Harry Markopolos
Harry M. Markopolos is an American forensic accounting and financial fraud investigator and former securities industry executive best known for initially discovering Bernie Madoff's Ponzi scheme in the late 1990s.
From 1999 to 2008, Markopolos uncovered evidence that suggested that Madoff's wealth management business was a fraudulent Ponzi scheme. In 2000, 2001, and 2005, Markopolos alerted the U.S. Securities and Exchange Commission of his views, supplying supporting documents, but each time the SEC ignored him or gave his evidence only a cursory investigation. Madoff was finally revealed to be a fraud in December 2008, when his sons contacted the Federal Bureau of Investigation. After admitting to operating the largest private Ponzi scheme in history, Madoff was sentenced in 2009 to 150 years in prison.
In 2010, Markopolos's book on uncovering the Madoff fraud, No One Would Listen: A True Financial Thriller, was published. Markopolos has criticized the SEC for failing to discover the Madoff fraud despite repeated tips, and for failing to investigate properly the larger companies it supervised.
Education and career
Markopolos attended Roman Catholic schools, graduating from Cathedral Preparatory School in Erie, Pennsylvania, in 1974. He received an undergraduate degree in Business Administration from Loyola College in Maryland in 1981, and a Master of Science in Finance from Boston College in 1997.He is a CFA charterholder, and a Certified Fraud Examiner.
He began his career on Wall Street in 1987 as a broker with Makefield Securities, a small Erie-based brokerage owned by Barry C. Hixon. In 1988, he obtained a job with Darien Capital Management in Darien, Connecticut, as an assistant portfolio manager.
From 1991 to 2004, he served as a portfolio manager at Boston-based options trading company Rampart Investment Management, ultimately becoming its chief investment officer.
He now works as a forensic accounting analyst for attorneys who sue companies under the False Claims Act and other laws, emphasizing tips that result in continuing investigations into medical billing, Internal Revenue Service, and United States Department of Defense frauds, in which a "whistleblower" would be compensated.
Madoff investigation
During 1999, Markopolos learned that one of Rampart's frequent trading partners, Access International Advisors, was dealing with a hedge fund manager who consistently delivered net returns of 1% to 2% a month.Frank Casey, one of Rampart's principals, met with Access CEO René-Thierry Magon de La Villehuchet, and learned the manager was Bernie Madoff, who was operating a wealth management business in which his clients essentially gave him carte blanche to invest the money as he saw fit, in a set of securities. Casey and Rampart's managing partner, Dave Fraley, asked Markopolos to try to design a product similar to Madoff's split-strike conversion, in hopes of luring away Access from investing in Madoff.
When Markopolos obtained a copy of Madoff's revenue stream, he spotted problems. The biggest red flag, he believed, was that the return stream rose steadily with only a few downticks – represented graphically by a nearly perfect 45-degree angle. According to Markopolos, anyone who understood the underlying math of the markets would have known that such a return stream "simply doesn't exist in finance", since the markets were too volatile even in the most favorable conditions for this to be possible. Based on this and other factors, Markopolos eventually concluded that Madoff could not mathematically deliver his purported returns using the strategies he claimed to use. As he saw it, there were only two ways to explain the figures: Madoff was either running a Ponzi scheme or front running.
Markopolos later said that he knew within five minutes that Madoff's numbers didn't add up. He claimed it took him another four hours to uncover enough evidence that he could mathematically prove that they could have been obtained only by fraud.
Despite this, Markopolos's bosses at Rampart asked Markopolos to deconstruct Madoff's strategy to see if he could replicate it. He could not simulate Madoff's returns, using information he had gathered about Madoff's trades in stocks and options. For instance, he discovered that for Madoff's strategy to work, he would have had to buy more options on the Chicago Board Options Exchange than actually existed.
His calculations of Madoff's trades revealed that there was almost no correlation between Madoff's stocks and the S&P 100, as Madoff claimed. Markopolos also could find no evidence that the market was responding to any Madoff trades, even though by his estimate Madoff was managing as much as $6 billion, three times more than any known hedge fund at the time. Given that Madoff's supposed trades should have had a substantial ripple effect on broader markets, Markopolos suspected that Madoff was not even trading.
With the help of two of his colleagues at Rampart, Casey and fellow quant Neil Chelo, Markopolos continued to probe the Madoff operation. What they found concerned him enough that he filed a formal complaint with the Boston office of the SEC during the spring of 2000. However, the SEC took no action. Nonetheless, others in the investing world took Markopolos's findings seriously. In 2000, Joel Tillinghast of Fidelity Investments dropped his plans to study Madoff's strategies after a meeting with Markopolos. Tillinghast wrote years later that his discussion with Markopolos convinced him that Madoff was almost certainly engaging in fraud; as he put it, "nothing in Madoff's ostensible strategy made sense."
Michael Ocrant, editor-in-chief of MARHedge, joined the effort to publicize Madoff's questionable actions. Casey surprised Ocrant with information that Madoff, whom Ocrant only knew to be one of the largest market makers on NASDAQ and one of the largest brokers on the New York Stock Exchange, actually ran a secretive multi-billion dollar hedge fund, directly managing investors' money. Ocrant investigated and wrote an article, "Madoff tops charts; skeptics ask how", published May 1, 2001, questioning Madoff's returns. Within a week, Erin Arvedlund followed with an investigative article in Barron's, further questioning Madoff's secrecy and results; despite the details in these scathing articles, they generated no action from the SEC, and did not scare off Madoff's existing investors.
Markopolos sent a more detailed submission to the SEC a year later. He also offered to let the SEC send him to Madoff's headquarters undercover, obtain the trading tickets, and compare them with the Options Price Reporting Authority tape. By then, Markopolos was convinced that Madoff was not really trading. He believed that his trading tickets would not match the OPRA tape, which would have been hard proof that Madoff was a fraud. This submission also passed without action from the SEC.
From the beginning, Markopolos believed that Madoff was most likely running a Ponzi scheme, given his voracious appetite for cash; a Ponzi scheme can last only as long as new money is flowing in to pay existing investors. His colleagues, Casey and Chelo, were more inclined to think that Madoff was front running. Casey and Chelo believed Madoff was already a very wealthy man, and on paper it made no sense for him essentially to steal billions of dollars that he didn't need. They suspected that it was more feasible for him to increase his returns on actual trades via front running. Markopolos was willing to accept that possibility, but thought it was unlikely since front-runners don't need the massive amount of new investor money that Madoff kept bringing in. Additionally, Markopolos believed that if Madoff was front running, he would have to siphon off money from his broker-dealer arm to pay the investors in his hedge fund. This would have resulted in the customers of his broker-dealer operation getting shortchanged — something that would not have gone unnoticed by Madoff's more sophisticated broker-dealer customers.
Soon after his second submission, Markopolos traveled to Europe with Magon de La Villehuchet to help get investors for an alternative product to Madoff that he'd developed for Rampart. While in Europe, Markopolos found that 14 different funds, at various firms, were invested with Madoff. Each manager believed that his fund was the only one from which Madoff was taking new money, a classic "robbing Peter to pay Paul" scenario. When Markopolos heard this, he was convinced that Madoff's wealth-management business was a Ponzi scheme. He warned Magon de la Villehuchet, but Magon de la Villehuchet refused to disengage from Madoff. Magon de La Villehuchet committed suicide soon after Madoff's scheme collapsed, having lost $1.5 billion of his own and clients' money.
Markopolos persevered, even though he felt that it created a considerable risk to his own safety. He learned during his European tour that a large number of funds invested with Madoff operated offshore. To his mind, this was evidence that the Russian mafia and Latin-American drug cartels were invested with Madoff, and might want to silence anyone who threatened the viability of the hedge funds.
On December 17, 2002, Markopolos came up with a plan to deliver an investigative file anonymously to an aide of then Attorney General of New York Eliot Spitzer as Spitzer delivered a speech at the John F. Kennedy Library in Boston. He put on a pair of white gloves to prevent leaving fingerprints, and wore an oversize coat.
Even after leaving Rampart in 2004, frustrated that he was in a business that had to compete with cheats and lawbreakers, Markopolos continued to be driven by the intellectual challenge of solving the problem, and the ongoing encouragement from Boston SEC staffer Ed Manion. The culmination of Markopolos's analysis was a 21-page memo sent during November 2005 to SEC regulators, entitled "The World's Largest Hedge Fund is a Fraud". It outlined his suspicions in more detail and invited officials to check his theories. He outlined 30 red flags that he believed proved Madoff's returns could not be legitimate. His analysis was based on more than 14 years of Madoff return numbers, during which time Madoff reported only four losing months, an implausible scenario that Markopolos said could be achieved only by fraud. In the document Markopolos states:
Although Madoff's scheme did not collapse until 2008, Markopolos believed that Madoff was on the brink of insolvency as early as the summer of 2005, when Casey found out that at least two banks were no longer lending money to their clients to invest with Madoff. This prompted Madoff to seek loans from banks. In June 2008 – six months before Madoff's scheme imploded – Markopolos's team uncovered evidence that Madoff was accepting leveraged money. In his book, Markopolos wrote that this was a sign Madoff was running out of cash and needed to increase his intake of new funds to keep the scheme going.
File:Thierry de la villehuchet.png|thumb|180px|Thierry Magon de La Villehuchet committed suicide three days before Christmas in 2008, shortly after Madoff was arrested by the FBI
On June 3, 2009, Markopolos told a conference at Boston College, his alma mater, that he believed Madoff personally kept less than 1 percent of the $65 billion reported stolen, and would probably lose what remained of his portion to money launderers. Markopolos estimated that $35 billion to $55 billion of the money Madoff claimed to have stolen never really existed, but were simply fictional profits he reported to his clients. Markopolos believed that Madoff's customers lost $10 billion to $35 billion, most of which went to early investors. "Madoff will wind up in a special prison designed as much to keep the crook's victims out as Madoff in. He's a guy who can't afford not to be in prison," he said.