No One Would Listen: A True Financial Thriller (15 page)
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Authors: Harry Markopolos
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About three years later Neil confirmed this to be a viable scenario. By that time he was working at Benchmark Plus in Tacoma, Washington. His employer was friendly with an extraordinarily successful investor named Edward Thorp, who had conducted due diligence on behalf of another institution many years earlier. As he told Neil’s boss, he’d gotten ahold of some of Madoff’s trade tickets and compared them to OPRA tapes. He was nice about it, but said he found some
discrepancies—
meaning he was unable to match all the reported trades against the OPRA data. Thorp promptly advised his clients and anyone in his network to stay away from Madoff, but didn’t take it any further. And this is why self-regulation doesn’t work. If industry practitioners don’t report suspected fraud, nor have any meaningful incentive to do so, and if government agencies don’t have systems set up to take in, evaluate, and investigate whistleblower tips—then self-regulation can never work.
discrepancies—
meaning he was unable to match all the reported trades against the OPRA data. Thorp promptly advised his clients and anyone in his network to stay away from Madoff, but didn’t take it any further. And this is why self-regulation doesn’t work. If industry practitioners don’t report suspected fraud, nor have any meaningful incentive to do so, and if government agencies don’t have systems set up to take in, evaluate, and investigate whistleblower tips—then self-regulation can never work.
I never got a response from the SEC for this second submission, either. It wasn’t until September 2009 that I finally found out what had happened to it. David Kotz, the SEC inspector general, who was charged with trying to figure out why the agency had proved to be completely dysfunctional, reported, “Although this time the
BDO
did refer Markopolos’ complaint,
NERO
decided not to investigate the complaint one day after receiving it. The matter was assigned to an Assistant Regional Director in Enforcement for the initial inquiry, who reviewed the complaint, determined that Madoff was not registered as an investment advisor and the next day sent an e-mail stating, ‘I don’t think we should pursue this matter further.’ The OIG could find no explanation for why Markopolos’ complaint, which the Enforcement Attorney and the former head of NERO acknowledged was ‘more detailed than the average complaint’ was disregarded so quickly.”
BDO
did refer Markopolos’ complaint,
NERO
decided not to investigate the complaint one day after receiving it. The matter was assigned to an Assistant Regional Director in Enforcement for the initial inquiry, who reviewed the complaint, determined that Madoff was not registered as an investment advisor and the next day sent an e-mail stating, ‘I don’t think we should pursue this matter further.’ The OIG could find no explanation for why Markopolos’ complaint, which the Enforcement Attorney and the former head of NERO acknowledged was ‘more detailed than the average complaint’ was disregarded so quickly.”
Of course, I didn’t know any of that. I was still suffering under the delusion that the SEC was a reasonably competent agency that actually served some purpose. So we just kept going.
Like Ocrant, we were beginning to believe that our original estimates of the size of Madoff’s fraud were low, maybe very low. He was voracious, sucking up hundreds of millions of dollars from feeder funds around the world—many of whom did not even know about the others. Every couple of months we were identifying another fund that was feeding cash to him. Madoff just kept growing. Originally we had him at $3 billion; then it was $7 billion. It was getting beyond absurd. I’d get a phone call from Frank, who’d tell me, “You’re not going to believe this, but it’s $8 billion and guess who has him?”
Before receiving that fax in early March identifying Fairfield Greenwich’s Sentry Fund, for example, I had never heard of it. So I had no way of knowing that this fund, which basically did nothing more than hand over its then $3.3 billion portfolio to Madoff, charging a fee to investors of 1 percent of the assets it was managing and 20 percent of the profits it reported, was Madoff’s biggest American client. Biggest
American
client. It’s doubtful anyone will know how much the European and Asian funds had invested with him, as we were to learn there were some pretty important reasons many Europeans never admitted they had money with Madoff. But in the material I received, Fairfield boasted that the fund had lost money in only four of 139 consecutive months. This was arguably the most extraordinary winning streak in Wall Street history: In almost 12 years of running a market-sensitive strategy, Fairfield claimed to have suffered losses in only four months. And somehow investors believed that!
American
client. It’s doubtful anyone will know how much the European and Asian funds had invested with him, as we were to learn there were some pretty important reasons many Europeans never admitted they had money with Madoff. But in the material I received, Fairfield boasted that the fund had lost money in only four of 139 consecutive months. This was arguably the most extraordinary winning streak in Wall Street history: In almost 12 years of running a market-sensitive strategy, Fairfield claimed to have suffered losses in only four months. And somehow investors believed that!
By now Neil and I were used to reading these astonishing claims. Whenever we got another one in, Neil would look at it and shake his head. “Wow,” he’d say, the sarcasm dripping from his words. “Bernie is amazing. Bernie is the best.”
The few pages I got basically duplicated what we’d seen previously—“We’re handing your money to a manager who will use a ‘split-strike strategy’ and make whatever investment decisions he chooses”—although they were very careful never to specifically identify Bernie Madoff. When I went to the Fairfield Greenwich web site I was immediately struck by its extensive claims about how the firm protected its investors’ money: “The nature of FGG’s manager transparency model employs a significantly higher level of due diligence work than that typically performed by most fund of funds and consulting firms. This model requires a thorough understanding of a manager’s business, staff, operational practices, and infrastructure.”
When Mike Ocrant got this material as part of his investigation, he decided to have his experts crunch the numbers. The
MARHedge
database included historical hedge fund returns that could be analyzed using proprietary software that could compare the Fairfield returns to the returns of all other hedge funds in the database, as well as to those of hedge funds using the same or different strategies. It could slice and dice the Fairfield numbers to provide a great amount of information. This historical comparison concluded that not only was Madoff the largest hedge fund in existence, but on a risk-adjusted basis it was one of the best-performing hedge funds in history. What it didn’t tell Ocrant—what it wasn’t programmed to find—was that the numbers were fictitious.
MARHedge
database included historical hedge fund returns that could be analyzed using proprietary software that could compare the Fairfield returns to the returns of all other hedge funds in the database, as well as to those of hedge funds using the same or different strategies. It could slice and dice the Fairfield numbers to provide a great amount of information. This historical comparison concluded that not only was Madoff the largest hedge fund in existence, but on a risk-adjusted basis it was one of the best-performing hedge funds in history. What it didn’t tell Ocrant—what it wasn’t programmed to find—was that the numbers were fictitious.
Mike called Frank when he got the analysis with the results. “It’s amazing,” he told him. “This guy has got beyond astounding returns for a guy we’ve never heard of.”
Ocrant went further. At an Association of Financial Engineers conference he had heard a lecture by Andrew Weisman, who was then the chief investment officer and a board member at Nikko Securities, where he oversaw that firm’s hedge fund of funds operation, and was generally considered one of the real experts in hedge funds. He called Weisman and asked him to take a look at a return stream to see if it made sense. He sent him only the raw data, removing any references that would have allowed anyone to identify Fairfield or Madoff.
Weisman called him about a week later. He’d asked his team to do some reverse engineering, he explained, then said, “This could be done. You could get this kind of return stream if you were a market maker.” Then he added, “But to get this kind of smooth return you probably have to have some front-running involved.”
“Okay. Now what if I told you that this is a fund managing as much as eight billion dollars.”
Weisman didn’t hesitate. “It’s impossible,” he said flatly. “In that case, I’d have to think it might be a Ponzi scheme.”
Ocrant took a long, deep breath. His journalism professor had nailed it: It always comes back to the money.
We were an extremely loosely knit team. Ocrant never officially signed on; we just began including him in our communications. Neither Neil nor I had ever met Mike Ocrant; in fact, we wouldn’t meet face-to-face for many years, and we spoke only a few times. But we were connected through the Internet and the telephone. We shared documents, information, and rumors; we taught Mike the basics of the business, and at some point, we finally understood that the four of us had fallen down the rabbit hole together. The four of us had evidence that certainly would change the financial world. It would create havoc in the markets worldwide—and nobody cared. Maybe even more than a commitment to do the right thing, we became bound together by our frustration.
I continued speaking regularly with Ed Manion. Nothing’s happening, he told me. “I’m not getting any feedback at all.” Having failed to interest the government, I figured my best shot was to publicly expose Madoff’s operation. Once the existence of this fraud was known, even if he didn’t go to jail he’d be out of business. I figured that if people found out this whole thing was a scam, the investors would take their money out and nobody in their right mind would put in new money.
I knew Ocrant was working on an article, but I had no idea how far along it was or when and if it might be published. That
if
was actually a major consideration. Bernie Madoff was a very powerful man. I didn’t have the slightest idea how long his reach was, and I wondered if a subscription-dependent trade magazine would risk its relationship with Madoff and everyone he knew in the industry by printing an expose. So in early March I sent a copy of my May 2000 SEC submission to a senior reporter at
Forbes
, a man I’d been casually introduced to by a friend who was my former finance professor at Boston College. I explained that I was enclosing evidence of what I believed to be the largest Ponzi scheme in history. I like to believe that if someone put a potentially Pulitzer Prize-winning story in my hands and said, take it, I’d be smart enough to at least investigate. But boy, the lack of serious interest was astonishing. I think the editors at
Forbes,
like so many others we were to encounter, were victims of their own hubris. These were people who took pride in knowing that they were the experts on the financial industry. They
knew
that the largest hedge funds were running $2 billion, give or take a few hundred million. So when this editor received a several-page letter from some guy in Boston he’d never heard of claiming that he had discovered a hedge fund six to 10 times larger than anything the experts knew about and it’s a complete fraud, it was pretty doubtful that he was going to take it very seriously. In fact, I suspect that the only way he would have taken it less seriously was if it had been written in crayon. He was just too smart to recognize the truth.
if
was actually a major consideration. Bernie Madoff was a very powerful man. I didn’t have the slightest idea how long his reach was, and I wondered if a subscription-dependent trade magazine would risk its relationship with Madoff and everyone he knew in the industry by printing an expose. So in early March I sent a copy of my May 2000 SEC submission to a senior reporter at
Forbes
, a man I’d been casually introduced to by a friend who was my former finance professor at Boston College. I explained that I was enclosing evidence of what I believed to be the largest Ponzi scheme in history. I like to believe that if someone put a potentially Pulitzer Prize-winning story in my hands and said, take it, I’d be smart enough to at least investigate. But boy, the lack of serious interest was astonishing. I think the editors at
Forbes,
like so many others we were to encounter, were victims of their own hubris. These were people who took pride in knowing that they were the experts on the financial industry. They
knew
that the largest hedge funds were running $2 billion, give or take a few hundred million. So when this editor received a several-page letter from some guy in Boston he’d never heard of claiming that he had discovered a hedge fund six to 10 times larger than anything the experts knew about and it’s a complete fraud, it was pretty doubtful that he was going to take it very seriously. In fact, I suspect that the only way he would have taken it less seriously was if it had been written in crayon. He was just too smart to recognize the truth.
This is an important point. Madoff’s operation was too big to be believed. Once I stated how many billions he purportedly was managing, people stopped listening. In a world in which a $2 billion hedge fund was considered huge, the fact that I was claiming Madoff was running between $12 and $20 billion made me about as believable as those people claiming NASA had staged the moon landing in a warehouse. Journalists, SEC staff, and others just didn’t have enough professional skepticism to at least conduct an initial investigation to see if any of my claims just might be valid.
As it turned out, it didn’t make any difference. When Mike Ocrant finally accepted the fact that Madoff was doing something illegal—whatever he was doing—and that he had enough evidence to support his story, he picked up the phone and called Bernie Madoff. That’s just good journalism; any fair investigative reporter gives the subject of a story a chance to answer all the questions before writing the story. And when the subject refuses to be interviewed, as often happens, it adds just a bit of spice to the story.
But to everyone’s tremendous surprise, Bernie Madoff didn’t refuse. In fact, he welcomed the opportunity. Ocrant placed a cold call to his secretary, introducing himself as a reporter for
MARHedge
and explaining that he was working on a story about Madoff’s money management company and had some serious questions he wanted to ask him. Rather than the secretary making the expected excuses, as had happened when he investigated the New Jersey currency scam, she was calm, polite, and professional. “Can we call you back, please?”
MARHedge
and explaining that he was working on a story about Madoff’s money management company and had some serious questions he wanted to ask him. Rather than the secretary making the expected excuses, as had happened when he investigated the New Jersey currency scam, she was calm, polite, and professional. “Can we call you back, please?”
Ocrant figured that was the easiest way to avoid him, that the call would never be returned; but within minutes his phone rang. Madoff was returning his call. Ocrant believes in being direct with his sources. “I understand that you manage quite a bit of money as part of a separate operation within your securities firm,” he said. “I’ve been talking to a lot of people in the hedge fund industry and they’ve raised some serious questions about this fund, and I’d like to ask you several questions about it.”
People who have something to hide find ways not to talk about it. That’s a big clue to an investigative reporter. Honest people most often will talk until the tape recorder batteries wear out. Mike expected to hear Madoff explain why he couldn’t meet with him at that time, which would be followed almost immediately by a phone call from an officious senior executive at the firm’s public relations agency, asking what specifically Ocrant wanted to talk about and then putting off the meeting for as close to never as they could get.
But none of that happened. Madoff was gracious, if not friendly. He said he was surprised that anyone would be interested in doing a story about his company. He may even have said it was a pretty standard operation. And then he suggested, “Why don’t you come down and we can talk about it?”
“Great,” Ocrant responded. “Let me look at my schedule. When’s a good time for you?”
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