firm but has not been implicated in the apparent fraud.

“We were concerned that we would have tipped off the target too directly and exposed ourselves to great harm,” he wrote.

Anyone who thinks creating a regulator like the SEC and empowering it and throwing a lot of money at probably also thinks that combing sideburns over a bald head fools everyone, too.

UPDATE: Larry Ribstein opines:

I have been sharply critical of the SEC’s role in the Madoff affair – essentially giving Madoff cover by purporting to regulate, and yet not. Along those lines, Harry Markopolos’s testimony about his inability to get the SEC to respond to his extensive sleuthing on Madoff over the years (summarized here) is must reading.

Markopolos concludes that “"the SEC securities' lawyers if only through their ineptitude and financial illiteracy colluded to maintain large frauds such as the one to which Madoff later confessed." This supports my characterization of the SEC in the post linked above as an “accessory” to the fraud.

It is important to recognize that this wasn't a matter of the SEC simply missing fraudster's obscure machinations. Madoff's scheme was designed to fool the unsophisticated regulators he knew would be watching him. Moreover, the SEC didn't just fail to find the problem -- over many years the agency deliberately refused to follow up on what Markopolos, at significant risk to himself, had found.