As the economy stalls after eight years of record low rates and a corporate debt binge that will likely end badly, the media is fixated on the next Bernie Madoff. Madoff was behind a $50 billion Ponzi scheme that shocked the country due to his sheer brazenness, and the fact that it went undetected.

The SEC only became aware of it after Madoff turned himself in. Weeks later Allen Stanford's $7 billion Ponzi scheme emerged. The Guardian article, How to stop the next Bernie Madoff, by Congressman Randy Hultgren of Illinois has created a lot of buzz. Mr. Hultgren suggests Madoff was able to thwart the SEC because they were using outdated technology. In my opinion, technology alone won't stop the next Madoff. A backbone would help.

Bernie Madoff had garnered a lot of scrutiny from the SEC. From 1992 to 2008 the SEC received six complaints about fraud pursuant to Madoff. The SEC conducted two investigations and three examinations into Madoff, but according to Hultgren, "the left hand didn't know what the right hand was doing": 

At one point, according to the inspector general, two examinations “were open at the same time in different offices without either knowing the other one was conducting an identical examination.” Madoff slipped through the cracks, and Americans lost billions of dollars. This fraudster was able to fool financial regulators because they are still using 1930s pen and paper technology to handle today’s digital challenges. This hurts investors, markets and the regulators’ own missions. And that’s why, along with some 34 other members of the House of Representatives, I am a sponsor of the Financial Transparency Act, HR 2477.

However, I beg to differ. The SEC knew exactly what it was doing and it knew Madoff was running a Ponzi scheme. It's difficult for investigators to stop someone when high-ranking officials within their own organization are protecting that person.

Madoff Bullied And Intimidated SEC Investigators

Madoff confounded the Street for years after his hedge fund delivered consistent double-digit returns even in years when the overall market was down. Rumors swirled that he was using his brokerage business to subsidize his hedge fund in down years. According to Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead, fraud investigator Harry Markopolos had been screaming to the SEC about Madoff's Ponzi scheme for nearly a decade:

In 2006 after a financial fraud investigator, Harry Markopolos, spent nearly a decade trying to persuade it that Madoff was running a Ponzi scheme, the SEC investigated Madoff. However, the former head of the NASDAQ and Wall Street icon bullied and intimidated SEC investigators. In a taped phone conversation between Madoff and representatives of Fairfield Greenwich, one of Madoff's feeder funds, he called the SEC investigation a "fishing expedition" and implied the SEC "might not press too hard because SEC lawyers have ambitions to go into lucrative private practice and don't want to alienate the sorts of firms that might hire them."

The SEC noted Madoff had lied several times and attempted to stonewall the investigation. Nonetheless, the agency closed the inquiry having found no evidence of fraud.

Technology Alone Will Not Stop The Next Madoff 

Mr. Hultgren's Financial Transparency Act sounds admirable. It proposes that regulators collect searchable, open data and that the data is in a consistent format. This could help regulatory bodies not only detect financial fraud, but detect it quicker. This type of standardized reporting is already happening in other countries like Australia and the U.K.

However, technology alone won't stop the next Madoff. First of all, the government needs to remove the financial incentives for regulators to protect fraudsters; for those who do, the government must hold them accountable. Secondly, who within the government really has the backbone to act? The public is highly skeptical. A message on Twitter had this to say about Mr. Hultgren's article:

Valleyhilltops2: @guardian the problem was that nobody wanted to stop Madoff. More tech will do nothing.

I too remain skeptical. However, Congressman Hultgren might have a chance to change my mind. I expect the S&P 500 (SPY) and the NASDAQ (QQQ) to turn down by the end of year due to a Fed rate hike or some other black swan, such as more turmoil in the EU or another China devaluation. According to Warren Buffett, when the tide goes out you discover who is swimming naked. After eight years of Fed-induced stock market gains, I expect the tide to soon go out.