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Authors: Harry Markopolos

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In late January John and I agreed that he would meet me in Boston in mid-February. I made copies of all our material in preparation for this meeting. In addition I made suggestions about how he could bring himself up to date on Madoff. I suggested he speak with five people—Frank, Neil, Mike, Erin Arvedlund, and Matt Moran, the vice president of marketing at the Chicago Board Options Exchange (CBOE). I then provided him with my list of 47 derivatives experts in the financial industry, including Northfield Information Services founder Dan DiBartolomeo, my friend who had first checked my math and agreed that Madoff’s returns couldn’t be derived from the market; Meaghan Cheung; and Goldman Sachs (Boston) Managing Director Daniel E. Holland III. I wanted them to speak with him because “Goldman Sachs is one of the largest traders of equity derivates and if they don’t handle Madoff’s flow or see it in the markets then something’s rotten,” and Citibank’s Leon Gross, whom “I met with in September 2005 when he came right out and said to me, ‘I can’t believe that Madoff hasn’t been shut down by the SEC yet. How can anyone invest in that stupid strategy? It shouldn’t even be able to earn a positive return.’ ”
 
While I knew most of these people, with the exception of Dan DiBartolomeo, only a few of them knew about my investigation. In fact, I’d guess that about half the people on the list probably didn’t even know that Madoff was running a hedge fund. They were all derivatives experts, and if they were asked the proper questions they would have told Wilke that Madoff could not have achieved his returns with this strategy. The big negative was that many of the people on the list worked for large firms with compliance lawyers on staff who would squash any attempt by an employee to report out to either the SEC or the press without first reporting up through the company and obtaining permission. And naturally these compliance lawyers would never grant permission for fear of rocking the boat, for fear the information might be wrong or that a nasty lawsuit might result from it.
 
But there were several derivatives experts on this list who knew that Madoff was a fraud, and if the SEC had called their firms and requested interviews with them, they would have been very happy to cooperate—and what they would have said would have toppled Madoff. It wouldn’t have required any legal action to get them to speak. Unfortunately, the SEC didn’t train its investigators to reach out to independent third witnesses for assistance. The SEC staff never picked up the phone to contact even one of my witnesses, nor did they ever express interest in obtaining my comprehensive master list of 47 witnesses even after I offered it to them. The SEC’s employees are not trained as fraud examiners, nor are they trained to call witnesses.
 
I also suggested two sets of questions for John Wilke to ask everyone he interviewed. If those people he interviewed responded that they were not aware of the strategy used by Madoff, after explaining the strategy he should ask questions such as: Could $20 billion plus be run by a single hedge fund manager using the strategy I just described without you having heard about it? Could this split-strike option conversion strategy be capable of earning average annual gross returns of 16 percent with only seven monthly losses during the past 14 years? But if this person had heard of Bernie Madoff, among the questions I suggested were: Do you know who Bernie Madoff trades his over-the-counter OEX index options through? Have you ever seen the footprints of Bernie Madoff’s trades in the markets that you trade? How realistic do you consider Bernie Madoff’s performance numbers to be? Have you heard any stories about Bernie Madoff going to cash ahead of major market sell-offs? If so, how do you think he manages to sell ahead of the market?
 
In the world of numbers, it should take only a few pointed questions to figure out what’s real. If Wilke had asked these questions to several people on the list, any doubts he had about our Madoff claims would have been settled right there. As I had told the SEC, give me Madoff for five minutes and three questions and I could have put him away. Ironically, this was the same month that the Integral Investment Management hedge fund fraud went to trial five years after being discovered. That one hadn’t surprised me at all. Several years earlier Frank Casey had pitched the Rampart product I’d created to the Chicago Art Institute, and its directors had shown a lot of interest. At that time, they told Frank, they were heavily invested in a very successful Integral derivatives fund, so Frank had borrowed Integral’s PowerPoint presentation and asked me to take a look at it. After looking at it, I couldn’t figure out what the hell they were doing. Like Madoff, their strategy made no sense. Frank and I called a manager at Integral and claimed we were interested in investing. We asked him seven questions and he responded with seven totally wrong answers, making it obvious the whole thing was a fraud. Integral didn’t know the first thing about options. Integral was basically a much smaller Ponzi scheme than Madoff, but we were too deeply entrenched in Bernie to take on another fight. Its founder, Conrad Seghers, was convicted of violating the antifraud provisions of the securities laws and was barred from the investment industry.
 
But all it took to find out was asking seven questions on the telephone.
 
Wilke couldn’t make it to Boston in February because he was working on a major political story, as well as a report on alleged price fixing by Chinese vitamin supplement suppliers. In April he broke the story about Congressman Alan Mollohan, who, according to the
Journal,
set up several nonprofits in his West Virginia district and then helped those organizations obtain millions of dollars in congressional earmarks, while at the same time increasing his own personal wealth from about $500,000 to more than $6 million in four years. When it ran I sent a copy to the team, explaining, “John Wilke, the senior investigative reporter for the
Wall Street Journal,
published this cover story on Friday, which is why he is so late in getting to Boston. He said he’s coming up either late this week or late next week and that his next big cover story will be Madoff.
 
“John’s working on a drug scandal that likely gets into the
WSJ
next week but then he’s going to work on Madoff. John’s been covering the Lipitor scandal pretty heavily lately but he’s just doing maintenance follows as that investigation continues.”
 
When I spoke with John Wilke I still could hear his enthusiasm in his voice. Admittedly I was starting to get a little anxious, knowing that once this story was published I would no longer be in jeopardy, but when the finest investigative reporter in the business tells you he’s doing your story, there is no reason to doubt him.
 
He was still coming in May and June, but by this time I had started worrying. Was Madoff so big he had a line into the editors of the
journal?
If Wilke had turned down this story six months earlier I would have accepted it, but he hadn’t. He’d actively pursued it, and he had continued to assure me that he intended to pursue this story.
 
While this was being played out, whenever possible Mike Ocrant would urge a reporter he knew at the
New York Times
to pursue this and several other possible stories. Ocrant was no longer reporting at
MARHedge,
instead having joined Institutional Investor, a global publisher and conference operator, as director of alternative investment conferences. When Mike told this
Times
reporter about Madoff, she had responded with some mild interest. She’d read his story and asked a few pertinent questions. But every time he brought it up to her she replied that, just like Wilke, she was under pressure to finish another piece or was in the middle of another assignment or any one of the many other reasons she just didn’t have time to conduct an investigation.
 
In June, Ben Stein, the
Barron’s
financial writer and TV comedian, was the featured speaker at the Boston Security Analysts Society’s annual dinner. I had always admired him. I felt he was a lot smarter than the reporters in the finance world, and when he showed up at this dinner wearing a nice suit and yellow sneakers, my respect for him grew even more. I introduced myself to him at the cocktail party before the dinner, explaining I was investigating securities fraud cases and I had discovered several billion-dollar frauds. He seemed interested and we exchanged e-mail addresses. While I didn’t mention Madoff to him, I thought he’d be the perfect person to go to if the
Journal
didn’t work out. He already had his own soapbox and he was funny enough to be taken seriously.
 
The next day I sent him an e-mail. He responded. I followed up one more time, but still not mentioning Madoff. This time he didn’t respond, and I never heard from him again. I’m sure he has no idea how close he came to being able to break the Madoff story and save people billions of dollars.
 
Even though he obviously wasn’t interested, I was not above turning our brief conversation into something just short of a death-bed promise. I e-mailed John Wilke and explained, “If you guys don’t want it, Ben Stein over at
Barron’s
said he’d take it.”
 
I got an immediate response. Of course the
Journal
wants it, Wilke wrote. And we set up another date to get together. He was going to come to Boston and get started on the story.
 
John Wilke and I continued dancing together. He was always just about ready to start working on the story, and then something always came up. In November, I sent an update to the team, and I can still read my hope and my optimism in my e-mail: “Because the reporter, John Wilke, did all of those front-page
WSJ
articles on Congressional corruption, he wasn’t able to get to Madoff. The 3 Congressmen (2 Republicans and 1 Democrat) he exposed are all being investigated by the FBI. He and I just talked on a different front-page story he’s doing in December that I gave him. John told me that his editor has read my Madoff analysis and is very, very excited to start their investigation in January....
 
“He said that his editor thinks that hedge fund scrutiny will increase now that the Democrats are in power and greenlighted John’s investigation starting in January. I guess we’ll wait and see what transpires. I’ll keep you posted. This guy does top shelf corruption stories, but everything he investigates is on a schedule.”
 
I continued to speak with John regularly. That other story I referred to was about one of my investigations, which we finally agreed to postpone until there was an indictment. But in those conversations I suddenly began to hear his interest in the Madoff investigation waning. Something was going on, but I couldn’t figure out what it was. For the first time he began talking about needing “a new angle, something different from what’s been already written.” In February 2007, I sent the team an e-mail admitting, “The
Wall Street Journal’s
John Wilke has been a big disappointment. Obviously they were the wrong choice. Eventually Bernie will blow up and everybody will say, ‘I told you so.’ Feel free to buy 45-day maturity, 5% out-of-the-money puts once the first news of the Madoff blowup comes out. I suspect he’ll be considered the Enron of hedge funds.”
 
I don’t know if I was more disappointed or confused, but more than either one, I was scared. There was never a moment I doubted John Wilke’s honesty or commitment. We spoke too often for me to ever believe he was just stringing me along, but clearly something (or someone) had happened at the
Journal
to prevent him from doing this story. If he wasn’t interested in this story, all he had to do was tell me he’d decided not to pursue it for whatever reasons. But he never did that. Until he began peppering our conversations with the need for a new angle, he had never even indicated there was any problem at all. It was always next week or next month. The only assumption I could make was that one of his editors—or perhaps the Dow Jones lawyers—had stopped him. In my mind, at least, I was convinced that someone high up at the
Journal
had decided it was too dangerous to go after Bernie Madoff.
 
The question I wrestled with for a long time was: Why? When the newspaper that existed only to cover the financial world was handed a detailed explanation of the biggest fraud in Wall Street history, why wouldn’t someone at least conduct a cursory investigation? Three phone calls, two phone calls, that’s all it would have taken to verify that I wasn’t some kind of nut, that the accusations I was making were based on fact. A half hour, that’s all. Instead, Wilke spent more than a year making commitments that he never fulfilled. Of course it occurred to me that Madoff might have a good contact at the paper and was able to convince them there was nothing to this story. And more frightening, considering that I was already worried that the SEC had revealed my identity, was the possibility that whoever had killed the story at the
journal
had leaked my name to Madoff.
 
I never blamed John Wilke. John was phenomenal; he was aces. I didn’t even blame the
Journal;
in fact, after Madoff went down I again handed the
Journal
the story it could have published three years and tens of billions of dollars earlier. I never found out why
the Journal
had not done the story.
 
While I spoke with John regularly about my other cases, we carefully avoided talking about Madoff. I was very busy with my other cases; I knew that John could be of great importance to me, and he knew that I was a credible source of important stories. We talked about the other cases I was working on, with Madoff silently between us. Pat Burns trusted him completely, so I did, too. Unfortunately, terribly, in October 2008 John was diagnosed with a very aggressive form of pancreatic cancer. He died in May 2009.
BOOK: No One Would Listen: A True Financial Thriller
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