Book Excerpt: Investigating Bernie Madoff

In 1999, local financial analyst Harry Markopolos was asked to figure out how Wall Street titan Bernard Madoff managed to achieve his spectacular investment returns. After concluding it was impossible — that Madoff was a fraud — Markopolos reported his findings to the SEC. Over the next nine years, Markopolos would warn the SEC four more times, to no avail. As this exclusive excerpt from Markopolos’s new book details, the audacity of Madoff’s scheme was matched only by the SEC’s unwillingness to investigate it.

Excerpted with permission of the publisher, John Wiley & Sons, from No One Would Listen: A True Financial Thriller by Harry Markopolos. Copyright © 2010 by Fox Hounds LLC.
 

[sidebar]AROUND 5:15 ON DECEMBER 11, 2008, I was at my local dojo in Whitman, the small town outside Boston where I live, watching my five-year-old twin boys trying to master karate, when I noticed several voice mails on my cell phone. That’s curious, I thought.

I stepped into the foyer to retrieve the messages. The first was from a good friend named Dave Henry, who is the chief investment officer of DKH Investments in Salem. “Harry,” his message said, “Madoff is in federal custody for running a Ponzi scheme. Call me.” My heart started racing. The second was from another close friend in Boston, Andre Mehta: “You were right,” he said. “The news is hitting. Madoff’s under arrest. It looks like he was running a huge Ponzi scheme.”

I was staggered. For several years I had been terrified that what I knew about Bernard Madoff would put my family and me in jeopardy. Billions of dollars were at stake, and rumors swirled that some of that money belonged to drug cartels and the Russian mafia — people who would kill to protect their investments. I wouldn’t start my car without first checking under the wheel wells. At night I slept with a loaded gun nearby.

But then, suddenly, it was over. I raised my fist high and screamed, “Yes!”

When I called Dave back, he said the media were reporting that Bernie Madoff had confessed to his two sons that his multibillion-dollar investment firm was a complete fraud. There were no investments; there hadn’t been for almost two decades. His sons immediately informed the FBI, and agents had shown up at Madoff’s apartment early that morning to arrest him. He had been running the largest Ponzi scheme in history.
 
It was exactly as I had warned the government, nine years — and billions of dollars — earlier.

WHEN MY TEAM AND I FIRST encountered Bernie Madoff, I was working as a portfolio manager for Rampart Investment Management Company, a small institutional-asset management firm in Boston. Back then, my team and I weren’t looking for the largest fraud in Wall Street history. Our interest in his strategy was simply an academic exercise: something to help us develop our own strategy that would benefit our clients. We weren’t looking for a crime; we just wanted to see how Madoff made his numbers dance.

It was a man named Frank Casey who first brought Madoff to my attention. Frank worked as a marketing representative for Rampart. He was essentially a Wall Street prospector, finding companies that would benefit from Rampart services.

In 1999, I referred Frank to an old friend, Tim Ng, who was then a junior partner at a New York outfit called Access International Advisors. Basically, Access was a hedge fund whose investments were spread among several other hedge funds. I had heard from Tim that his boss had found a money manager who was consistently netting 1 to 2 percent a month for his clients. “Why don’t you go down there and figure out what their game is?” I told Frank.

  • lynda

    Thank God for Markapolos–and for Mike Garrity. Is it completely impossible for someone (like those whom Madoff defrauded) to initiate a suit against the NY SEC and perhaps Ms. Cheung personally? If a watchdog institution and the person directly in charge of the relevant branch fails to keep watch over precisely what it is charged with watching— and this occurs not because of mere oversight but because of repeated acts of willful negligence–and that negligence ends up costing possibly millions of investors a collective billions of dollars—why should Ms. Cheung and the higher ups in the SEC who knew about this and should have acted, walk away scot-free? I assume that Cheung and the others who were directly in the know continue today to work at the SEC and likewise continue to make a whole bunch of bucks for their supposed proficiency as watchdogs. I say they should be rudely shoved out of the kennel and fined so heavily that they will find themselves sharing the mean financial

  • arthur

    I wonder if Meaghan Cheung of the SEC was a product of Affirmative Action ?