Chasing Bernie

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.

Chasing Bernie

Photographs by Jason Reed/Landov (Markopolos); Brendan McDermind/Reuters/Landov (Madoff)

Read our Q&A with Harry Markopolos

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.

A few weeks later, at Access’s Madison Avenue office, Tim introduced Frank to the CEO of Access, a Frenchman named René-Thierry Magon de la Villehuchet. When Frank asked Thierry about the manager who was producing such spectacular returns, Thierry nodded. “It’s true. He’s my partner.”

If that was the case, it was a major find, and Frank told Thierry that Rampart might be interested in doing business with Access if he could put together a portfolio that included managers like that. Thierry liked that concept.

“His name is Bernie Madoff,” he said.

Anyone who had worked in the stock market knew that name. Madoff’s company, Bernard L. Madoff Investment Securities LLC, was among the most successful broker-dealers on Wall Street. It was also a well-known market maker, meaning he both bought and sold stocks, generating profits by selling for a few cents more per share than his purchase price, a strategy that had made Madoff a very rich man.

When Frank got back to the office, he handed me the copies of the revenue stream. This comes from that manager in New York we were wondering about, he said. “Harry, if we do something similar we can make a lot of money,” he added.

I glanced at the numbers, and I knew immediately they made no sense. The problems popped out as clearly as a red wagon in a field of snow. “This is a fraud,” I told Frank. “You know there’s no way in hell this guy’s getting these returns from this strategy…whatever it is, it’s total bullshit.”

And that’s when we began chasing Bernie Madoff.


The investment strategy Madoff  claimed to be using was a technique known as split-strike conversion. There was nothing unique or exotic about it. In Madoff’s case, it involved buying a group of 30 to 35 blue-chip stocks and then protecting them with put options. The downside is that you limit your potential profit if the market rises sharply. The upside is that you protect yourself against devastating losses should the market drop.

Looking at Madoff’s returns was like trying to solve a jigsaw puzzle using pieces that didn’t fit. In certain markets, a split-strike conversion strategy can produce great returns, but it can’t make money in all types of markets. Yet month after month, year after year, no matter how the market performed, Madoff’s returns remained steady. In fact, over seven years, he reported only three down months. He was the slot machine that kept coming up cherries.

During the next few weeks I began modeling his strategy. Madoff claimed that his basket of securities correlated to the S&P 100. Right from the beginning that made no sense, because it meant that he couldn’t afford for even one of his stocks to go down substantially; it would kill his returns. He needed all his stocks to go up or at least stay the same. But it is impossible to pick 35 stocks that won’t go down. Even after I accepted the dubious notion that Madoff’s brokerage dealings allowed him to select the strongest stocks, there still should have been a correlation between his returns and those of the index. But that’s not what he was reporting. Whatever the index did — up or down — he returned the same 1 percent per month.

I was so startled by the numbers that I didn’t trust my math. Maybe I’m wrong, I thought. By then I had been working in the industry for 13 years, and I had built up a reasonably large network of people I could go to for help. I turned to a man named Dan diBartolomeo, a brilliant mathematician who is the president and founder of Northfield Information Services in Boston. After going through my work, Dan confirmed my conclusions: Whatever Madoff was doing, he wasn’t getting his results from the market. Later, I showed Madoff’s numbers to Leon Gross, at that time the global head of equity-derivatives research at Citigroup. Thirty seconds after looking at the material, Gross said, “No way. This is a loser.”

What surprised me most when I talked to Wall Street people was how many of them knew Madoff was a fraud. Years later, the question most often asked would be: How could so many smart people not have known? The answer was that they did know. People had been questioning Madoff’s claims for a long time, but even those who questioned his strategy often accepted his explanations — as long as the returns kept rolling in.

I had no doubt that Madoff was running a multibillion-dollar scam, but the question that Neil Chelo (a Rampart portfolio manager), Frank, and I continued to debate was: What kind of scheme was it? There were several reasons I believed it was a Ponzi scheme. (We found out quickly that Madoff was continually on the prowl for new money; by definition a Ponzi scheme requires a continuous flow of new investors to pay old ones.) Frank disagreed. He was certain Madoff was front-running — illegally taking advantage of his position as a market maker to know how certain stocks would move. Neil was ambivalent, but when pressed he leaned toward front-running. Why would Bernie Madoff risk everything in his life to steal money he didn’t need?

That might have been the end of it for me, but my bosses began pushing me hard to deconstruct Madoff’s strategy so that Rampart could market a product that would deliver similar returns. “Can’t you develop something that we could run at Rampart that would compete against Madoff?” Frank asked me.

Creating a financial product wasn’t the problem — it was creating a product that could compete with a Ponzi scheme. And in the spring of 2000, my anger over the situation led me to the SEC. Bernie Madoff was my competition. He was playing on my field, and I knew he was a dirty player. I decided it was time to go to the referee and get him thrown out of the game.


The U.S. Securities and Exchange commission is supposed to police the financial industry. Yet the commission has a lot less power than most people assume. While it can bring civil actions against corporations or individuals, it has limited authority. In criminal cases, the most that SEC investigators can do is refer suspect activities to state or federal prosecutors. Because the SEC also has the power to revoke licenses and prevent companies or individuals from participating in the market, though, I figured it could at least prove I was right — that Madoff was a fraud — and shut him down, eliminating the pressure on me to create a product that mirrored his returns.

I had established good relationships with two men I respected in the SEC’s Boston office, Ed Manion and Joe Mick. One day, I called up Ed. “I’ve got something really serious I need to talk to you about,” I began. “I discovered this huge scheme…it’s bigger than anything you can imagine — unbelievably huge.”

In his typically understated manner, Ed replied, “That sounds rather serious. When can you bring it in?”

I spent the next few weeks preparing a written report to reinforce the points I intended to make during my oral presentation. In the end it was only eight pages long, which didn’t seem like much, considering who I was going after, but it was what I had. My expectation was that my explanation of Madoff’s operation would at least put the SEC on his trail. “In 25 minutes or less,” my report began, “I will prove one of three scenarios regarding Madoff’s hedge-fund operation: (1) They are incredibly talented and/or lucky and I’m an idiot for wasting your time; (2) the returns are real, but they are coming from some process other than the one being advertised, in which case an investigation is in order; or (3) the entire case is nothing more than a Ponzi scheme.” I included six red flags that, taken together, made it clear that Madoff’s whole operation was a fraud.

After reading my submission, Ed Manion believed it was strong enough to persuade the SEC to investigate. I don’t get nervous very often, but I was nervous. Going forward officially with this accusation represented a big step for me. If my bosses at Rampart found out about this meeting, it would cause me some serious difficulty. I suspect I would have been asked to drop the investigation, and if I had persisted it might have cost me my job. But I also knew it was the right thing to do.

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.

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.

On October 25, 2005, I met with Garrity and several others in the SEC office. Garrity had read my report and had a lot of questions. There was a whiteboard in the front of the meeting room, and when there was something he didn’t understand, he had me outline it on the board. I spent hours drawing charts and diagrams and guiding him through the math. At one point he asked about the possibility that I was totally wrong. “What if his returns are real? Is there any possible explanation for that?”

Actually, there was one, I said. “Bernie Madoff is an alien.”

By the time we finished our meeting, Garrity not only understood the math, he also understood the threat that Madoff posed to the economy. I left the meeting more excited than I had ever thought possible.

Garrity called me less than a week later. “I’ve found some irregularities that are very disturbing,” he told me. “I’m not at liberty to share them with you, but I think I need to put you in touch with our New York regional office.” He said that if Madoff were subject to the Boston office’s jurisdiction, he would have a team tearing his office apart tomorrow. Unfortunately, Madoff was in New York. Garrity promised to do as much as he could before passing my report along, and he gave me the names of the two people he would be contacting. The only thing I asked was that my identity be protected.

One of the names Garrity gave me was New York branch chief Meaghan Cheung. She was Garrity’s counterpart in New York. He had suggested I contact her directly, and in early November I called and identified myself as the Boston whistleblower. I guess I expected some kind of reaction. But all she would say was that she had read the report. She didn’t ask a single question about it. Not one. When I asked if there was anything she didn’t understand, she acted as if I were insulting her. The point I was trying to make was that I could help; the point she was trying to make was that she didn’t want my help. That was the way our relationship progressed. Over the next few months I would call or e-mail her from time to time. She would always take my call, but she never initiated a conversation or followed up.

As the weeks passed, it became obvious to me not only that Cheung wasn’t going to do anything to stop Madoff, but also that she did not seem to appreciate the danger I was in. What really frightened me was the fact that she knew my identity, and I worried that she would be careless enough to allow my name to get out. The more I considered the potential danger, the more anxious I got. By then, we had discovered that Madoff’s operation was a massive international scheme spread across several continents, involving the rich, royalty, and possibly some of the most dangerous men in the world.

I felt boxed in: I was trying to alert the government about how big this thing was, but because it was so big the government refused to take me seriously. The enemy was a grandfatherly philanthropist, the most respected man in his community, perhaps the very last person anyone would suspect of violence. But we already knew that his reputation was his disguise, and that he was a world-class criminal. What nobody could predict was how far he would go to protect himself.

I had long since taken to looking over my shoulder when I walked down the street and checking underneath my car before I turned the key. But that no longer seemed like enough protection. I started carrying an airweight Model 642 Smith & Wesson gun everywhere I went. I also decided it was time to get some outside help.

When my wife, Faith, and I had moved to Whitman, I went to the local police precinct to apply for a firearms permit. There I had met Sergeant Harry Bates, and since then, I had often seen him around town. In those encounters, I was always pleasant and calm, so when I came barging into his office one afternoon pale as a ghost, he knew whatever was bothering me was serious. “I need to talk to you,” I told him.

Bates settled comfortably into his chair. “What’s going on?”

I laid out the broad strokes for him. Basically, I told him I had uncovered one of the biggest frauds in history and I was afraid people might try to kill me to shut me up.

“What do you want us to do?” he asked.

“You have to keep this very quiet,” I explained. “If you put this in the precinct log and the newspapers pick it up, my life is going to be in jeopardy. If you talk about it and the word gets out, my life is going to be in jeopardy.”

It took a little while for Bates to understand I was deadly serious about this, but he began working to set up the safest possible situation. He knew if I called for help he had to come running with the cavalry. He knew if my home alarm went off it wasn’t going to be a false alarm. Then he asked, “You carrying?” I told him yes. Then he asked if I wanted to wear body armor. I had thought about it. But if Madoff wanted to kill me he would use professionals, and that meant two bullets to the back of my head. A bulletproof vest wasn’t going to help.

In addition to meeting with Sergeant Bates, I upgraded my home alarm system. I began altering the routes I traveled to get home at night. But I also made a decision.

There was no way of knowing if, or when, Madoff would figure me out. And I’d decided that if Madoff threatened me, I was going to drive down to New York and take him out. At that point it would come down to him or me; it was as simple as that. By failing to do its job and protect me, the government would have forced me into it. In that situation I felt I had no other options. I was going to kill him.