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.

In May 2000, Ed and I were waiting in a small conference room at the SEC’s offices in downtown Boston when Grant Ward, an attorney who was the commission’s New England regional head of enforcement, walked into the room. After introductions, I began my presentation. As I tried to explain Madoff’s fraud to Ward, it quickly became clear he wasn’t understanding a single word I said. I had tried to make my submission as bare-bones as possible so the SEC staff could understand it. But even that wasn’t basic enough. If blank looks were dollar bills, I would have walked out of that room a rich man.

Ed was devastated. He knew how badly the meeting had gone. He’d done his job; he’d brought in evidence of a fraud and handed the case over to the division charged with investigating such matters. As we waited for the elevator, I asked him, “You think he got it?”

Ed shook his head. “Not one single word.”

My error was in believing that the SEC was actually capable of protecting investors. The problem was that I knew a few dedicated men like Ed Manion, and I assumed there were lots of others like him. As I was to learn over the next few years, however, there is a mismatch in skills between the SEC regulators and the people they are supposed to be regulating. I suspect SEC attorneys like Grant Ward are well intentioned, but they never should have been put in their positions. Sending government lawyers to oversee Wall Street professionals is like sending chickens to chase foxes.

I had expected that we would hand over this case and watch happily from the sidelines as the SEC closed down Madoff. Instead, I never got a response from the agency after that meeting. Not even a “Thank you, and can we validate your parking?”

Even after Ward showed no interest in my report, it never occurred to me to drop the investigation. Frank, Neil, and I always felt we were just about there, that if we could get a little more evidence, the SEC would be forced to listen to us. And when that happened, it would be bye-bye, Bernie.

Over the next year, Ed Manion grew increasingly frustrated at the SEC’s Boston office. As I later discovered, I was right: Grant Ward hadn’t understood my presentation, and simply dropped the matter.
In March 2001, though, almost a year after the first meeting, Ed urged me to resubmit my report. I added some new information and prepared an analysis comparing Madoff’s returns to the market. During the period I analyzed, the market had 26 down months. Madoff had three. “His numbers really are too good to be true,” I wrote.

In this report, I included an offer. If the SEC couldn’t prove Madoff was a fraud, I would do it for them. “I can provide you with detailed questions for your audit team,” I wrote. “In fact, I would be willing to accompany a team undercover under certain conditions (new identity, disguise, proper compensation)… and serve under the command & control of the SEC.” I was confident I could walk into Madoff’s office and within a few minutes prove he was a complete fraud. I didn’t think it would take me more than five or six of the right questions and one hour of my time.


  • 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 ?