“In a small Massachusetts town, American fund manager Harry Markopolos lived in fear of his life. For three years, he carried a Smith & Wesson revolver, checked under his car for bombs and avoided walking along dark shadowy streets. A self-confessed maths geek, he had unravelled the secret of Wall Street’s biggest conman.”
Thus began a 2010 Guardian profile of the unlikely whistleblower of a powerful “investor,” Bernard Madoff, who actually never invested his clients’ money in that particular fund – he also ran a legitimate business as a middleman – but, instead, created the greatest ever Ponzi scheme, in which early clients were paid off with later clients’ money and the whole thing was covered up with false statements of investments and returns.
Likewise, the “$65 billion fraud” ascribed to Madoff who died in prison early Wednesday, is not a real number, but is based on his company’s own misleading statements about the balance of investor accounts in 2008. Markopolos himself was the first to point out that fact, in his 2010 book “No One Would Listen: A True Financial Thriller.” In the book, he estimated that at least $35 billion, and as much as $55 billion, of the purported “stolen funds” did not exist but were fictional profits reported to his clients.
According to the Associated Press, Madoff’s clients entrusted him with an estimated $17.5 billion. “Over the years, court-appointed trustees laboring to unwind the scheme have recovered more than $14 billion,” AP’s obituary of Madoff said.
Markopolos, 64, is the oldest of three children of Georgia and Louis Markopolos, of Erie, Pennsylvania, who ran Greek and American restaurants in many locations.
Markopolos, who had began investigating Madoff’s activities in 1999 by chance, had become obsessed with his target. “Think about it. Here was a man that wiped out thousands of families,” he told the Guardian in 2010.
Markopolos was not only afraid of Madoff, but of the so-called “feeder funds” that fed him customers’ money. “If he didn’t have a reason to kill me, think about the feeder funds. What’s going to happen to their lifestyles? They’re all going to be ruined financially, they’ll all be sued and, hopefully, many of them will go to jail. What will people do to protect their lifestyles?” Also, his somewhat free-ranging imagination had led him to believe that among Madoff’s investors were Russian mafiosi and Latin American drug cartels.
In 1999, Markopolos was a “quant,” a specialist in quantitative financial analysis, at Boston-based Rampart Investment Management, when his boss, Frank Casey, met with one of Rampart’s trading partners, Access International Advisors CEO Rene-Thierry Magon de la Villehuchet. The French aristocrat informed him that he was doing business with a hedge fund manager who consistently delivered monthly returns of 1%-2% and that he was thinking of dealing almost exclusively with him. That manager was Bernard Madoff.
Concerned about losing a good client, Casey and another of Rampart’s principals, Dave Fraley, asked Markopolos to design a product that could replicate Madoff’s stellar returns.
Markopolos obtained a copy of Madoff’s revenue stream and almost immediately spotted a problem: the return stream rose almost steadily, with very few down months – something that never happens in the real world of volatile markets. The rise, represented in a graph, was a line running at an almost perfect 45-degree angle between the two axes. He also found, by simulation, that Madoff would have had to buy more options on the Chicago Board Options Exchange than actually existed. Of course, records showed no such buys.
Markopolos guessed there could be two ways of achieving the constant positive returns: either through a Ponzi scheme or through “front-running” (also known as “tailgating”), which is essentially a form of insider trading. Many well-known firms have been caught doing that (Goldman Sachs, Morgan Stanley and others), but Markopolos concluded fairly soon in favor of the Ponzi scheme explanation. He also found that, very surprisingly, the market never responded to Madoff’s high-volume trades, although his was supposedly the largest hedge fund, three times as large as the closest competitor. He became increasingly convinced there were no trades involved.
Markopolos and his colleagues first filed a complaint to the Securities and Exchange Commission in 2000. It was ignored. So was a more detailed filing in 2001 and another, titled “The largest hedge fund in the world is a fraud” in 2005. Some journalists were convinced: the first articles questioning Madoff’s methods were published in May 2001. But they had no effect: it would take another seven and a half years, before Madoff, seeing his Ponzi scheme collapsing for lack of cash, confessed to his sons and then the FBI. Rene-Thierry Magon de la Villehuchet, the client whom Markopolos’ bosses didn’t want to lose, sparking the investigation, committed suicide on December 22, 2008, 11 days after Madoff’s arrest: his losses are estimated at $1.5 billion.
So, why no one with power to intervene heeded Markopolos’ warnings? Corruption was almost certainly not to blame. Maybe there is a psychological explanation: it was difficult to accept that a man of Madoff’s reputation and impeccable list of clients would indulge in such bare-faced criminality.
Markopolos himself was partly to blame: “I’m a little bit eccentric, of course,” he told the Guardian. “If you are a whistleblower, you need to be eccentric.” In his book, he revealed that he kept an Army gas mask by his bedside in case SEC investigators burst into his home with tear gas. The Wall Street Journal, which was conducted by Markopolos but did not act on his evidence for years called him “a little bit nuts.” And The Guardian itself wrote that “he talks with a degree of utter certainty that can seem, at times, unnerving.”
Now Madoff is dead and Markopolos has long been vindicated. But still restless: his allegations of fraudulent accounting by General Electric, made in 2019, have met with pushback, derision and accusations that he was shorting GE’s stock. Perhaps it is too early for a vindication; perhaps, this time, he has overreached.