No One Would Listen: A True Financial Thriller (13 page)
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Authors: Harry Markopolos
BOOK: No One Would Listen: A True Financial Thriller
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The only chance the SEC had to even the playing field was the extensive use of whistleblowers. The agency needed people on the inside to expose corruption, but it offered no incentives to encourage those people to come forward. This isn’t true only in the SEC; it’s pervasive throughout government agencies and private industry. People who come forward to expose corruption risk their jobs, their personal relationships, and even their lives. Rather than being celebrated for their honesty and integrity, too often they end up alone and embittered. The sad truth is that in too many cases whistleblowers have gotten badly screwed. In the past few years I’ve come to know several of them well, and this includes people who have received large rewards for exposing frauds that robbed the government of hundreds of millions of dollars, and the truth is that many of them are sorry they ever got involved. The money they eventually received wasn’t worth what they had to go through simply to do the right thing. The SEC whistleblower program was extremely limited in scope—it didn’t apply to Ponzi schemes, for example—as well as in the protections it offered.
Like all whistleblowers, I had taken a risk preparing this submission and showing up at the SEC offices. And then to be so easily dismissed by a powerful senior enforcement executive who had absolutely no understanding of the industry he was supposed to be monitoring was really discouraging.
As Ed and I rode down in the elevator we looked for something positive that had come out of that meeting—we rode all the way down to the bottom floor but we couldn’t find any positive outcome.
I never received a response of any kind from the Boston office of the SEC after that meeting. Not even a “Thank you, and can we validate your parking lot ticket?” Ed really encouraged me to keep going; he kept pushing me. Being smart enough to understand the tremendous damage that Madoff could inflict on the industry, as well as on the SEC, he remained deeply concerned about it. He told me he was going to keep pressing for answers inside the agency, but urged me to continue tracking Madoff and gathering as much additional evidence as possible. At that point I don’t believe I had even told Ed about Frank and Neil. I really wanted to keep them out of it for their own safety.
I believe Ed would have tried to move up the SEC food chain, but as he explained to me, he had run into a jurisdictional problem. The SEC’s New England region extended south only as far as Greenwich, Connecticut. Even if Ward had wanted to, he would not have been permitted to send an investigative team into New York City. Once you crossed into New York State, you had to deal with the New York regional office. And, Ed admitted, the two offices were extremely competitive; there was not a lot of respect in either office for the other one. Although he was going to forward my submission to New York, he pointed out that the chances of the New York office warmly embracing a case handed to them by the Boston office were somewhat limited. “I really don’t have a choice,” he told me. “I’ve got to forward this to New York for action.”
Obviously I was disappointed. I had expected that we would hand over this case to the SEC and watch happily from the sidelines as they closed down Madoff. Then I could get back to my real life, which by then included my new wife, Faith. Faith is an amazing woman. She is Chinese; her parents were senior diplomats in the Chinese Foreign Ministry, and for several years they represented the Communist Chinese government in New York. Faith came to the United States as an exchange student and ended up living with a Jewish family who helped her get a scholarship to Wellesley College. When I met her she was working as an analyst at Fidelity.
We got engaged the old-fashioned way. She gave me a deadline and told me if we weren’t engaged by that date I was history. Her dream was a two-carat engagement ring and I wanted to fulfill that dream. I found out one carat was $3,000, so I naively assumed that two carats would be $6,000. That assumption was wrong. The price didn’t double; it increased geometrically to about $20,000. Maybe Bernie had billions, but I certainly didn’t.
I tried to negotiate with her, suggesting, “Maybe we shouldn’t do the same old diamond ring thing. Jewelers rip you off. Diamond rings are like new cars—they lose half their value the moment you take them out of the showroom. I think we should get cubic zirconia because diamonds have flaws in them, but cubic zirconias are flawless, just like you.”
She didn’t buy that one for a second. So I tried to reason logically with her. “I’ll tell you what. I have a buddy, Paul, who works at a trading desk down in Westchester, and he thinks the only silicon worth investing in is a set of breast implants. When he got married, instead of giving his wife a diamond ring he gave her a $6,000 set of breast implants.” I paused for effect, and added hopefully, “I’m willing to do the same for you. That way it’s something we both can enjoy.”
We settled for a carat and a half.
After we were married I convinced her to become an American citizen. Truly one of the most memorable days of my life was watching Faith become a citizen. She was part of a large group taking the oath of allegiance together. I cried, literally. When you’re watching this ceremony, when you’re listening to a cacophony of accents reciting the pledge of allegiance, it is absolutely impossible not to think about this country and the American values. I’m not going to claim I thought about Bernie Madoff at that moment, but I did think of my Greek family who came here to earn an honest living and taught their children the difference between right and wrong.
I have been asked many times why I continued to pursue Bernie Madoff when no one except the members of my team showed any interest and, if I was right and this was a Ponzi scheme, there was no chance of receiving a bounty. The answer is because what he was doing was wrong and he needed to be stopped. I didn’t put any human face on it. I didn’t do it for any potential reward or to save corporate investments. At that time I didn’t even know about affinity schemes. I did it because my parents had taught me the difference between right and wrong.
That was the reason that even after Ward showed no interest in my submission it never even occurred to me to drop our investigation. Frank, Neil, and I never even discussed that possibility. We were intellectually and emotionally engaged in the pursuit of a master criminal, disguised in plain sight as a highly respected member of the community. In some ways it was like playing a real-life game of Clue: Bernie’s in the parlor with $5 billion!
We were living with the constant feeling that we were just about there, that if we could get just a little more evidence the SEC would be forced to listen to us. And when that happened, it would be bye-bye Bernie.
For Frank, of course, there actually was the potential of a pot of gold at the end of this particular rainbow. Frank continued to believe that Bernie was front-running. If Madoff’s fund was closed down, Access alone had at least $300 million to invest, and Frank was confident that I could create a legitimate product whose returns mimicked Bernie closely enough to grab a chunk of that business—and perhaps a lot more.
What our investigation lacked up to that point was any inside information. We had Bernie Madoff’s numbers, but we knew nothing about him or the way he operated. He existed only through his reports and charts and beautiful returns. I had seen photographs of his brother, Peter, and his two sons, but I had no idea what he looked like. The word most often used to describe him was
distinguished,
which on Wall Street generally means rich and powerful. Later, as our investigation intensified, I would try to find a disgruntled employee or a former employee who was willing to talk about the company. I’ve done several investigations since this first one and I’ve always been able to recruit one or two insiders who would talk to me. But in this case we were never able to find anyone like that. If there were unhappy employees who knew anything about Madoff and his hedge fund operation, we never found them. He kept his employees. He paid them very well and apparently provided great benefits. And those few people who had left for other opportunities either had no inside information or felt they had been treated fairly.
distinguished,
which on Wall Street generally means rich and powerful. Later, as our investigation intensified, I would try to find a disgruntled employee or a former employee who was willing to talk about the company. I’ve done several investigations since this first one and I’ve always been able to recruit one or two insiders who would talk to me. But in this case we were never able to find anyone like that. If there were unhappy employees who knew anything about Madoff and his hedge fund operation, we never found them. He kept his employees. He paid them very well and apparently provided great benefits. And those few people who had left for other opportunities either had no inside information or felt they had been treated fairly.
But in the winter of 2001 we got very lucky, and added an investigative journalist to our team. Frank Casey had been invited by the hedge fund industry magazine
MARHedge
to speak to potential investors at a conference in Barcelona, Spain.
MARHedge
had been founded in 1994 to provide information for the rapidly growing hedge fund industry. It was the first monthly magazine aimed specifically at fund managers and investors, and had become a must-read for everybody in that industry.
MARHedge
conferences brought together the heavy hitters from both the United States and Europe, so this was an important sales opportunity for Frank. He had been invited to speak to fund managers on the potential value of structured financial notes to hedge funds. He was trying to convince managers to let Rampart run a portfolio of those notes for their funds.
MARHedge
to speak to potential investors at a conference in Barcelona, Spain.
MARHedge
had been founded in 1994 to provide information for the rapidly growing hedge fund industry. It was the first monthly magazine aimed specifically at fund managers and investors, and had become a must-read for everybody in that industry.
MARHedge
conferences brought together the heavy hitters from both the United States and Europe, so this was an important sales opportunity for Frank. He had been invited to speak to fund managers on the potential value of structured financial notes to hedge funds. He was trying to convince managers to let Rampart run a portfolio of those notes for their funds.
As Frank and his wife climbed into the backseat of a cab that would take them from the Barcelona airport to the hotel, a somewhat harried younger man asked, “Do you mind if I share the cab? I’m also on my way to the conference.”
After settling in the front seat, Michael Ocrant introduced himself. “I’m from
Managed Accounts Reports,”
he said, reaching across the seatback and shaking hands.
Managed Accounts Reports,”
he said, reaching across the seatback and shaking hands.
“I’m with Rampart,” Frank responded. “We’re an options management house,” he continued, explaining his product. Frank and Mike Ocrant were doing the industry dance, learning as much about each other as quickly as possible, calculating to see if there was a common ground on which they might meet for some mutual benefit. Frank Casey assumed that Ocrant knew a lot of the fund managers and might well be able to make some valuable introductions. Ocrant was a reporter, continually building a deep reservoir of sources and information, always searching for his next big story—although it’s doubtful he realized his next big story was sitting in the backseat of this cab. Finally Frank asked, “And what do you do for
MAR
?”
MAR
?”
“I’m the editor-in-chief, but I also do some investigative reporting on a selective basis,” Ocrant said, in a way that Frank remembered was self-assured but not overbearing. As they began talking, Ocrant explained that he had been the reporter who uncovered the Hillary Clinton cattle-trading scam. He said, smiling, “I’ll bet you didn’t know that Hillary was the world’s best cattle trader.”
In 1994, as Ocrant explained to Frank and his wife, the
New York Times
had revealed that in 1978 Hillary Clinton, at that time the wife of the governor of Arkansas, had successfully turned a $1,000 investment in cattle futures into $100,000 in only a year. In 1978 $100,000 was a substantial sum of money. Just after the story was published, Ocrant had been at a cocktail party at the Futures Industry Association conference in Boca Raton, Florida. A well-known futures industry executive had whispered in his ear, “Look at the broker,” then walked off. Ocrant did his homework, discovering through research and sources that a corrupt broker had been allocating his trades, giving the successful trades to his friends and most important clients, while giving the bad trades, the losers, to people who never realized what he was doing. In response to the initial reports Hillary had claimed she made that money by reading the
Wall Street Journal.
Unlikely, Ocrant thought, and had spoken to the chairman of a commodities exchange, an older, completely bald man. “I said to him,” Ocrant told Frank Casey, “‘What are the chances that she’s telling the truth—that it really happened that way?’
New York Times
had revealed that in 1978 Hillary Clinton, at that time the wife of the governor of Arkansas, had successfully turned a $1,000 investment in cattle futures into $100,000 in only a year. In 1978 $100,000 was a substantial sum of money. Just after the story was published, Ocrant had been at a cocktail party at the Futures Industry Association conference in Boca Raton, Florida. A well-known futures industry executive had whispered in his ear, “Look at the broker,” then walked off. Ocrant did his homework, discovering through research and sources that a corrupt broker had been allocating his trades, giving the successful trades to his friends and most important clients, while giving the bad trades, the losers, to people who never realized what he was doing. In response to the initial reports Hillary had claimed she made that money by reading the
Wall Street Journal.
Unlikely, Ocrant thought, and had spoken to the chairman of a commodities exchange, an older, completely bald man. “I said to him,” Ocrant told Frank Casey, “‘What are the chances that she’s telling the truth—that it really happened that way?’
“And he responded, ‘About the same as me waking up tomorrow with a full head of hair.”’ Mike Ocrant’s story was carried around the world, and he later received the National Press Club’s annual award for breaking news.
It was sometime during this long drive to the hotel that it occurred to Frank that Ocrant could be a very valuable ally in the pursuit of Madoff.
He heard the opening he was looking for when Ocrant began discussing the hedge fund industry, claiming that he knew most of the major players in the business.
MARHedge
maintained a database that tracked about three-quarters of the fund managers. There weren’t that many of them. At that time you could count on your fingers the number of funds running even $2 billion in assets.
MARHedge
maintained a database that tracked about three-quarters of the fund managers. There weren’t that many of them. At that time you could count on your fingers the number of funds running even $2 billion in assets.
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