No One Would Listen: A True Financial Thriller (19 page)
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Authors: Harry Markopolos
BOOK: No One Would Listen: A True Financial Thriller
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I had been to Europe briefly several times in my life. I had done a three-week art tour in France while I was in college, I’d vacationed in Greece with my family, and the army had sent me to Germany and Belgium a few times. But this trip was different. During this trip I met the rich and the royals of Europe. But also during this trip I got to really know Thierry de la Villehuchet. His founding partner at Access, Patrick Littaye, went with me to several meetings, and I also spent time with Prince Michel of Yugoslavia, who was marketing for Access; but mostly I was with Thierry. Thierry de la Villehuchet was a nice person, a French nobleman who was a noble man. He lived his life, and he died, by a very strict code of honor and obligation.
I think I began to understand the burden he was carrying the day we drove past the Arc de Triomphe. “Look up there, Harry,” he said. “Look at those names under Napoleon.” As I read those names, I recognized several of them. These were the people we were going to be meeting with on this trip. Several lines down was the name Flaghac. François de Flaghac was also selling my product, and Thierry explained, “His father was only a general. Everybody else was a field marshall or an admiral.”
Thierry had been born into royalty. His clients were people of his social class. These people didn’t have a particularly good understanding of finance, or even math, but they believed completely in the strength of their relationships. In some cases their families had been doing business for two hundred years. There was a firmly rooted trust between them that went far beyond any type of due diligence. On this level a man’s word was paramount. Men like Thierry had started these funds to raise money from the nobles and well-connected and invest it, and these people invested with him because they knew his family could be trusted. Thierry understood that; that was the way he conducted his life, and he believed in it all. He was a fascinating man. In the United States he had been warm and personable, but in Europe he played his role of a nobleman. He returned to his roots there. It was good business.
That became clear to me on the first day of this trip, June 20, 2002. We spent the day in London. I was jet-lagged and went to my room for a nap. Later that day I met Prince Michel and learned that he had taken Thierry out to the polo fields to introduce him to Prince Charles and his sons, Harry and William. I was told that Prince Michel was somehow related to Prince Charles. It seems to me that the only logical reason for this meeting was to interest Prince Charles in either Madoff or, if he was already invested, our product. That’s certainly a guess and I never found out anything more, although after Madoff surrendered, Prince Charles’s spokesman did say he was not an investor (although if he had invested in Madoff through an offshore fund, it’s unlikely he would have admitted it).
Thierry and Michel told me that they hadn’t invited me to this meeting because I didn’t know how to curtsy. Obviously that was their joke, and so I responded, “Of course I do. But by tradition Americans don’t curtsy to British royalty because they never defeated us on the battlefield. That’s why Americans don’t bow when meeting the Queen.”
I don’t think they liked my joke. I was scheduled to have dinner with the two of them that night but it never happened. In fact, throughout the entire trip, after the last meeting of the day I got kicked to the curb. We didn’t eat a single dinner together. Obviously I was good enough to have breakfast and lunch with them, but I didn’t make the dinner cut. I wasn’t particularly pleased with that, but I was polite enough not to remind them who won the Revolutionary War. We were there to conduct business, as much business as was possible, and if they believed that this was the most effective way to get it done I didn’t care if I had dinner with them.
We had 20 meetings in three countries in 10 days. It was a whirlwind tour of Europe. We met with various hedge funds and funds of funds. The meetings eventually ran together in my memory, but it seemed like each office or conference room was more luxurious than the previous one. The floors were covered with plush Persian carpets; the walls were done in rich walnut and cherry woods, and hung on many of them were oil paintings; we were served only with sterling silver, and the fixtures were gold. These rooms had been decorated to impress clients, to show them that money didn’t matter—which they apparently believed was an effective means of convincing clients to give them their money.
We met with many of the leading investment banks and private banks of Europe. The system there is quite different than here, as wealthy investors use private banks to conduct their business. I went with Patrick Littaye to a meeting with members of the L’Oreal family. At JPMorgan I met with a member of the Givenchy family, who spent considerable time complaining about the Hermès family, who apparently were suing his family over an investment that had soured. At lunch one day with Prince Michel we sat at a table near Mark Rich, the disgraced financier whom Bill Clinton had so controversially pardoned. All these people knew each other. These were the kind of people we were with every day. In Geneva, we were supposed to meet with Philippe Junot, the play-boy who had been married to Princess Caroline of Monaco, but he canceled, I was told, because he thought my strategy was too risky, and he preferred to stay with Madoff.
Thierry began every one of our 20 meetings the same way: “Harry is just like Madoff. It’s an option-based derivative strategy, only he offers a higher risk and a higher return. But it’s different enough from Madoff that you should have him in your portfolio. If you have Madoff and you want some diversification, this will do it.”
And every time he said it I got furious. What I wanted to shout out loud was that I was offering higher returns than Madoff because my returns were real and his were not. And now that I had corrected my math error, I was a lot lower risk, because at most I was going to lose only 50 percent of their money while with Bernie they were going down a full load.
But I didn’t. Instead I smiled and explained how this strategy worked. After that we would drill down to the details. I’d go through my pitch book. Then they would ask the usual range of questions: What are your risk controls? What are your trading rules? What is the frequency of the bad events that can hurt you?
It was the potential risk that scared them. I told them that way less than 1 percent of events could hurt the product, although admittedly should it happen it could be catastrophic. I was honest: “You could lose half your money very quickly.” I didn’t bother to describe the near meltdown Neil and I had survived—and learned from.
The only fund that asked what I thought were the right questions about my due diligence was Société Générale. The people I met with there knew their derivative math. They told me, “We like your risk controls. You’re the only guy who’s ever come in here and specified what we can lose. But that risk is too high for us.” Ironically, we found out in January 2008 that they actually weren’t such good risk managers, as an employee named Jérôme Kerviel defrauded them of more than $7 billion by executing a series of “elaborate, off-the-books transactions that circumvented the bank’s internal controls.”
These meetings generally lasted about 90 minutes, and Thierry would end each one the same way: “When can I have your answer? When shall I call you to find out how much you’d like to invest?” It was never “if you want to invest,” always “how much.” He was a master salesman.
While the objective of this trip was to introduce my product to these fund managers, it also turned out to be an extremely educational trip for me. I came back with a lot more knowledge about Bernie Madoff than I had expected—and what I learned changed my life.
My team had absolutely no concept of how big Madoff was in Europe. We assumed several European funds and funds of funds had invested with him, but we never appreciated the number of funds or the size of their investments. It became clear to me during this trip for the first time that Madoff presented a clear and present danger to the American capital markets—and to the reputation of the Securities and Exchange Commission (SEC). While obviously I had lost confidence in the SEC, I also knew that investors around the world believed that it offered them a great level of protection and that their money was safe. That was one reason they invested here. When they discovered that wasn’t true, that confidence in the integrity of the American markets that led people to invest in them was going to be badly shaken. When Madoff went down, and that was inevitable, the American financial system was going to take a worldwide beating to its reputation. A primary reason to invest in the United States would have disappeared.
Of the 20 meetings we had, the managers from 14 of those funds told me they believed in Bernie. Listening to them, I got the feeling it wasn’t so much an investment as it was some sort of financial cult. What was almost frightening was the fact that every one of those 14 funds thought that they had a special relationship with him and theirs was the only fund from which he was continuing to take new money. At first I thought the only reason they would admit to me, someone they didn’t know at all, that Madoff was managing their money was because they trusted Thierry, but then I began to understand that they were telling me this to impress me. The message was practically the same in every one of those 14 meetings: “We have a special relationship with Mr. Madoff. He’s closed to new investors and he takes money only from us.”
When I heard that said the first time I accepted it. When I heard it the second time I began to get suspicious. And when I heard it 14 times in less than two weeks, I knew it was a Ponzi scheme. I didn’t say anything about the fact that I heard the same claim of exclusivity from several other funds. If I had, or if I had tried to warn anyone, they would have responded by dumping on me. Who was I to attack their god?
What I did wonder about was what was going on in Thierry’s mind. He heard these 14 fund managers bragging, literally bragging about this special access, just like I did, and he knew it was a lie just like I did. But we never discussed it. Like Frank, I had previously tried to warn him. Before we’d left for Europe I’d told him, in these precise words, “You know Madoff is a fraud, don’t you?”
And just as he had done when Frank told him, Thierry became extremely defensive. “Oh no, that’s not possible,” he’d replied. “He’s one of the most respected financiers in the world. We check every trade ticket. We have them faxed. We put them in a journal. He’s not a fraud.”
I had considered asking to see those trade tickets, knowing I could use them to prove to Thierry I was right, but I didn’t. I was afraid that if I asked to see them he would think I was using them to reverse engineer Madoff, and I knew he wouldn’t let me kill his golden goose.
I cared about Thierry and I wanted to save him. After it had become clear that Thierry wouldn’t listen to me, I called Access’s director of research, who was a bright guy and understood derivative math, and told him that I had compiled a substantial amount of evidence proving Madoff was a fraud. “I get into the office at 6:30 in the morning,” I’d told him. “If you’ll come over half an hour early before tomorrow’s scheduled meeting, I can prove to you mathematically that Madoff is a fraud.”
He never showed up. And then I got it. He didn’t want to know. Thierry didn’t want to know. They were committed to Madoff; without him they didn’t exist. It was their access to Bernie Madoff that allowed Access International to prosper. So when Thierry heard each of these funds claim an exclusive relationship, there was nothing he could do about it. It changed nothing. I also felt absolutely no obligation to tell any of the 14 asset managers that Madoff was a fraud. I had no personal relationship with any of them, and I certainly didn’t want Bernie Madoff to know we were tracking him. Like Access, these funds needed Bernie to survive; they didn’t need me. Where would their loyalty be? And what would happen to me when Madoff found out I had warned them?
I did appreciate the fact that they were trapped. They had to have Madoff to compete. No one had a risk-return ratio like Bernie. If you didn’t have him in your portfolio, your returns paled in comparison to those competitors who did. If you were a private banker and a client told you someone he knew had invested with Madoff and was getting 12 percent annually with ultralow volatility, what choice do you have? You’re going to either get Madoff for that client or lose the client to a banker who has him. And Madoff not only made it easy; he made it lucrative. He allowed the feeder funds to earn higher fees than anyone else and always returned a profit.
That was the reason so many European funds gave their millions to him. It was after these meetings that I strongly suspected Madoff was even bigger in Europe than he was in the United States. I estimated the minimum amount of money Bernie had taken out of Europe was $10 billion and in retrospect even that probably was low.
Once I realized how much money he had taken out of Europe—and was continuing to take—there was no longer any doubt in my mind that he wasn’t front-running. This was a Ponzi scheme. If he was front-running he wouldn’t want new money, because it would lower his return on invested capital. The money to pay the investors in his hedge fund would have had to come from investors in his broker-dealership. The more money invested in the fund, the more money he would have been forced to drain from the broker-dealership. Eventually it would have been spotted by some of his more sophisticated customers. And once those investors figured out they were getting bad price fills—which eventually they would have—that business would have declined rapidly, making it impossible for Bernie to continue paying such huge hedge fund fees and returns.
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