No One Would Listen: A True Financial Thriller (45 page)
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Authors: Harry Markopolos
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I saw this piece for the first time sitting in my living room with my family. It’s an odd feeling watching the edited version of the past nine years of your life; it’s a combination of too much and not enough, exactly right and where did that come from? Mostly, though, they got it right. “Until a few months ago Harry Markopolos was an obscure financial analyst and mildly eccentric fraud investigator from Boston....”
Mildly eccentric? Okay, as a quant I actually took that as a compliment. Maybe they thought they were being kind. Actually, I would have preferred being called “wildly eccentric” because that would have impressed my fellow quants, but I accepted “mildly eccentric.”
“... But today he enjoys an almost heroic status....”
I laughed at that line. I have never thought of myself as a hero, unless being a hero has come to mean simply telling the truth, pursuing a criminal, and trying to protect investors and my country’s reputation. Heroes are brave and I know that I wasn’t brave, just frightened. I went forward with the investigation only because it was too risky to turn back or stop. The only way to safety was forward, hoping we could get to the other side in one piece. My team and I had taken too many risks and made a few mistakes in whom we trusted. If Madoff had learned about our pursuit, only bad things would have happened.
The
60 Minutes
story showed me speaking at a gathering, at which I began, “I stand before you, a fifty-billion-dollar failure....” To me, that’s much more accurate. I often say, “We saved no one,” which is not quite accurate, as there were a few people we warned away from Madoff; but we saved very few people. The best way to make up for that, I felt strongly, was to make sure the SEC became the agency it should be.
60 Minutes
story showed me speaking at a gathering, at which I began, “I stand before you, a fifty-billion-dollar failure....” To me, that’s much more accurate. I often say, “We saved no one,” which is not quite accurate, as there were a few people we warned away from Madoff; but we saved very few people. The best way to make up for that, I felt strongly, was to make sure the SEC became the agency it should be.
During the next few months, as we all waited patiently for David Kotz’s report to be published, Mary Schapiro began making significant changes to the structure and culture of the SEC. She began by sending over 400 examiners to participate in the Association of Certified Fraud Examiners training and certification program, which teaches them how to recognize the warning signs of fraud and the risk of fraud. In addition, she took steps to ensure that investment advisers be required to hire truly independent firms to provide the necessary oversight; restructured the Enforcement Division by creating specialized units to “help detect patterns, links, trends and motives”; and hired an independent firm to revamp the SEC’s procedures for “collecting, recording, investigating, referring and tracking” the 800,000 tips it receives annually and for using risk analysis techniques to “reveal links, trends, statistical deviations and patterns” that might be noticed when individual complaints are examined.
Maybe even more important, as far as I was concerned, she asked Congress to provide funds to reward whistleblowers; changed the agency’s examination procedures to proactively identify “firms or products that may pose a risk to investors or markets”; and began recruiting new staffers with specialized experience “in areas such as trading, operations, portfolio management, options, compliance, valuation, new instruments, portfolio strategies and forensic accounting,” as well as experts capable of providing “other staffers with new information and perspectives to help them identify emerging issues and understand the way the industry is changing.” She instituted many of the reforms that my team had suggested, including adopting methods to create examination teams in which “people with the right skill sets are assigned to examinations” to ensure that “the examination team includes those most expert in the subject of the examination.”
Obviously, Mary Schapiro realized that the existence of the SEC as an independent agency was at stake. To demonstrate that the SEC was serious about finally fulfilling its responsibility, in the first half of 2009 it filed “more than twice as many emergency temporary restraining orders this year related to Ponzi schemes and other frauds as compared to the same period last year.”
I think it is fair and accurate to claim that this restructuring never would have happened without the work done by my team, without Frank, Neil, Michael, and myself. I’ve gotten most of the credit in public, but in every respect we were a team. These three men used excellent cover stories to push forward the investigation at every opportunity. They warned others away from Madoff and sometimes succeeded. I was very lucky to have this team in the field for that long a period and have them in one piece at the end. Several other like-minded folks in the industry helped us along the way, proving that there are plenty of honest people out there willing to do the right thing. And every single person did it for free, proving that some things are just so important in life that you’ll do something because it is the right thing to do.
Reading about these changes made me cautiously optimistic; on paper the SEC was making substantial changes in an effort to do its job. Of course Bernie Madoff had proved how little value reports on paper actually have in the real world. So it will take a long time to determine if those changes actually translate into an effective SEC.
While we waited through the summer of 2009 for David Kotz’s report to be released I focused on my other cases. One of them, involving a custody bank that was cheating millions of government pension accounts via a currency trading fraud scheme, had been successfully filed as a False Claims Act case more than a year earlier and remained under seal—but we were optimistic the state of California would be intervening and making the case public early in the fall. I’d been waiting several years for my first case to be unsealed. I figured I could wait a few months more.
On Wednesday, September 3, 2009, the greatly abbreviated 22-page Executive Summary of David Kotz’s 457-page report was released. It included staggering evidence of the SEC’s complete and total failure in this case. It was even better than I anticipated it would be, and believe me, I was already expecting a great report. “Embarrassing” doesn’t come close to describing the actions of the SEC investigators.
David Kotz had written a damning document that castigated his own agency. This summary concluded that the SEC’s failure to catch Madoff began as early as 1992, when the agency first discovered that the accounting firm Avellino & Bienes had raised hundreds of millions of dollars for Madoff by guaranteeing 20 percent annual returns. When the firm was unable to provide an audit, the SEC allowed it to pay back all the money—but did nothing to stop Madoff. That was the beginning, and it continued until Madoff successfully caught himself.
In this summary one SEC investigator involved in the 2005 investigation described Madoff as “a wonderful storyteller” and “a captivating speaker,” who claimed to be on “the short list” to become the next chairman of the agency.
But when these investigators politely asked Madoff to produce specific documents he got so angry that “veins were popping out of his neck.” Apparently that proved to be an effective defense because the SEC investigators did not press him and when they reported his response they were “actively discouraged from forcing the issue.”
As an attorney, Gaytri was particularly incensed by the fact that two SEC lawyers were aware that Madoff had lied to them but didn’t know what to do about it. One of them apparently told the other, “I don’t think he’s allowed to lie to us!” She just couldn’t believe that the people in charge of the investigation were not aware that lying to officials of the federal government is a felony.
Every complaint we had made about the SEC was verified in this report. It turned out that some of the investigators “weren’t familiar with securities laws.” The only time investigators tried to verify that Madoff actually was making the trades he claimed, a letter was drafted to be sent to the National Association of Securities Dealers (NASD) to obtain the necessary trading records—but that letter was never mailed, because the investigators decided that it would have taken them too much time to actually compare those records with Madoff’s so-called trades. In fact, if they had sent that letter, just the opposite would have happened—there were no trading records, because Madoff never actually traded. They wouldn’t have spent 30 seconds trying to match orders.
Apparently none of that mattered to the SEC—for attorney Simona Suh’s work in this investigation, Meaghan Cheung gave her the highest possible performance rating, and particularly cited her “ability to understand and analyze the complex issues of the Madoff investigation.... Simona’s command of the laws, regulations and staff guidance was such that she was able to convince Madoff and his counsel that he needed to register” as an investment adviser.
I don’t know which was worse: the fact that most of the time the SEC had refused to investigate Madoff or the fact that on several occasions it actually did investigate Madoff. According to this summary, at one time, in fact, two SEC offices were simultaneously investigating the same issues—and neither of them knew about the other one.
As I read this summary, I realized this agency was more like Keystone Accountants than any kind of professional organization. And this report also confirmed what I had already been told. The New York office didn’t take my submissions seriously because they didn’t like me. They questioned my motives, claiming I was “a competitor of Madoff” who “was looking for a bounty.” And the enforcement team reported that I didn’t “have the detailed understanding of Madoff’s operations that we do, which refutes most of his allegations.”
Frank was disappointed in the summary. In his opinion it was a whitewash. He just couldn’t believe that any institution could be that incompetent. “Maybe I am wrong,” he told me later. “Maybe they really were just that stupid.”
And this was just the summary. I couldn’t wait to read the entire 457-page report, which was supposed to be issued before the Labor Day weekend. Apparently, though, someone in the SEC was not quite as excited about it as we were. There were some rumors that its release would be “delayed.” That apparently infuriated the House Capital Market Subcommittee’s chairman, Paul Kanjorski, a Pennsylvania Democrat, who contacted the SEC and expressed his concern. And then we were told it would be available at 1 P.M. that Friday afternoon.
There is an old public relations trick. When you have to release potentially damaging information and you want the fewest people to learn about it, do it Friday night after people have left for the weekend. The fact that it was finally released about 5 o’clock the Friday afternoon of the Labor Day three-day holiday weekend probably suggests how much the SEC wanted people to be aware of it. In this particular case, the Friday afternoon release had an additional benefit for the agency; so many of Madoff’s victims were members of the New York Orthodox Jewish community, and the Jewish Sabbath begins Friday night at sundown.
As soon as it was available, I sat down and read it. Even after all I knew about the investigation, this report astonished me. At least one-third of the entire document either was directly attributable to me and Neil, Frank, and Mike, or was based on information we had provided. It was as if we were reading the story of the preceding decade of our lives. Just reading the 17-page Table of Contents told the whole story:
The SEC’s 1992 Investigation of Avellino & Bienes, “SEC Contacted Avellino and Suspected That Avellino & Bienes Was Selling Unregistered Securities and Running a Ponzi Scheme.”
SEC Review of 2000 and 2001 Markopolos Complaints: “Markopolos Approached the SEC’s Boston Office in May 2000 with Evidence That Madoff Was Operating a Ponzi Scheme ... Markopolos Met with Grant Ward, a Senior SEC Enforcement [Official] ... Ward Decided Not to Pursue the 2000 Submission.”
Markopolos Made a Second Submission to the Boston Office in March 2001 ... “NERO Decided Not to Investigate Madoff Only One Day After Receiving the 2001 Submission ... Two Articles Were Published in May 2001 Questioning the Legitimacy of Madoff’s Returns.”
Markopolos Made a Third Submission to the Boston Office in October 2005 ... “Markopolos and His Team Continued to Gather Information about Madoff ... The Boston and New York SEC Offices Reacted Very Differently to the 2005 Submission ... The Matter Was Assigned to a Relatively Inexperienced Team, Particularly with Respect to Conducting Ponzi Scheme Investigations ... The Enforcement Staff Considered the Evidence of Little Value Because Markopolos Was Not a Madoff Investor or Someone Personally Involved in the Alleged Ponzi Scheme ... The Enforcement Staff Questioned Markopolos’ Credibility Because of His Perceived Self-Interest ... The Enforcement Staff Concluded That Madoff Did Not Fit the ‘Profile’ of a Ponzi Scheme Operator.”
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