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* 28 Mar 2010 The man who outed Madoff
Blank stares, disdain and tears. Harry Markopolos encountered all three during his nineyear struggle to convince the U.S. Securities and Exchange Commission that Bernard Madoff ’s returns were mathematically impossible. SEC officers didn’t grasp the numbers until the Ponzi scheme had
swelled to $65 billion, as Markopolos shows in No One Would Listen, a
disturbing firsthand account of his quest to expose one of the most powerful
men on Wall Street. Markopolos, a self-described “proud Greek geek,” is a former chief investment officer at Rampart Investment Management in Boston. His investigation began in 1999, when a colleague learned of Madoff ’s investment returns and urged Markopolos to replicate his strategy, he writes. Markopolos soon concluded that the numbers didn’t add up: “There’s no way this is real,” he recalls telling his colleague. “This is bogus.” So began his surreal journey into the warped world of Bernie Madoff, the broker-dealer who was producing too-good-to-be-true returns of one per cent to two per cent per month. Markopolos’s odyssey pitted him against bosses who urged him to match Madoff ’s results, against investors who didn’t want to hear the truth, and against SEC staffers who either didn’t listen or couldn’t understand what they heard. By the time Madoff was arrested on Dec. 11, 2008, Markopolos had reported his concerns to the SEC five times and had begun to wonder if Madoff was untouchable. Fearing that he and his family were in jeopardy, he packed a Smith & Wesson and even considered killing Madoff if need be, he says. “ If he contacted me and threatened me, I was going to drive down to New York and take him out,” Markopolos writes. Markopolos can come across as paranoid but when, in an interview with The Sunday Times of London, he pointed to the book’s map showing where Madoff ’s money was going, it’s easy to see why he felt nervous. With his American business at saturation point, Madoff had his eyes on Russia and Asia. Markopolos believes money from drugs and gangs washed through Madoff accounts. “ Prison is the safest place for him,” Markopolos said. “He is in jail to protect him from his investors” — although it emerged recently that Madoff had been beaten up at the North Carolina prison where he is serving a 150-year sentence. The truly shocking thing about this book is its cumulative effect, not any individual revelation. Step by step, Markopolos exposes the dangerous “mismatch in skills” between SEC lawyers and the market pros they regulate. “Sending lawyers to oversee capital markets professionals is like sending chickens to chase foxes,” he says with characteristic bravado. Time after time, Markopolos offered SEC officials mathematical evidence that they seemed ill equipped to comprehend. In May 2000, for example, Markopolos says he met with a senior SEC enforcement official in Boston to explain why Madoff couldn’t be making money, as claimed, with a stock-and-options trading strategy known as a split-strike conversion. All Markopolos got for his trouble was a blank look. “It very quickly became clear he didn’t understand a single word I said after hello,” he writes. In November 2005, Markopolos called another senior SEC official, he says, and asked if there was anything in his third submission that she didn’t understand. She seemed insulted and in a hurry to get off the phone, he says. “Do you understand derivatives?” Markopolos asked. “ I did the Adelphia case,” she replied. Well, Markopolos responded, that case involved an accounting fraud. A derivatives fraud, he said, requires a higher level of financial sophistication. Those two episodes were previously reported in a damning 457-page review by SEC Inspector General H. David Kotz, who said the agency missed at least six opportunities to spot Madoff ’s fraud. They take on greater significance here, as Markopolos lays out the market realities that SEC off icials either didn’t understand or ignored. For one SEC off icial, the math may have sunk in only after Madoff ’s arrest. During a meeting in February 2009, the SEC’s deputy inspector general, Noelle Frangipane, asked Markopolos to quantify how much money would have been saved if the SEC had listened to him in May 2000. His answer — $43 billion — was followed by a loud thud, he says. “I turned to Noelle,” Markopolos writes. “Her head was down on the table and she was sobbing uncontrollably.” The other hurdle for Markopolos was of course Madoff ’s reputation, both at the SEC and among investors. Madoff was “the ultimate insider,” Markopolos says. “I was the bothersome outsider. I was some quant from Boston nobody had ever heard of.” It probably didn’t help that Markopolos revels in being geeky, tells off-colour jokes and takes pride in being politically incorrect. One money manager who ignored red flags about Madoff was René-Thierry Magon de la Villehuchet of Access International Advisors LLC, the man who f irst alerted Markopolos and his colleagues to the fact that Madoff was managing money. Though they warned de la Villehuchet of their suspicions, he wouldn’t listen, Markopolos says. He was later driven to suicide by his firm’s Madoff-related losses, his brother said. He was found dead in his Madison Avenue office, with his arms and wrists slit. A box cutter and pills were nearby. Markopolos has no time for those who argue that Madoff ’s honest investors should have realized that their returns were too good to be true. “ Those people didn’t know. They’re not financial people. Madoff preyed on them. He was evil. He would go to funerals, put his arm around the widow and promise to take care of her. He’s a pathological liar, incapable of telling the truth,” he said. Markopolos now heads an independent financial fraud investigation firm.
He is currently investigating America’s giant healthcare and pharmaceuticals
industry. “Those guys make Madoff look small time,” he said. |