Chasing Madoff. Interview with Harry Markopolos, CFE, CFA

Fraud magazine May/June 2009 cover

From the May/June issue of Fraud Magazine, the magazine for the Association of Certified Fraud Examiners, comes this interview with Harry Markopolos, who spotted in 1999 that Madoff was running a Ponzi scheme.

What events led you to investigate Madoff’s business?

In late 1999, I was a portfolio manager for a multibillion-dollar equity derivatives asset management firm in Boston’s financial district. Frank Casey, a marketing senior vice president for the firm, returned from New York with marketing materials for a high-performing, derivatives-based hedge fund managed by Bernard Madoff. In early 2000, the firm’s partners asked me to reverse-engineer the strategy so that we could offer this successful product to our firm’s customers.

After I modeled the strategy, I determined that the returns could only be coming from illegal front-running of the Madoff broker/dealer arm’s client orders or from fictional returns that were the result of a Ponzi scheme. I went to the firm’s partners and jokingly asked if they really wanted to get into that business. They hastily replied, “No way, if that’s what he’s doing then we don’t want to compete in that space.”

He then describes the numerous tip-offs that Madoff was running a scam. He submitted his findings to the SEC in 2000, 2001, 2005, 2007, and 2008 to no avail. Inquiring minds want to know why the SEC was seemingly comatose about this for years on end when the evidence was convincing. How could such a thing happen?

SEC staffer stopped from asking Madoff the right questions

Her supervisors told her to stop her Madoff inquiry and work on mutual fund investigations instead. Her supervisor was Branch Chief Mark Donohue, who answered to Eric Swanson, director of the department, according to Post reports. Eric Swanson is the one who later married Madoff’s niece.

Gosh, I know what you’re thinking. But I’m sure this must have just been some kind of misunderstanding at the SEC. Because if corruption and influence peddling was happening at such a high level then the entire regulatory apparatus of the US would then be suspect wouldn’t it? But that only happens in Other Countries and couldn’t happen here, right?

Why do you think Madoff suddenly turned himself in on Dec. 11, 2008?

The dramatic fall in the worldwide financial markets of October and November 2008 led to panic, resulting in massive investor redemptions from hedge fund of funds. These fund of funds operators felt that Madoff was their best-performing, most-liquid hedge fund manager so they redeemed him first, which led to him not being able to meet all of those redemption requests.

Madoff had taken money from every corner of the globe and he had taken it from some very unsavory characters. That’s why he didn’t flee; he had nowhere to run and nowhere to hide; so he did the logical thing – he turned himself in.

Gosh, that seems to hint at money-laundering, doesn’t it? Well, more than a hint, really.

You’ve said that all the members of your team feared for their lives during your investigation. Did you have any specific threats that made you fear for yours?

The “off-shore” feeder funds were only one step removed from organized crime. If organized crime knew that Madoff was stealing their money, he would have been killed. Therefore, if Madoff had ever found out that he had a team tracking him through Europe and North America and that he risked getting exposed, it was a good bet that he would have had several billion reasons to want us silenced. To compartmentalize the damage, I was the only one who went to the SEC. The SEC never knew I had a team in the field helping me.

Sue, who is also a CFE, says maybe organized crime was in it from the beginning, as early investors in a Ponzi scheme always get the highest return.