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.

I never got a response from the SEC for this second report, either. It wasn’t until September 2009 that I found out why. The Boston office had forwarded my complaint to the regional office in New York, which decided not to investigate. An enforcement officer who reviewed the initial inquiry determined that Madoff was not registered as an investment adviser, and the next day sent an e-mail stating, “I don’t think we should pursue this matter further,” the SEC’s Office of the Inspector General would later report.

IN AUGUST 2004, I LEFT RAMPART. I had been considering the move since early that year. When I woke up in the morning, the thought of another day in the finance industry depressed me. I just didn’t feel the industry was providing products that people should be buying.

By then, the only person at the SEC that I continued to speak with regularly was Ed Manion. Ed was embarrassed about the agency, but he also urged me to keep going. Early in 2005 he began pushing me to put all the material together and make yet another report. Grant Ward had been replaced as head of enforcement, and there was a new branch chief, Mike Garrity. “You’ll like him,” Ed said.

Reluctantly, I told Ed to set up a meeting. In preparing for the meeting, I remembered that in August 2001 the Bush administration had successfully avoided paying any attention to an intelligence briefing titled “Bin Laden Determined to Strike in U.S.” I hoped the government had learned some lesson from that mistake, so to make sure anyone reading my report would know exactly what it contained, I titled it: “The World’s Largest Hedge Fund Is a Fraud.”

After explaining how I had gathered the information, I outlined my qualifications and explained my fears. “As a result of this case, several careers on Wall Street and in Europe will be ruined. Therefore, I have not signed or put my name on this report. I request that my name not be released to anyone other than the branch chief and team leader in the New York region who are assigned to the case without my express written permission. The fewer people who know who wrote this report the better. I am worried about the personal safety of myself and my family….” And then, over the next 19 pages, I made my case. I described Madoff as “effectively the world’s largest hedge fund” but admitted no one knew how much money he was managing. I estimated the fund to be managing somewhere between $20 billion and $50 billion. Then I described more than two dozen red flags, which, taken together, once again made it clear Madoff’s operation was a fraud.