No One Would Listen: A True Financial Thriller (28 page)

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Authors: Harry Markopolos

BOOK: No One Would Listen: A True Financial Thriller
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In late 2005 a reporter from the hedge fund magazine
Absolute Return,
another publication owned by the company that would later acquire the parent company of
MARHedge,
got hold of a copy of my 2005 Securities and Exchange Commission (SEC) submission. Ironically, Mike had gone to work at the company, Institutional Investor, after leaving
MARHedge.
Mike hadn’t given it to him, and he was reluctant to ask this reporter about his source. We had all agreed that we would keep the identities of everyone—except mine—secret. There is no reason to believe that reporter knew that Mike and I were working together, and Mike didn’t even want to hint at it.
 
The reporter had come to Mike because he had written the original Madoff piece and was wondering if there was a new way to approach it. “He’s looking for a new angle,” Mike told me. “He wants to do another piece, but he needs something to make it newsworthy. He says that a lot of the stuff in the submission has already been reported, and what’s new isn’t a game changer. Is there anything else we should give them?” It was not news that Madoff was managing a lot of money, the reporter had told Mike, and the new red flags in the submission were certainly more detailed than Ocrant had written almost five years earlier, but mostly these things had already been reported.
 
Sometimes I wondered what world these people were living in. Didn’t anyone want to win a Pulitzer Prize?
 
The team batted around some ideas that might convince them to do the story. We had heard a rumor, literally nothing more than a rumor and I don’t remember the source, that based on my submission the SEC had opened an informal inquiry. That was considerably less than a formal investigation, but it was more than twiddling their thumbs and singing “Home on the Range.” Mike finally told the reporter, “I’ve been told, but I can’t tell you my source, that the SEC has opened up an informal inquiry. If you can get somebody to confirm that, that’s probably a pretty good angle.”
 
Apparently the SEC refused to confirm that information. Without this new peg, the reporter went to look for a story that would be more pertinent for the magazine’s hedge fund readership.
 
By this time I don’t think I was capable of being surprised or disappointed by anything that happened in this investigation. Ocrant and
Barron’s
reporter Erin Arvedlund had done their job in 2001-they’d exposed Madoff. So I understood the way journalists were thinking now; if nobody had been outraged by those stories, they needed much stronger ammunition before going after Madoff. What was so obvious to me and my team was obviously confusing to the media.
 
It was Pat Burns who convinced me not to give up on the media. “Go public and finish this guy,” he said. “If investors read the story, he’s going to collapse and he’s going to end up behind bars. Once he’s behind bars you’re safe.”
 
Pat is an arranger; he has tremendous contacts throughout the entire financial industry and enjoys bringing people together for their common benefit. So not only did he urge me to go public, but he also introduced me to John Wilke, an investigative reporter at the
Wall Street Journal
whom he greatly respected. “This is the guy,” he told me. “This is the guy.”
 
Pat Burns made the initial contact with Wilke. In preparation for that I sent him a one-page memo suggesting a three-part package for the
Journal,
which that paper could promote as “the largest hedge fund blowup since that of Long-Term Capital Management in August-October 1998. And, in reality, since it will likely involve hundreds of billions in selling pressure, the losses to investors will be akin to the largest company in the S&P 500, General Electric (with a market capitalization of $373 billion) suddenly collapsing.” I sat in my office late into the night, and as I wrote this I could almost feel the hope igniting inside me again. I included everything I could think of to make this reporter understand how important this story would be. “Therefore,” I wrote, believing completely that this was true, “this is a much bigger story than the falls of Enron and WorldCom, and truly is the biggest finance story since LTCM’s demise that almost led to a systemic collapse of the world’s financial system.”
 
What reporter could resist that pitch?
 
There were actually three stories in this package, I pointed out to Pat. The first one would require “calling the senior equity derivatives folks on Wall Street for their opinion on BM’s strategy.... An earthquake will soon follow.”
 
The second story would be tracking the complete destruction of Madoff’s empire that would inevitably follow the first story. And the third story would highlight the complete ineptitude of the SEC, which would include “the fact that the SEC’s Section 21A(e) bounty program has paid bounties to whistleblowers only twice in its 71-year history and that the bounty only pays rewards for information related to insider-trading cases. General securities fraud is not rewarded.... The lack of a meaningful bounty program allows and encourages small frauds into becoming large frauds.”
 
Pat e-mailed me the day he met with Wilke: “This reporter is a repeat player and he understands we are elephant hunting. If he can get a clear shot at the target he will bag this trophy story... [but] the
Wall Street Journal
is always cautious....”
 
Wilke was interested, Pat reported after their meeting. He’d like to talk to me.
 
“I’m a senior investigative reporter,” John Wilke explained when we spoke for the first time. His tone was courteous and professional, and maybe a little bit dubious. “I don’t pump out stories on a daily basis like a lot of guys. I do in-depth reporting and sometimes a story’ll take me several months. So if you’re in a hurry, I’m probably not the right person for you to be talking to.
 
“On the other hand, when I do land a story it usually ends up on the front page.” As I found out, John Wilke was one of the best investigative reporters in the newspaper business. He wrote about antitrust cases, crooks in Congress malfeasance, the Chinese vitamin industry, and corruption in the financial industry. He had put people in jail. After our first conversation I began following his stories, and he turned up on the
Journal’s
front page so often that I nicknamed him Front Page Wilke, which he loved.
 
It was clear to me that Pat Burns was right: Wilke was obviously the right reporter for this story. He had reliable sources inside the financial industry, so he could do the necessary background investigation; he knew the difference between puts and calls and had law enforcement connections who would act on his reporting; and he was based in Washington, D.C., rather than New York. That made me feel a lot safer. I had been taught in the army to camouflage the direction of the main attack, so if a Washington-based reporter broke the story, hopefully Madoff would be looking south and never suspect that the article had originated northward from Boston. Finally I sent him all my material.
 
We spoke on the phone often, and finally he decided to pursue the story. John never made a commitment that the story would run, but certainly he gave me every indication he was going to investigate and see where the facts took him. Eventually I went to a Taxpayers Against Fraud conference in Washington and snuck out to meet secretly with him at a local bar—naturally.
 
We sat in a corner for several hours. Wilke asked all the right questions, the questions the SEC had failed to ask: Who is involved? How do you know? Where did you go to find out? Who did you speak to? Who, what, when, where, and how much? (Especially how much?) Finally, as I wrote to the team, “Right now he’s jammed with a front page story exposing fraud by a major mutual fund family which involves an aerobics instructor (sounds like it’ll be sex with financial fraud so it’ll be juicy). Once that story hits, Bernie is next.”
 
Based on the discussions I’d had with Wilke, I continued, “The current thinking is that this story can’t just be a rehash of the Ocrant article in
MARHedge
and the
Barron’s
article which Madoff somehow survived. They’re going to want to dig deep, real deep, and it looks like they’re going to investigate BM’s entire 40-year career looking for dirt. This could take several weeks.”
 
Bernie is next; that’s what Wilke had told me. And if Charlie Brown’s Lucy had been standing there holding the football right in front of me I couldn’t have been more confident we finally were going to take down Bernie Madoff.
 
What I did not know for sure at that time was that the SEC had finally decided to investigate Madoff. As I’d told Ocrant, I’d heard rumors that something was happening, but no one—and that includes Ed Manion and Mike Garrity—would provide any details. The report issued in September 2009 by the SEC’s inspector general, David Kotz, confirmed many of my suspicions—as well as my worst fears—about what was going on inside the SEC. Whereas Garrity had sent my report forward and stated that it was about the most complete filing he’d ever seen, and in the Boston office I was regarded as a “credible” person, the New York office treated me and my submission with disdain. Basically, according to this 477-page report, Meaghan Cheung’s team was incapable of winning a game of Clue if they were given all the answers, which is pretty much what happened in this situation. For example, the only thing about my red flags that concerned Doria Bachenheimer, the assistant director of enforcement, was the fact that Madoff’s earnings were so consistent. As she told Kotz, “I was trying to come up with a theory of what he was doing, so I was thinking was this like an accounting case, is this like cookie-cutter reserves, does he have money somewhere else? When he said he had these other accounts, I just thought let’s get the records and see if there is some way he’s smoothing earnings. I don’t even know if you can do that. I was wondering.”
 
Once again, your tax dollars at work.
 
Bachenheimer sent my submission to Simona Suh, an attorney on the enforcement staff. Suh had even less experience in this area than Bachenheimer; in fact, this was the first time she had led an investigation. She had never been involved in a Ponzi scheme and had no idea how to proceed. So I guess this was on-the-job training to prepare her if a really big case came in.
 
Bachenheimer told the inspector general that she didn’t really think I was credible because I didn’t work for Madoff and hadn’t invested with him. As she said, Markopolos “was not an employee and, as far as I knew, received no information from Madoff.” In other words, Madoff didn’t tell me he was running a Ponzi scheme. As for all the red flags in my report, she thought they were only “theories” and that “it wasn’t something we could take and bring a lawsuit with.... We had to test it and substantiate it.”
 
This was from the assistant director of enforcement. What did she think enforcement meant?
 
As Bachenheimer explained, “It’s very challenging to develop evidence that something is going wrong until the thing actually falls apart.”
 
In case you’re wondering, I am quoting word for word from the inspector general’s report.
 
Cheung claimed she was skeptical about my claims because “I remember thinking after I spoke to him that he wasn’t technically a whistleblower because it wasn’t inside information so that was, I think, a distinction that I’m sure I made.”
 
The inspector general did confirm that at least part of Cheung’s reluctance to accept my offer to help may have come from the fact that she simply didn’t like me. Simona Suh told David Kotz that she didn’t know why Cheung disliked me. Asked why Meaghan Cheung refused to meet with me, she said, “I don’t know what her reasons were. I knew her general impression of him was she was skeptical of him, but I don’t know what her reasons for not meeting with him were.” Later she added, “I remember hearing that she thought he was kind of condescending to the SEC.”
 
Certainly one reason that office paid so little attention to my submission is that they believed my motive for pursuing Madoff was to collect a big reward. Bachenheimer described me to SEC Inspector General David Kotz as “a competitor of Madoff’s who had been criticized for not being able to meet Madoff’s returns, and that he was looking for a bounty”—information she probably got from my previous public testimony. She added, “If the first thing I hear from someone is what’s in it for me, then it raises my antenna a little bit.”

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