Harry, several years have now passed since your famous Congressional testimony exposing Bernie Madoff. How has it been to work under the media’s spotlight?

I did my professional duty investigating Madoff’s global criminal organization and testifying before various agencies of the U.S. government regarding the scheme. These days, I shy away from publicity so that I can keep busy investigating fraud cases against crooked Wall Street firms that cheat investors. I find great satisfaction in detecting financial fraud schemes and building teams of whistleblowers to file cases under seal (in secret) with law enforcement agencies so that the perpetrators can be brought to justice and so that investors can receive their money back. I wouldn’t be able to do my casework if I responded to every interview request that I received. However, I was thrilled to be asked to sit for this interview because CFA Society Toronto has always impressed me. Your Society serves as an important role model for Societies globally.

A lot of egregious cases of financial fraud, including your whistleblower case against Bernie Madoff, have been uncovered, and yet you are as busy today as ever in your fraud investigation work.

Indeed. Currently, I am working on multi-billion, multi-year foreign exchange pension fraud cases involving two large U.S.-custody banks. I also completed an insider trading case and several smaller, but no less damaging, Ponzi schemes. Prosecution for one such scheme settled recently, and the fund operator received over three years in prison. I am also always busy with bank money-laundering cases, and what I discovered is that many large U.S. and European banks are nothing more than organized crime rings masquerading as financial institutions. They act as if they are above the law, “too big to fail, too big to jail.” Unfortunately, many of their transnational criminal activities still go unpunished.

I believe the big banks should not have been “rescued.” Rather, their shareholders should have been wiped out and their bondholders made to accept equity ownership and made to appoint new, competent boards to select new management that was both honest and competent. These banks could easily have been recapitalized, and they’d be in much better shape today if we had handled them as pre-packaged bankruptcy reorganizations. All too often, the same people that ran these institutions into the ground in 2008 are still in charge, and their boards of directors are mostly intact too. It would be impossible to have confidence in these large banks today without a total housecleaning at the top first.

Why do you think it is so difficult to detect fraud and believe the sober facts?

Take Europe, for example. European banks are, I believe, five years behind American banks in terms of their financial reporting. Many are continuing to undercount overwhelming toxic liabilities sitting on their balance sheets and many are likely insolvent. The euro monetary union is unstable. It’s a matter of when, not if, it will fall apart. You cannot have a currency union based on fraudulent financial statements. To believe in the EU would be to believe in Enron, WorldCom, and Tyco too. I doubt that any CFA charterholder truly believes any budget deficit numbers coming from the EU. How many times can a European country falsify its budget deficit numbers before you stop trusting it? How many different sets of budget numbers have Greece, Italy, and Spain issued? Why would anyone ever trust them again after the first set of falsehoods?

“I would even argue that if CFA charterholders had been less trusting prior to 2008, we might have prevented the crisis”

For individuals, the picture is further complicated because of recent market history. We are still not at the March 2000 market highs, if measured on an inflation-adjusted basis, so the U.S. and other countries’ investors are way behind on achieving their retirement goals. Trying to catch up, they reach for yield and for highly risky investment propositions where return objectives are unlikely to be achieved. As such, they are easy targets for securities fraudsters. Time and again, they risk all of their savings by placing all their eggs in one basket—and all too frequently placing them with a Ponzi scheme manager—or by choosing the wrong manager or investment.

Regulators are grossly underfunded in your country, just as they are in most countries, the U.S. included. The Canadian financial industry must be ever more vigilant, as fraudsters will take their business to the more lightly regulated markets. Less-regulated markets have the most problems—look at Cyprus today. Its banking system was basically unregulated, and it was also way too big for the country’s GDP. But depositors realized too late that their accounts were not safe there after all. I believe that any smart, legitimate business will only want to be operating in competently regulated markets that ensure fair dealings.

Oftentimes we hear of large banks threatening to move their operations overseas to less-regulated jurisdictions. I think Cyprus has proven this to be an idle threat. No investor who came by his or her money legitimately would ever seek to invest in a less-regulated bank in a secrecy or haven nation because those countries offer no investor protections. It’s amazing to me that we investors allow our securities regulators to be chronically underfunded. Sadly, all too often, financial industry lobbying keeps our regulators from obtaining sufficient budgets or enforcement powers, and that’s wrong on every level. Competent regulation leads to healthier capital markets and to a lower cost of capital for businesses. Those who lobby against enhanced regulatory powers for enforcement agencies are almost always the ones with the most to hide.

“I was thrilled to be asked to sit for this interview because CFA Society Toronto has always impressed me. Your Society serves as an important role model for Societies globally.”

What does the future hold for fraud? With more sophisticated detection systems, more dedicated resources, and more regulation, will fraud get more sophisticated?

Not only has financial fraud been moving to less-regulated markets, but indeed it grows ever more sophisticated. The biggest problem is that law enforcement is always going to be several steps behind. Most of the large fraud cases these days are transnational, and a majority take place via the Internet. The bad guys operate at the speed of the Internet, the speed of a wire transfer, or via instant messages. The slowest that securities fraudsters operate is when they use overnight express parcels. Contrast that with law enforcement today, which is stuck using diplomatic treaties and rules from the early 1900s. The respective countries’ ministries must communicate to obtain a court order, which then goes to the other country’s regulatory authorities. This can take months or years, and by then it’s too late. It’s a grossly inadequate convention to use in the 21^st century. Thankfully, there is now a global Economic Crime Agencies Network (ECAN) formed last year in the U.K. to help develop quicker, more efficient communication and action on transnational crimes. Next year’s ECAN meetings will be hosted by Singapore’s Corrupt Practices Investigation Bureau, and I hope that Canada will choose to send an official delegation to join other nations’ white-collar law enforcement bodies that are already ECAN participants. Fighting transnational economic crime requires transnational cooperation among our law enforcement bodies.

For CFA charterholders eager to heed the lessons and the warnings of fraud exposés in their practice, what are the key things to look for?

When analyzing an investment manager (or any company), start at the bottom of that organization’s pyramid and work your way up: from the back office, through the middle office, to trading, and to sales and marketing. Work your way to the top until finally you meet with the firm’s senior executives. Then compare all their stories. If they do not match, if you do not get a strong, single, cohesive message, run in the other direction.

A CFA charterholder must never outsource his or her own due diligence responsibilities. Our industry sometimes seems to be 100 percent trust and zero percent verify, yet you see failure of this all-too-trusting attitude time and time again. Most professionals do not check anything, but instead rely on the statements of others. We need to have a heck of a lot more verification in our profession. Rely on your own analysis, your own eyes, and your own common sense. As a charterholder, you have a unique set of analytical skills: use them always.

“As a charterholder, you have all of the required skills required to do your own fact-checking and to do it competently, with integrity, and better than just about anyone else.”

For example, with prudent independent research, it was possible to detect that the AAA-rated CDOs and AAA-rated Mortgage Backed Securities that fixed income managers were purchasing for their clients’ portfolios leading up to the global financial crisis were toxic waste. None of those investments would have fooled a charterholder who did their own proper due diligence. I would even argue that if CFA charterholders had been less trusting prior to 2008, we might have prevented the crisis. But too many investment professionals failed to read the prospectuses, trusted the investment banks’ representations and warranties, trusted the ratings agencies’ ratings, trusted that the underlying mortgages were valid, and it led to a sea of tears for all involved. Question everything. Don’t farm out your due diligence to regulators, ratings agencies, accounting firms, or investment banks. As a charterholder, you have all of the required skills required to do your own fact-checking and to do it competently, with integrity, and better than just about anyone else.

Any final thoughts for CFA charterholders reading this article?

I am very proud to be a CFA charterholder. CFA Institute is the bright shining beacon for our profession and for investors. Our members speak up in front of regulatory authorities worldwide in favour of fair dealing, transparency, and in support of other critically important ethical issues. We have a strong and unified voice and abide by a strict Code of Ethics. And CFA Institute sets the highest possible standard with its own governance. Hopefully, more pubic companies will look at CFA Institute governance standards and raise their own to match ours. Unfortunately, there are powerful vested interests that benefit immensely from maintaining opaque, unfair markets. We certainly have our work cut out for us.