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Madoff Versus Markopolos: How The Journal Dropped The Ball

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Two years back, as I watched the collective panic attack over Rupert Murdoch's bid to acquire Dow Jones -- remember when that was the sort of thing people panicked over HA HA? -- I fondly recalled those old television advertisements for the Wall Street Journal, that intimated that they were the paper of the smart set. Read the Journal, and you, too, would become an awesome force for wealth and gentrification while all those New York Daily News simps fought for the scraps and leftovers in the gilded Terrordome that you and Bruce Ratner built, out of gold and gossamer. I exaggerate, of course. Of course! Because as it turns out, if you'd have been reading the Wall Street Journal all this while, you could have got caught up in Bernie Madoff's ridiculous Ponzi scheme, and never been the wiser, because the Journal just flat-out refused to heed repeated warnings and report the story.

That's the contention, anyway, of Harry Markopolos, who gave extensive testimony Wednesday before a House panel on his growing suspicion of Madoff and his subsequent frustrations in getting anyone to listen to him. Markopolos' primary target was the SEC -- as well it should be (and let me reiterate one more time: Mary Schapiro? PLEH.) but Markopolos lowers the boom on the Wall Street Journal, as well. This didn't escape the attention of Gary Weiss, Portfolio contributing editor and author of Wall Street versus America, who lays it down like so:

It seems that the Journal missed an opportunity to achieve one of the biggest scoops ever, win a Pulitzer Prize and all that other good stuff--and extinguish the biggest fraud in financial history.

According to Markopolos' testimony:

[Pat Burns, communications director at Taxpayers Against Fraud] put me in contact with John Wilke, senior investigative reporter for the Wall Street Journal's Washington bureau. Mr. Wilke and I would become friends over the next three years. Unfortunately, as eager as Mr. Wilke was to investigate the Madoff story, it appears that the Wall Street Journal's editors never gave him approval to start investigating. As you will see from my extensive e-mail correspondence with him over the next several months, there were several points in time in which he was getting ready to book air travel to start the story and then would get called off at the last minute. I never determined if the senior editors at the Wall Street Journal failed to authorize this investigation.

All of that email correspondence can be seen, here, in a collection of additional record-keeping that Markopolos kept during his Sisyphean quest to get the news out about the Madoff scam. Reading through it all is like an exercise in despair-spelunking -- the same well-stated case, made again and again and again, for three hundred pages.

Along the way, Markopolos identifies some of the people who got this right, or tried to, anyway. Erin Arvedlund wrote a 2001 article for Barron's (which is maybe the Dow Jones publication YOU SHOULD BE READING) entitled "Don't Ask, Don't Tell; Bernie Madoff is so secretive, he even asks his investors to keep mum," which is, as Markopolos puts it, a "Red Flag." Also, Michael Ocrant, reporter for MAR Hedge, wrote a piece called "Madoff tops charts, skeptics ask how," also written in 2001. 2001, for Pete's sake!

In 2005, Markopolos was optimistic, and plying his case with remarkable thoroughness. In email exchanges with Patrick Burns of Taxpayers Against Fraud, Markopolos displays some remarkable savvy in how the story could take shape on the pages of the Journal- - a three-piece package deal moving from inquiry to exposure. "In presenting the package," he writes, "you can bill it as the largest hedge fund blow up since Long Term Capital Management's in...1998." In a reply, Burns gave cause for hope, discussing his plan to take Markopolos story to a WSJ reporter: "This reporter is a repeat player and he understands that we are elephant hunting. If he can get a clear shot at the target, he will bag this trophy story."

Or, maybe not: "The WSJ," Burns wrote, "is always cautious."

That reporter was the aforementioned John Wilke, who at the time of contact was, according to Markopolos, "jammed with a front page story exposing fraud by a major mutual fund family which involves an aerobics instructor (sounds like it'll combine sex with financial fraud so it'll be juicy)." The tone is still optimistic, though one wonders now if maybe the problem the WSJ had with the Madoff story is that he wasn't photogenic enough.

By the way, Markopolos was, during this time, being absolutely, CRAZY, thorough. His "List of Questions the Wall Street Journal may want to ask RE Bernie Madoff," reads like a flowchart intended for a two year-old ("If the answer is 'NO, I never heard of Bernie Madoff' then ask:...").

Wilke and Markopolos make first recorded contact in December of 2005. Markopolos continued to dig deep and diligently during this time, making contact with Ocrant at MAR Hedge, developing a list of sources for Wilke, and pulling in as much evidence as he could. By all accounts, Wilke reciprocated with his own efforts, and stayed in contact with Markopolos.

Markopolos' complaints about the SEC start ticking up in 2006. At the time, the SEC was struggling to bring a fraud case against Integral Partners, five years after the fund collapsed. In one email, Markopolis opines, "The SEC is in way over their heads with respect to hedge fund frauds that much is clear." At this point, the Journal was probably Markopolos' best hope for exposing Madoff. He writes:

That's why I called the Wall Street Journal RE Madoff. If the SEC took this long to address a simple derivatives fraud like Integral, what chance to they have with Madoff?

By March, Markopolos was struggling to arrange a meet with Wilke, but he was still optimistic, based on the Journal's prior performance:

The REFCO Story appeared in the Wall Street Journal on Friday and they never opened for business on Monday because they filed for bankruptcy on Sunday. That's the WSJ advantage. Enron, number 7 on the Fortune 500 list, appeared on the cover of the WSJ. They lasted 24 days before their bankruptcy filing. Madoff will be no different...

I trust that by now, you are getting a sense of just how tragic all this misplaced trust is!

Markopolos stayed on the hook with the Journal through 2006. In August, he finally mentions that he's "meeting with the WSJ in two weeks," a meeting he secured after threatening to take the story to "Ben Stein over at Barron's." An "immediate response" from the WSJ, with a meeting set-up, was his reward.

Even still, the next reported contact with Wilke was at the end of September 2006. Wilke was still working the story at that time, but it's telling that in his September email, he captures the effort as one "to get the Bernie Madoff Story up and running."

Things seemed to unravel from there:

11/20/2006, Markopolos email to Frank Casey:

"[Wilke] said that his editor thinks that hedge fund scrutiny will increase now that Democrats are in power and greenlighted John's investigation starting in January.

I guess we wait and see what transpires...the guy does top shelf corruption stories, but everything he investigates in on a schedule."

By January 2007, Markopolos had detected further disturbing news on Madoff, still sending the news to Wilke like shock and awe: "Bernie Madoff purported to deliver 8.45% to his investors in 2006...It didn't happen because it is mathematically impossible."

The defibrillation didn't help. By February 2007, Markopolos is sounding a downcast note: "The Wall Street Journal's John Wilke has been a huge disappointment. Obviously they were the wrong choice. Eventually Bernie will blow up and everybody will say, 'I told you so.'"

Nevertheless, at the end of June, Markopolos is back in touch with Wilke, encouraging him to go out on strike: "Keep it up. Murdoch would be poison for the paper." If Wilke continued to be a "disappointment," Markopolos didn't let on. His Murdoch criticism was larded with praise for the paper and its "insightful financial journalism" and the need to preserve it.

So, at some point, Wilke manages to get back in Markopolos' good graces. But movement on the story seems to grind to a dead halt soon after. For months, the collected emails from Markopolos are mainly filled with gallows humor on the coming disaster, shared with the handful of contacts with whom he'd been pursuing the investigation.

By his own prepared testimony, Markopolos and Wilke have remained on good terms:

Mr. Wilke and I would become friends over the course of the next three years. Unfortunately, as eager as Mr. Wilke was to investigate the Madoff story, it appeared that the Wall Street Journal's editors never gave their approval for him to start investigating...there were several points in time when he was getting ready to book air travel to start the story and then would get called off at the last minute. I never determined if the senior editors at the Wall Street Journal failed to authorize this investigation."

For his part, Markopolos, in his testimony before Congress, reiterated all of this, taking the blame off of the reporter and onto the Journal's higher-ups. Gary Weiss captured that moment:

Markopolos just raised the issue of his contacts with the Journal at the hearing, saying "I believe that senior editors of the Journal respected and feared Mr. Madoff" and wouldn't let him "get on the plane" and meet with him on the fraud.

At the very least, the Journal was willing to report on the fact that Markopolos had accused them of shirking their duty to their readership. But, by Weiss' analysis, the Journal blew it, and it's really hard to disagree. The Journal had this story in its pocket and could have ruled the street with it, but they passed? Why? Who knows. Maybe they thought that inaction would turn a corrupt Ponzi scheme into a good investment. Whatever the case, we have a long list of people who've been let down. Any subscriber with a nickel's worth of good sense has got to ask themselves if they want to be next.

That Bernie Madoff managed to deceive scores of people is not in question, and it's not even really news at this point. The real story is that -- like so many other frauds I could mention -- he didn't manage to fool all of the people, all of the time. It's just that those who don't get fooled don't seem to get any attention. I guess the big takeaway -- and it's a sad one -- is that is you want to expose widespread, catastrophic, fraudulent financial skullduggery, don't bother going to the Journal. Unless, of course, you can work in a hot aerobics instructor. I mean, Murdoch's at least got some set of standards, right?