Harry Markopolos has unearthed a new fraud: The Boston Transit Authority (MBTA) pension fund is $500 million deeper in the hole than previously reported. The half a billion dollar gap is due to bad investments, fraudulent accounting and unrealistic actuarial assumptions, he revealed at a June 9 seminar. Furthermore, there’s reason to believe that MBTA’s problems are endemic among similar pension funds.
Markopolos, an independent forensic accountant and certified fraud examiner (CFE), earned his spurs as an analyst by exposing Bernie Madoff’s Ponzi scheme. He first submitted evidence against Madoff to the U.S. Securities Exchange Commission (SEC) in May 2000. From 2001 through 2005, he continued to alert the SEC. He provided additional evidence and supplied supporting documents; but each time, the SEC either ignored him or gave his evidence and warnings only a cursory investigation.
Meanwhile, Madoff continued to fleece his clients for eight years. Markopolos harshly criticized the SEC for ignoring his warnings about Madoff. “Nothing was done. There was an abject failure by the regulatory agencies we entrust as our watchdog,” he stated in 65 pages of prepared testimony.
After the SEC’s failures and criticism of the agency, Markopolos was fearful of taking complaints to the industry’s self-regulatory authority, the National Association of Securities Dealers (NASD) [since succeeded by the Financial Industry Regulatory Authority (FINRA)]. That’s because, in a classic case of an infestation of wolves guarding the hen house — Madoff’s brother Peter until 2008 was vice chairman of the NASD.
Markopolos also feared that Madoff had associations with Russian Jewish organized crime. Curiously, the big firms on Wall Street had placed no funds with Madoff, only the muppets did. Madoff largely preyed on his own Jewish community.
The case is touched upon in the following “60 Minutes” interview.
In February 2016, Markopolos revealed he has been working on three multibillion-dollar schemes, including one that will be bigger than Madoff’s. He didn’t name names, stating that he was giving the proper authorities the evidence with which to conduct investigations. But, par for the course, 16 months later nothing is forthcoming from Markopolos’ new warnings.
Now, Markopolos is naming a new case, pointing to the unfunded status of the MBTA (Boston Transit Authority). When my writing focused more on the financial markets, it was (and still is) my contention that bubble-market criminals have saturated the American pension-fund system.
AdvisorPerspectives.com: … The underlying cause of the MBTA’s problems was poor management and oversight. “No good outcomes result when you mix politics and money,” Markopolos said.
The problems began with failed investments in two hedge funds and culminated in the more widespread problems that Markopolos uncovered.
The troubles at the MBTA began in 2012, when it was revealed that it had lost $25 million in an investment in Fletcher Asset Management [FAM], a hedge fund run by Alphonse “Buddy” Fletcher. The MBTA had been hiding this loss until it was exposed by an investigative reporter from The Boston Globe.
Fletcher had promised guaranteed returns of 12%, similar to Madoff’s sales pitch. It was nothing more than a Ponzi scheme. In addition to the MBTA, three Louisiana pension funds lost $100 million in the scheme.
What made the Fletcher loss so galling, according to Markopolos, was that its chief investment officer, Karl White, had been the executive director of the MBTA pension fund. One year after leaving the MBTA, he convinced it to fund Fletcher. …
The Fletcher irregularities went unnoticed by the MBTA’s board, which Markopolos said consisted of mostly non-college graduates – union members who worked on or operated the city’s buses and subways. The board had one person with an MBA and a couple of lawyers, who Markopolos said were not experts in investing.
Neither the MBTA’s auditor, KPMG, nor Marco Consulting, its pension consultant, reported any problems with the Fletcher investment.
In 2013, the MBTA invested approximately $10 million in Weston Capital, a hedge fund run by Jason Galanis, whose father had run a big Ponzi scheme in the 1970s, stealing approximately $400 million from mostly Hollywood investors.
Markopolos said in 2007 that Galanis bought shares in Penthouse magazine, filed a false 10Q with forged signature, and had caused its auditor, Deloitte, to resign. All this happened before the MBTA made its investment in 2009.
“How much due diligence do you have to do to invest with Weston Capital?” Markopolos asked, rhetorically.
… KPMG should have found the discrepancies. But Markopolos said its auditors are typically “22-year olds who catch more colds than frauds.”
It’s even more shocking when one considers that Weston Capital’s principals had already been exposed for forgery and fraud even before the funds were handed over. One can’t help but wonder how much cocaine and hookers it took to pull this off. The Hollywood investors who lost millions through Galanis’ father’s Ponzi schemes included Dan Aykroyd and Eddie Murphy. Before John Galanis was tossed into prison for the first time in 1973, he convinced the former head of the New York Stock Exchange to invest in his hedge fund.
In February this year, the 400-pound, 73-year-old John Galanis and his sons, Derek and Jason, were sentenced to prison terms of 11 and six years respectively for massive securities fraud schemes. The story of the elder Galanis and his clan provide the grist for a whole book. As best as we determine, the family has ties to Kosovo. In 2001, the younger Galanis brother was arrested for his part in an ecstasy drug ring. This information could have been easily gleaned via an open-source search by any due diligence officer.
Even after the fleecing, the MTBA managers involved have not been fired. Markopolos describes fraud problems as endemic in the pension arena. The New Nationalist goes a step further: Both pension operators and large central banks are receptacles of massive criminal frauds, Ponzi schemes, securities inflation and front running — but, all the more chilling, the private central banks remain immune from audits and independent oversight.