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The man who knew too much
Harry Markopolos, MS’97, began warning federal officials about Bernard Madoff in 2000. What went wrong?
It’s a still evening in early June as I make my way across Lower Campus for a reception and dinner at the Yawkey Center. Tonight’s speaker is Harry Markopolos, MS’97, the man who became semi-famous in the months after the spectacular fall of Bernard L. Madoff, con man extraordinaire. Markopolos is the man who knew, the man who tried to blow the whistle on one of history’s greatest financial frauds. He’s the man who could have—would have—saved investors billions of dollars if the federal government had heeded his warnings.
The antenna truck of New England Cable News is parked in the lot outside the Yawkey Center. It’s been almost six months since the day Madoff turned himself in, on December 11, 2008, but media interest in All Things Madoff is going strong. The many strands of the saga will keep writers, lawyers, and documentarians busy for years. There are even rumors of Hollywood interest in the Harry Markopolos story.
On the fourth floor, the Murray Room is beginning to buzz. That’s Markopolos over in the corner, looking much as he did three months ago on CBS News’s 60 Minutes. He’s chatting with the lone Boston College police officer assigned to tonight’s event, the kickoff of the annual conference sponsored by the Carroll School’s Center for Asset Management. As the room fills and Markopolos mingles with bankers and finance professionals, it’s impossible not to notice: While almost all the men are wearing dark suits—gray, black, navy, charcoal—Markopolos is in a suit the color of Dijon mustard, with a yellow shirt and a gold-and-brown checkerboard necktie.
Markopolos’s eyes look small and sharp under his dark eyebrows. There’s something rabbit-like about him, a tense alertness. When I get the chance, I introduce myself. “You won’t be taping me, will you?” he asks, first thing. He asserts that he’s not giving interviews. Still, he hands me his business card and says maybe we’ll talk.
In the adjoining banquet room, about a hundred attendees take seats at round tables. As dessert is served, finance professor Alan Marcus introduces the featured speaker, giving the outlines of Markopolos’s unusual résumé: a BA from Loyola College of Baltimore; 17 years in the Army National Guard and Reserve, which included training in intelligence gathering and special operations; his years in a Boston investment company; and his more recent work as an independent investigator of white-collar crime.
Then Harry Markopolos stands up, fiddles with his PowerPoint clicker, and launches into his story. He speaks rapidly, with bubbling energy, eyebrows flitting, pacing around the front of the room like a roving talk-show host. “Let me tell you a little bit about myself,” he begins, “because I think the press has it wrong. I’m not a hero. I certainly wasn’t brave—I was very frightened.” He tells of his eight-year undercover campaign to expose Madoff. How he smelled a multibillion-dollar fraud as early as 2000 and soon urged the Securities and Exchange Commission (SEC) to look into whether Madoff was running a Ponzi scheme. He alludes frequently to an ever-present fear: Utterly convinced that Madoff was corrupt, and knowing how high the stakes were, he worried that Madoff might have him killed. And he bolsters his case that he was no hero by noting his ultimate failure. For all his efforts, he wasn’t able to stop Madoff’s elaborate scam. It was the crashing economy that brought Madoff down.
As Markopolos recounts the evidence of fraud, the warning signs he says should have been obvious, the details he lived with for years, his sense of outrage is as fresh as this moment. It’s as if he still can’t quite believe it. How could Madoff have fooled so many people? How could the SEC have been so incompetent? Over the course of his 40-minute talk, there is not the slightest sign of accommodation in him, no tired acceptance that “that’s just how things are.”
When he spoke at the conference that night, and later when I interviewed him by phone in June and August, he complained about the way he’s been portrayed in the media. “I’m very leery of the press,” he told me. “I don’t like the press. There’s so much inaccuracy.” It especially rankles him that he has been labeled “a Boston accountant.” He is, in fact, a chartered financial analyst and a certified fraud examiner. In a broader sense, too, he is no stereotypical accountant. Friends describe him as “a character,” “colorful,” “irreverent,” “intense,” and “slightly eccentric.”
When we spoke in August, he elaborated on his desire to stop giving interviews. He had just signed a book contract and was not inclined to hand over choice material to other writers. (The book contract also covers a New York ghostwriter and several longtime Markopolos colleagues who helped investigate Madoff over the years; Markopolos said his colleagues have agreed not to tell their story elsewhere.) Plus, he felt overextended. He was cooperating with a documentary team, hoping to time the release of its film with the publication of his book. Negotiations were also under way, he said then, for a movie that might or might not involve Tom Hanks. And, with a wife and three young children, he had family responsibilities, too.
I soon found that there is a wealth of choice material already on the record. The voluminous documents that are part of Markopolos’s Quixote-like adventure tell a story that has yet to receive the kind of in-depth treatment that Madoff’s machinations and lifestyle have. There is, in fact, a more interesting Harry Markopolos than the “whistle-blowing accountant” in the Madoff morality tale. The 375 pages of material he submitted to Congress when he testified in early 2009 show him to be full of preternatural certitude and deep suspicion, with an oddball sense of humor, emotions worn on his sleeve, and righteous disdain for both Madoff and the SEC. He is a man who has an aversion to the spotlight and a curious interest in it. It’s the story of an American maverick, a true original. In a world of fine gray pinstripe, he’s the man in the mustard-colored suit.
There is bravery and heroism in his story. It is also, as he says, a story about failure.
In the years of his dogged pursuit of Madoff, Markopolos never spoke publicly about what he knew. But when news broke on December 11 that Madoff admitted to running a Ponzi scheme, Markopolos went into high alert. Suddenly he had the panicky feeling that he might have a new enemy to worry about: the Securities and Exchange Commission. People in the agency now knew Markopolos had been right—and that they were going to look like accomplices in a billion-dollar crime. Fearing they might try to use the power of the government to cover their mistakes, perhaps by sending authorities to confiscate his records, he frantically began working with a Boston law firm to photocopy years’ worth of correspondence and documents he had submitted to the SEC. The law firm then put them in the hands of several media outlets.
A week after Madoff was taken into custody, the Wall Street Journal was the first to tell the story of Markopolos’s role. In January he was the subject of a profile in the Boston Globe. In February, Markopolos testified in front of a congressional panel looking into the regulatory failure of the SEC. In March, he appeared on 60 Minutes. He’d come a long way, from obscurity to sudden prominence.
Markopolos grew up in Erie, Pennsylvania, where he was born in 1956. His father owned two luncheonettes and his mother stayed home in their small duplex, raising Harry and a younger sister and brother. He went to Loyola College on an Army ROTC program, where he earned a BA in business administration, and served in the National Guard and Reserve until 1995. Meanwhile, he started work at Rampart Investment Management in Boston in 1991. From 1995 through 1997 he completed work on a master’s degree in finance at the Carroll School of Management.
Markopolos was at Rampart when, in late 1999, some of his colleagues began talking about the stellar investment performance of a money manager on Wall Street named Bernard L. Madoff. Because Markopolos had a sophisticated understanding of the derivatives market and excellent mathematics skills, his firm asked him to see if Rampart could imitate Madoff’s methods. Markopolos and his colleague Frank Casey, then a senior vice-president for marketing at Rampart, became especially intrigued with Madoff as they collected information in the spring of 2000. Markopolos says that upon looking over some documents from a Madoff-managed fund that showed consistently high monthly returns from 1993 to early 2000, he immediately suspected something was amiss. When he spent about four hours running the numbers—trying to “reverse engineer” the results based on Madoff’s reputed investment strategies—he concluded Madoff was probably engaged in fraud.
But what kind of fraud? Markopolos could see only two possibilities: Either Madoff was involved in “front-running” (a kind of early insider trading), or he was directing a Ponzi scheme—continually taking on new investors and paying off old investors with the cash infusions, regardless of actual investment results. To Markopolos, either scenario meant the SEC should take a look. He expected an investigation could proceed quickly and, if his suspicions were right, Madoff would be shut down in short order.
So, in May of 2000, Markopolos drafted an eight-page memo and went to the Boston office of the SEC. He had a good contact there, Edward Manion ’67, whom he had worked with while both were on an ethics committee of the Boston Security Analysts Society. Manion arranged a meeting with an SEC regional director of enforcement. But both Markopolos and Manion (a chartered financial analyst with industry experience) left with the feeling the meeting did not go well. It seemed to them that the official, a lawyer with no background in finance, had not grasped their argument and had no inclination to pursue the matter further.
Markopolos didn’t let it go. Working with Frank Casey and another Rampart colleague, Neil Chelo, he continued to collect and study materials from funds connected to Madoff. Manion got back in touch with Markopolos in October of 2001, feeling that the SEC had dropped the ball, and asked Markopolos to resubmit his original memo. He did, adding three pages of new material. Markopolos had originally pegged Madoff’s scheme as involving between $3 billion and $7 billion. Now he estimated a figure as high as $20 billion.
In June 2002, Markopolos took a business trip to Europe. By this time, he had found a new ally, an investigative reporter named Michael Ocrant who had written a story in May 2001 for MARHedge, an industry publication, entitled “Madoff tops charts; skeptics ask how.” Eventually, he began to think of Ocrant as the fourth member of his “team,” as Markopolos, Casey, Chelo, and Ocrant continued to share information with one another about Madoff.
It was during the European trip, when Markopolos met with wealthy European investors on behalf of Rampart, that he began to realize how extensive Madoff’s empire was. He noticed how many of the investors he met “bragged” about getting into Madoff-connected funds. To Markopolos, this was a key tip-off. As he later explained in his testimony to the House committee on financial services in February 2009, Madoff’s “masterful use of a ‘hook’ by playing hard-to-get and his false lure of exclusivity were symptomatic of a Ponzi scheme.”
Still, there was no apparent investigative interest in Madoff at the SEC. Markopolos, Casey, and Chelo were operating secretly, without sanction of their bosses; they continued to share information even after Casey and Chelo left Rampart for other jobs in the industry. In August 2004, Markopolos decided to leave Rampart and set up a business as an independent investigator of white-collar crime. He kept in touch with Ed Manion in the Boston SEC office. In October 2005, Manion arranged another meeting, this time with Boston SEC branch chief Mike Garrity, JD’88.
Markopolos drafted a 19-page report and gave it the unambiguous title “The World’s Largest Hedge Fund is a Fraud.” He listed 29 “red flags” that signaled suspicious activity—and declared it “highly likely” that Madoff was running a Ponzi scheme.
Garrity saw enough merit in the case that he directed Markopolos to his counterpart in the New York branch office, which had jurisdiction over Madoff. Markopolos resubmitted his memo in November to the New York SEC office and later spoke with branch chief Meaghan Cheung. But Cheung asked him almost no questions, he has testified, and seemed uninterested in pursuing an investigation. Shortly after that, he decided to take a new risk: He contacted John Wilke, an investigative reporter in the Washington office of the Wall Street Journal. Wilke seemed eager to pursue the story, and Markopolos communicated with him frequently over the next two years. For reasons that remain unclear, the story never made it into print. Wilke died of cancer in May 2009.
Markopolos continued to gather materials in 2006 and 2007, occasionally providing more documentation to the New York SEC office. But he had clearly not “connected” with regulators there. As he later explained it in written testimony to Congress, “Every phone call to Meaghan Cheung made me feel diminished as a person, so I consciously chose to e-mail her so that I didn’t have to undergo unpleasant and unsatisfying telephone calls.”
By 2008, the world of global finance was moving toward crisis. Markopolos, Casey, and Chelo had their hands full with their own jobs and had for the most part given up on the SEC. By the end of that year, everything came crashing down. Madoff admitted he had lost about $50 billion of investors’ funds and turned himself in.
When Markopolos related this tale in front of the Center for Asset Management conference at Boston College in June, he left quite a few heads shaking. It was an astounding account that made it all the more difficult to see how Madoff had stayed in business so long.
In the question-and-answer period after his talk, Markopolos was asked why, when he lost confidence in the SEC, he couldn’t have somehow become a “Deep Throat” source for a journalist capable of breaking the story. Why didn’t he, for example, go to the New York Times?
“I thought the Journal was the way to go,” he explained. “I was looking at the New York Times really seriously,” but, he said, “I was so afraid of New York, because I saw Madoff as a spider with a big web in New York. And I was afraid to make a ripple there, to get caught. And I was really fearing for my life.”
He then recounted an incident that illustrates the cloak-and-dagger mindset he had at the time. At some point years ago, a friend mentioned to him that Eliot Spitzer, the hard-charging attorney general of New York, would be attending an event at the Kennedy Library in Boston. Markopolos decided to go. (He is unsure of the year, but remembers it as being in “the dead of winter.” Spitzer was on a panel discussing corporate responsibility at the Kennedy Library in December 2002.) Markopolos made a copy of his case submission to the SEC. “No finger prints, no DNA,” he told the audience, “this thing is as clean as clean can be.” He put the materials in a 9 x 12 envelope and then put that envelope in a larger one. He handed the package to a staff person at the event with the request that it be given to Spitzer. Markopolos left quickly. “Anything to do with New York I was paranoid about,” he said. “Because if this got back to [Madoff], I didn’t think I was going to be walking around much longer.”
I was not the only one that evening who wondered if perhaps Markopolos’s methods were not effective for some obvious reasons. As the crowd was dispersing, I buttonholed Richard Syron ’66, former CEO and chairman of Freddie Mac, who had been at the head table with Markopolos. What did he make of the fact that Markopolos had the goods but wasn’t able to get results? “That’s a conundrum,” Syron said, “it doesn’t make—it doesn’t seem to make sense. . . . This was a pretty compelling story.” I put the same question to Mitchell Zuckoff, a former reporter for the Boston Globe and the author of a book about Charles Ponzi. “I don’t know why he couldn’t have gotten it out,” Zuckoff said. “I was joking with him earlier, ‘Why didn’t you call me, Harry?’ And he said, ‘Because I would have been putting your life in danger.'” Zuckoff said he thinks Markopolos is “a remarkable guy.” But he suspects he has been “affected by being a voice in the wilderness for so long.”
Later, when I spoke to several people who have known Markopolos over the years, a consistent assessment emerged: The independent-mindedness that led Markopolos to see things differently from most industry insiders may have worked against him when it came to bringing influential people around to his point of view. Alan Marcus recalled having Markopolos as a student in his class on derivatives and risk management in the late 1990s. He knew then that Markopolos, who had already worked for several years in the investment world, was ahead of most of the other students—and was not the shy and retiring type. “He’s a pretty intense guy,” Marcus said. “So he was really very much front and center in the classroom.”
I asked Marcus how he thought about the role Markopolos played in the Madoff story.
“My impression is that he was not alone in the industry in being highly skeptical of Madoff. In retrospect, there were lots of people who looked at Madoff and said at the very least this doesn’t smell right,” Marcus said. “The issue is that most of them just felt like ‘Well, I’m not going to have anything to do with this guy,’ but they sort of went along and kept their heads down.” Not Markopolos. “He has that bulldog personality and he’s the kind of guy who has a hard time letting things rest.” The result can be that industry insiders “view him as being kind of ‘out there.'”
Citing a letter Markopolos sent to the SEC, Marcus said, “At one level the letter is so angry about what was going on that in a sense he kind of did himself some harm. . . . If he would have been more measured I think they would have paid more attention to it.”
In that same period when Markopolos took Marcus’s class, he took a course in financial econometrics taught by Declan Mullarkey, MS’88, now a portfolio manager at John Hancock in Boston and a lecturer in finance at the Carroll School. Mullarkey noticed “a lot of intellectual energy” in Markopolos, and that “he didn’t take anything at face value.”
Christopher Argyrople, a lecturer in finance at Boston College who was introduced to Markopolos in 1997, offers a different spin. So what if Markopolos is, as he puts it, “not the most corporate individual”? The fact that the SEC didn’t act on the documents Markopolos sent was a kind of “malpractice.” “These people just totally pooh-poohed Harry. They should have been all over it.”
“I’ve got one thing that overlaps with Harry,” Argyrople says. “We’re Greek-Americans. The Greeks are just very outspoken. And most people don’t like it.”
Argyrople believes Markopolos had good reasons to be cautious in taking on a corrupt and powerful Wall Street titan like Madoff. But what excuse did regulators have?
On September 10, 2009, Markopolos went to Washington for the second time to testify about his experience with the SEC, appearing before the Senate banking committee. Much had changed since his appearance before the House panel seven months earlier. Madoff had been sentenced in June to 150 years in prison. The Obama administration’s new chairman of the SEC, Mary Schapiro, was attempting to turn the agency around, to mostly favorable reviews. And from the first weeks when the Madoff story broke, the SEC’s office of the inspector general had been charged with conducting an internal investigation of how things went so wrong in the agency.
The inspector general’s report was released on the last day in August. It is a thorough accounting, to say the least. Running to 477 pages, it is based on the sworn testimony of 122 individuals and a search of 3.7 million e-mails in the agency’s records. Harry Markopolos figures prominently in the narrative.
At the September Senate hearing, Markopolos effusively praised the SEC’s inspector general, David Kotz, saying that the work of Kotz and Schapiro have “reaffirmed my faith in government.”
“I commend it to you,” Markopolos said of the IG’s report. “It’s great reading. For the victims out there—I know you’re watching—you definitely want to read all 477 pages. It’s hard-hitting; it’s like watching a train wreck in slow motion, from 477 different angles, and it has the same tragic ending on each page. It’s unbelievable, but sadly it’s true.”
Because Kotz had the authority to go back into the records, we now have an answer to the nagging question that followed Madoff’s exposure: Why did the SEC refuse to pursue the leads that Markopolos provided? Was this a case, as some supposed, of strings being pulled at high levels to protect an influential Wall Street tycoon?
Kotz’s report, and his testimony before the Senate panel, states that no evidence was uncovered that showed high-level interference with an SEC investigation. Instead, what Kotz found was that SEC regulators, at every turn, had things backward: They were more skeptical of Markopolos than they were of Madoff.
Perhaps the most telling passages in Kotz’s narrative concern the events of late 2005 and early 2006. This was after Markopolos submitted his report “The World’s Largest Hedge Fund is a Fraud” to New York SEC branch chief Meaghan Cheung. A lawyer, Cheung assigned her deputy Simona Suh, a staff attorney, to assist her in looking into Markopolos’s claims. One of Suh’s first steps was to go online to find more information about their Boston informant. She didn’t find much, but on November 4, 2005, sent an e-mail to Cheung reporting that Markopolos had been quoted in the Bloomberg newswire in August 2004 giving a negative assessment of George W. Bush’s reelection chances that year. “If Iraqi cities go up in flames, so do Bush’s reelection hopes,” Markopolos was quoted as saying. “And if oil prices keep rising, so do Kerry’s chances of winning.”
Questioned by Kotz, Suh later admitted Markopolos’s political views were not especially relevant to the matter at hand. Kotz asked Cheung what she thought when she was contacted by Markopolos. She testified:
“I remember thinking that after I spoke to him that he wasn’t technically a whistleblower because it wasn’t inside information, so that was, I think, a distinction that I’m sure I made, because I think—I think that, you know, when you hear ‘whistleblower’ or ‘informant,’ there’s an assumption that it’s somebody who’s inside an operation and has—and has nonpublic information to give you. And I remember realizing that he was not.”
Suh elaborated. She believed Cheung was skeptical about Markopolos because “I remember hearing that she thought he was kind of condescending to the SEC in terms of SEC expertise and knowledge.”
Nevertheless, Cheung opened an investigation, of sorts, in late 2005 that went into 2006. The suggestion that Madoff was running a Ponzi scheme was not the primary focus. Instead, Cheung’s office discovered a few inaccuracies here and there in the information Madoff provided, and decided the problem was that he wasn’t properly registered as an investment advisor. He agreed to register in August 2006 and Cheung and Suh were happy, they said, to be done with the Madoff case.
From Kotz’s report, it becomes clear that Markopolos had good reasons to be frustrated with SEC regulators. It is clear, also, that Markopolos wasn’t the only one who tried to warn the SEC. In late December 2006, the commission received a letter from an anonymous “concerned citizen.” It contained this passage:
“Your attention is directed to a scandal of major proportion which was executed by the investment firm Bernard L. Madoff . . . Assets well in excess of $10 Billion owned by the late Norman F. Levy, an ultra-wealthy long time client of the Madoff firm have been ‘co-mingled’ with funds controlled by the Madoff company with gains thereon retained by Madoff.”
In January 2007, the letter landed on Simona Suh’s desk. She checked her list of Madoff clients and didn’t find the name Norman Levy. So she called Madoff’s lawyer, Brandon Becker. On January 9, she e-mailed Cheung to say, “Brandon Becker has called me to report that Bernie says he has not managed money for Norman F. Levy, the investor referenced in the anonymous letter.” Cheung responded: “Then I think we are done and do not have to worry any further.”
As Kotz’s report dryly notes, “It is extremely curious that when the staff received a tip that Madoff had stolen from Levy, they simply accepted Madoff’s claim that he had not managed money for Levy as an explanation for the tip.”
And so it went. When Madoff’s scheme collapsed, it turned out that Levy was one of Madoff’s largest investors and had been one of Madoff’s closest friends. In January 2009, Levy’s JEHT foundation closed, due to the millions lost to Madoff.
Kotz’s report goes on to note that about six months after the SEC dismissed the tip about Levy, Markopolos sent the following e-mail to Cheung:
“Hello Meaghan, Attached are some very troubling documents that show the Madoff fraud scheme is getting even more brazen. . . . Madoff couldn’t possibly be managing the billions in this strategy unlevered, much less levered. I thought you would want to see these Wickford documents. When Madoff finally does blow up, It’s going to be spectacular, and lead to massive selling by hedge fund[s]…as they face investor redemptions.”
By that time, Cheung and Suh considered the Madoff matter closed.
Months later, Madoff did “blow up,” and, just as Markopolos said, it was spectacular.
Dave Denison is a writer in the Boston area.
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