The man who blew the whistle on Bernard Madoff
Harry Markopolos spotted Bernard Madoff's $65bn Ponzi scheme years before it imploded. He tells the Guardian how he lived in fear of his life while trying to convince the world
Harry Markopolos testifies at a congressional hearing on Bernard Madoff’s Ponzi scheme Photograph: Jason Reed/REUTERS
In a small Massachusetts town, American fund manager Harry Markopolos lived in fear of his life. For three years, he carried a Smith & Wesson revolver, checked under his car for bombs and avoided walking along dark shadowy streets. A self-confessed maths geek, he had unravelled the secret of Wall Street's biggest conman.
A belatedly celebrated whistleblower who was ignored by everybody, Markopolos tried, umpteen times, to raise the alarm about Bernard Madoff's $65bn (£43bn) Ponzi scheme which imploded at the end of 2008, leaving thousands of charities, hedge funds, pensioners and Hollywood stars bereft of billions of dollars. Dismissed as a misguided obsessive until Madoff's eventual confession, he became increasingly anxious for his safety.
"Think about it. Here was a man that wiped out thousands of families," says Markopolos, who was afraid both of Madoff and of the tame "feeder funds" that fed him customers' money. "If he didn't have a reason to kill me, think about the feeder funds. What's going to happen to their lifestyles? They're all going to be ruined financially, they'll all be sued and, hopefully, many of them will go to jail. What will people do to protect their lifestyles?"
A quantitative financial specialist with an instinct for the numbers behind complex derivatives, Markopolos smelt a rat about Madoff Investment Securities as far back as 1999 when his boss at Boston-based Rampart Investment Management asked him to create a product that could provide similarly stellar returns to the astonishingly consistent numbers produced by Madoff.
In a newly published book, No One Would Listen, Markopolos describes agonising over how Madoff could produce 1% to 2% returns every month, in positive territory 96% of the time, producing a 45-degree curve of profit – with no volatility. For months, he tried to reverse-engineer Madoff's stated strategy of using a basket of S&P 500 shares hedged against risk using options on Chicago's derivatives exchange.
After analysing Madoff's vague, broad-brush statements to clients, Markopolos concluded that it was impossible – not only was it mathematically inconceivable to smooth out all the ups and downs in the S&P index's performance, Madoff would need to use more options than existed on the entire Chicago Board Options Exchange, where nobody owned up to seeing any volume from Madoff's firm at all.
"The math was so compelling," Markopolos told the Guardian in an interview this week, over beer and french fries at an Irish bar in midtown Manhattan. "If there's only $1bn of options in existence and he's many times that size, unless you could change the laws of mathematics, I knew I had to be right. And the risk-return ratios had never been seen in human recorded history. They were off the charts."
It's easy to say so with hindsight. But Markopolos was shouting the same thing for years – not just once, but continually. He approached the securities and exchange commission (SEC) as early as 2001. He contacted politicians and badgered journalists to write about Madoff, succeeding in getting a couple of business magazines to publish sceptical stories. In a coup de grace, he even presented the SEC with a detailed dossier in 2005 bluntly entitled The World's Largest Hedge Fund is a Fraud. So why did nobody take any notice?
"Mainly, it was incompetence," says Markopolos, who believes that the SEC's staff, who are largely lawyers rather than financiers, simply lacked the financial nous to follow his reasoning. But also, he says, it was unthinkable. "It was just too big."
Madoff, a respected Wall Street name, kept his investment management business very quiet, beneath his legitimate market-making operation. Markopolos says: "I'm coming in saying there's a hedge fund you've never heard of that's six to 10 times larger than anything you know that exists and by the way, it's corrupt, it's secretive and it's run by someone you already know, Bernie Madoff."
Tall, lean, in an immaculate cream suit and pink shirt, Markopolos, 53, cuts a credible figure, although he talks with a degree of utter certainty that can seem, at times, unnerving. A father of three young boys, he has been criticised as an obsessive and a self-publicist, while some have wondered if he was motivated by a financial bounty, which he denies. The Wall Street Journal, which did nothing with Markopolos's dossier on Madoff for two years, recently patronised him as "a little bit nuts".
"I'm a little bit eccentric, of course," concedes Markopolos, who reveals in his book that at one point he kept an old army gas mask handy in case SEC investigators burst into his home with teargas. "If you're a whistleblower, you need to be eccentric. You have to have a firm belief in your core values and you have to be willing to risk it all to do what's right."
He's clearly relishing elements of his new-found notoriety. Giving evidence before a congressional committee, he says, was thoroughly enjoyable, and he likes the interest that movie scriptwriters have shown in his story – perhaps, he suggests, Nicolas Cage could portray him as a "nerd with a hard edge". He quit fund management in 2004 to pursue fraud investigations full-time and was presented with a silver whistle last year by Boston's Security Analysts Society.
But Markopolos stresses that he wasn't the only person who was suspicious. He believes Madoff's more financially astute clients – feeder funds and hedge funds – chose not to look too closely. Some, Markopolos thinks, knew that Madoff was dubious but believed he was "front-running" by using advance knowledge of clients' trades from his stockbroking business to insider trade his way to success. And there were glaring signs – such as Madoff's use of an unknown two-man accounting firm, Friehling & Horowitz, to audit his books.
"Hundreds, if not a few thousand people knew. They knew something was wrong with Madoff and they stayed away from him," says Markopolos, who compares the fraudster's lack of subtlety to somebody running through Times Square stark naked in the middle of a summer's day. "You'd hear people say 'I don't think he's legitimate, I think he's a fraud'."
Now serving a 150-year sentence at a federal prison in North Carolina, Madoff has prompted a searching self-examination and a series of reforms at the SEC. Markopolos advocates a list of further changes – including moving the agency from Washington to New York, axing lawyers in favour of experienced financiers, improving databases and copying the tax authorities by offering a share of recovered funds to whistleblowers.
He remains wary over safety, claiming that Madoff's clients included Russian mafia and South American drugs cartels. And he wastes few words describing his view of Wall Street's most notorious crook, describing the 71-year-old as "evil".
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