“We don’t quit.”
Harry
Markopolos’ father owned a chain of
12 Arthur Treacher’s Fish ‘n’ Chips restaurants. As a child, he must have
developed a nose for knowing when something smells fishy.
When he grew up he
became an investment advisor and portfolio manager at a Boston investment
company. In 1999 another money manager at his
firm told him about a hedge fund that was earning its luxe clients a steady one
to two percent net return on their money every month—month after month, with
only a very few monthly exceptions. The question was—Should we get our clients
in on this action?
To Markopolos, this smelled like
week-old carp in August. After all, when Markopolos was a young man he
discovered fraud at his father’s restaurants—An employee was stealing
cases of frozen fish fingers, and Harry put his thumb down on the not-so-well
breaded bandit.
It is impossible for any investment
to always return a profit (unless it is something like a bank savings account
that has a fixed return). Instantly, Markopolos knew he was looking at a Ponzi
scheme.
This
type of financial rip-off gets its name from con artist Charles Ponzi who
promised investors fantastic returns. He was able to achieve this, for a while, by taking money from newcomers and parceling it out to those who got in first
on the deal. The only way it works is if the con man has a steady and growing
stream of new money coming in.
The $65 billion con
What Markopolos had stumbled onto
was Bernie Madoff’s $65 billion con game. His secretive, exclusive fund served some of the world's most prestigious institutions and most famous people, as well as the Russian mafia and international drug
cartels.
Back in 1999, Markopolos calculated
that based on how much money Madoff was taking in, he should have
been running the world’s largest hedge fund and therefore managing and actively trading as
much as six billion dollars. This was at a time when the best-known hedge
funds had no more than two to three billion under management. No matter how
hard Markopolos looked he couldn’t find traces of Madoff’s trading activity in
the financial markets. That meant he really wasn’t doing much trading at all.
Pleased with this insight,
Markopolos in 2000 wrote an eight-page report and took it to the U.S. Securities and Exchange Commission (SEC), the federal agency that regulates the American
banking and financial industries.
“I
had given them the case on a silver platter and gift-wrapped it, too,” he said.
The result? Zip. Why? Markopolos guessed (correctly as it turned
out) that the SEC was staffed with lawyers, not finance wizards. The SEC
enforcement director he met with simply didn’t understand what he was
saying.
Not one to give up, Markopolos went
back to the SEC in 2001 this time with an 11-page report, containing even more evidence
and asserting that Madoff had now sucked in $12 billion from investors. Again,
nothing happened.
The
report got kicked up the ladder to the SEC’s New York office, but its chief there after the most superficial of reviews ruled that since Madoff was not a registered investment advisor he, therefore,
could not be conducting dishonest business as an investment advisor.
For the next four years, Markopolos
and his small team of financial sleuths continued to investigate Madoff. In the
interim, in 2001 the well-respected U.S. financial journal Barron’s published a
disquieting report on Madoff’s business that had first appeared in an obscure finance
magazine. Result? Crickets.
So,
in 2005 Markopolos wrote yet another report, this one 21-pages long, and gave
it once again to the SEC. Now he estimated that Madoff had pecked as much as $50 billion
from his pigeons.
For a year, the SEC did nothing.
Then it actually sent agents to talk to Madoff. They suspected that he was
lying to them but concluded that his misdeeds, whatever they were, simply “were
not so serious as to warrant an enforcement action.”
In 2008, Markopolos tried again, and
again the SEC did nothing. But later that year the markets crashed, and Madoff,
unable to pay investors demanding money, was desperate. In December 2008,
his two sons, who worked for him, asked their father why he seemed so
distressed. Madoff confessed to them. The sons called an attorney. The attorney
called the SEC, and the next day Madoff was arrested.
Packing heat
Around this time, Markopolos started
packing a concealed .38 revolver. After all, he had helped bring down a man who was
managing money for Moscow mobsters and South American cocaine cartel leaders.
As much as $65 billion vanished. The
hardest hit were hundreds of philanthropies, charities, museums, and
foundations around the world, as well as the Royal Bank of Scotland, the
Japanese investment firm Nomura, Massachusetts Pension Reserves, and wealthy
individuals such as Holocaust survivor Elie Wiesel, real estate magnate Mort
Zuckerman, the family of former New York Governor Eliot Switzer, and actor
Kevin Bacon.
Today Madoff is serving a 150 year
term in a federal penitentiary. Worst of all for Madoff is that his eldest son
hanged himself on the second anniversary of his arrest. His younger son
died of cancer four years later. His wife refuses to communicate with him.
Markopolos won acclaim for his
dogged pursuit of Madoff, and he’s become a global fraud investigator. Before
going in finance, Markopolos served in the Army. Today he says, “I came
from an Army background, and the one thing I can say about the Army is that we
don’t quit.”
No comments:
Post a Comment