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Authors: Harry Markopolos

No One Would Listen: A True Financial Thriller (36 page)

BOOK: No One Would Listen: A True Financial Thriller
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But like the many thousands of other investors, no one wanted to hear it. People who had invested in Madoff through Tremont believed it must be safe, because Tremont had done substantial due diligence.
 
Neil tried with him and many others he’d met in the hedge fund industry. I tried with Thierry. Mike Ocrant made it clear to people in the industry that Madoff wasn’t kosher. But just like the SEC and the media, nobody listened.
 
The reality that a lot of individual investors were going to be devastated when Madoff collapsed was brought home to us in the fall of 2008. Frank Casey had left Benchmark and had started repping a British money management firm that built customized portfolios for investors. He had been pitching this company to an executive who approves new products to be sold by a major insurance company. As Frank remembers, the man listened carefully for almost an hour, then told him thank you very much but it wasn’t a good fit for his brokers. It was too complicated for them, he said; they didn’t know how to sell customized products.
 
Frank packed his briefcase as he had done countless times before and got up to leave. The two men shook hands, and as Frank turned to leave the man asked suddenly, “Frank, what do you know about Bernie Madoff?”
 
Frank was stunned. That question had come out of nowhere. His first thought was that he had been set up. He turned around and said sharply, “Who are you and why are you asking?”
 
“You know who I am.”
 
“No, I don’t,” Frank snapped. “I know your name and I know your position in this firm, but who are you and why are you asking me about Madoff?”
 
The man explained calmly, “I don’t want to tell you why I’m asking yet, because it may affect your answer; but I’ve been sitting here for 40 minutes listening to you talking about hedge funds and mitigation of risk and customization of portfolios, and what I was thinking the whole time was that you’ve got gray hair, and you told me you’ve been around the industry in derivatives for 34 years; so I figured you had to know something about Madoff.”
 
Frank sat down. “Okay, you’re right. I know a lot about him. What do you want to know?”
 
“Everything.”
 
As Frank later explained to me, he felt somewhat reassured by the fact that this man wasn’t in the financial industry; he worked for an insurance company. And Frank was very curious; why Bernie? “Okay, you want to know about Bernie Madoff. I’ll tell you,” he decided. And for the next half hour he related in detail the whole story of our investigation. It was the first time he’d told the complete story from beginning to end, and after holding it inside for seven years it just seemed to flow out of him—although he was careful not to mention any of our names or where we worked. When he’d finished, he looked this man right in the eyes and said, “Now. You tell me: What’s this all about?”
 
“Two years ago I married into a very wealthy Jewish family,” the executive began. “My wife is the sole heir to her father’s estate. At our wedding Bernie Madoff came up to me and introduced himself; then he put his arm around my shoulders and told me, ‘I’ve known [my wife] since she was just a little girl. Now that you’re family, I’m gonna let you in. Come in and talk to me when you have a little time and we’ll get you set up.’
 
“I knew all about Bernie from her father. He’d had most of his money with Bernie forever and he couldn’t stop talking about it. Bernie this, Bernie that. Bernie’ll give you the best returns with no risk. He wanted me to get in right away. But before I did anything I took a look at his strategy. Frank, believe me, I don’t know that much about derivatives, but I couldn’t figure out how his returns could be so steady if he was doing what he said he was doing. I decided not to give him any of our money until I could get some answers. So I declined.
 
“You can imagine what that’s done to my relationship with my father-in-law. Every time I see him it’s ‘Why haven’t you called Bernie?’ He’s like ‘It’s your job now as my son-in-law to take care of my daughter, and you should be putting your money with Bernie. He’ll take care of you.’ It’s really causing a problem in the family. My father-in-law’s making a real issue about this.”
 
Frank smiled at that. “Boy, did you nail it,” he said. “What we can’t understand is why nobody else seems to be able to figure it out. We think he’s going to blow soon.”
 
The executive took a long, deep breath. “What I really want to do is convince him to get his money out as soon as possible. I’m sick and tired of listening to him, and I’m really afraid my wife is going to lose her inheritance. Can you help me? Can you put any of what you just told me in writing?”
 
Frank laughed at that suggestion. “Oh sure,” he said. “I don’t think so—I don’t want a bullet in my head. Sorry.”
 
The executive practically begged him. “Frank, I’m afraid my wife’s gonna lose everything if you don’t help me,” he said. “Her father isn’t going to listen to me unless I have some proof.” Frank thought about it. And then he sat down and wrote a long e-mail, using as his foundation the red flags from my 2005 submission to the SEC. He knew it was risky, that it could put him in jeopardy, but he felt he had a moral obligation to help. He also knew, when he paused to think about it, that it was really a stupid thing to do.
 
Knowing that there was a real chance this person might confront Bernie with this information, he did as much as possible to protect himself. Rather than just scanning in the submission, he created a completely new document, eliminating several of the most technical points as well as anything that might lead back to me. He changed the order, renumbered the flags, and substituted the phrase unknown scheme for Ponzi scheme because he didn’t want to be out in public with that accusation. At the top of the e-mail he wrote a disclaimer, stating that this was not his opinion and certainly not his firm’s opinion, but that he had run into an unnamed analyst extremely knowledgeable about derivatives, who had shown him these red flags. “I’m not stating that the analyst has it nailed,” he wrote. “I haven’t done my due diligence on this analyst. I present this information solely for your own use and you have to do your own due diligence.”
 
Then he moved the cursor to the upper lefthand corner of his screen and hit send. And then forgot all about it. It would be more than a month before he received a response, and by that time the whole world had changed.
 
It’s impossible to pinpoint the moment at which Bernie Madoff realized it was over for him. It wasn’t beauty that killed this beast; it was the cold numbers. As it turned out, the market that Madoff had dominated for decades finally destroyed him.
 
Beginning sometime in 2007 the world financial system was staggered when the American housing bubble burst. Millions of people who had been living on the rising equity in their homes saw that cushion disappear. Within several months trillions of dollars in real estate value was lost. People with low-interest adjustable-rate mortgages saw their payments rise and could no longer afford those mortgages, causing banks to foreclose. Banks had issued millions of those mortgages to people who were not financially qualified and whose only viable exit strategy was to sell their homes at a higher price, but these homeowners now saw that option collapse. Investment firms had wrapped those mortgages into financial products called mortgage-backed securities. Those securities had been sold as high-quality assets, but in fact were low-quality realty. They were also very illiquid, and when people realized there was little or no underlying value to them and saw no new buyers coming into the markets, their value plunged.
 
It was like a big game of musical chairs, but in this game when the music stopped those institutions holding these securities were out hundreds of billions of dollars. Within two years the American housing market had lost about 20 percent of its value. As the market collapsed, banks stopped lending and the years of easily obtainable credit ended. Even people and businesses with really good credit couldn’t get loans. At the same time commodity prices, especially oil, rose rapidly. By September 2008, this had become a global financial crisis. Banks began closing. There was a real sense of panic as the media wondered if we were on the edge of a second Great Depression.
 
The stock market, which had been in a somewhat orderly decline for about a year, suddenly began dropping fast. In October, the head of the International Monetary Fund warned that the international financial system potentially could collapse. The week of October 5 the S&P 500 lost 20 percent of its value and the Dow Jones Industrial Average lost 18 percent. The deputy governor of the Bank of England called it “possibly the largest financial crisis of its kind in human history.” By November the markets had fallen almost 40 percent. While hundreds of other hedge funds had been forced to close or had stopped allowing redemptions, Madoff was still claiming to be profitable. Incredibly, there were numerous people who still believed in Bernie, and rushed to get out of money-losing investments and into the safer Madoff funds. Bernie told Fairfield he was open and would take whatever FGG could raise for him. Maybe he still had some hope that he could survive. Who knows?
 
But too many of Madoff’s investors were desperate for cash to protect their investments and meet their growing client redemptions, and attempted to withdraw their money—apparently these requests totaled more than $7 billion. There was no possible way Madoff could cover all these requests, but he wouldn’t give up. He started scrambling, desperately trying to raise cash. In late November Fairfield announced the creation of a new fund, Fairfield Emerald. But it was too late; it was over for him.
 
Finally, on December 10, 2008, he supposedly told his two sons that his investment business was a fraud, “Basically, a giant Ponzi scheme.” Early the following morning, December 11, 2008, two FBI agents knocked on his front door and asked him if there was an innocent explanation.
 
He shook his head. “There is no innocent explanation.” The two agents immediately placed him under arrest. The largest Ponzi scheme in history had finally collapsed.
 
Chapter 8
 
Closing the Biggest Barn Door in Wall Street History
 
The moment they put the handcuffs on Madoff, my life was changed forever. I just didn’t find out about it for several hours. That morning Frank and I had been to a partnership breakfast of an organization called World Boston. World Boston is part of the 60-year-old World Affairs Council that brought politicians and dignitaries from around the world to Boston to speak to local leaders of the business community. We were there to support Gaytri Kachroo, who was on its board. Among the other people there were bank chairs, investment officers, and fund managers. It was a terrific event; even the food was good. We couldn’t have known it, but we were sitting in a sea of Madoff victims.
 
I’d gotten home from that meeting just in time to take my twin boys for their karate lesson. It was while I was waiting for them at the dojo that my life changed. Madoff had admitted he was running a Ponzi scheme. Madoff had been arrested. Billions of dollars were gone. The whole financial industry was shaken. People were panicking.
 
After dealing with the initial shock, I didn’t really know how to react. I wanted to do a hundred things first, and my brain sorted through them rapidly, trying to put them into some kind of sensible order. But I was in new territory. I needed information. I needed to know what had happened, when, and how. I needed to have all the details. I called Dave Henry back. “It’s finally over,” he said, bringing me up to the minute. “There could be a bloodbath on Wall Street.” We tried to guess the ramifications, who was going down, but we had no real idea. I returned Andre Mehta’s call, but he was being overwhelmed by clients. Wall Street was in an uproar; everybody was trying to find out who and what was affected. People were desperate for information.
 
The energy generated by my excitement was surging through my body and I couldn’t stand still; as we spoke I kept walking in tight circles. I began thinking,
One enemy down;
but there still was one battle to fight. The one that might have gotten me killed was finished, but the Securities and Exchange Commission (SEC) was still potentially very dangerous to me. The papers I had in my possession would expose the incompetence of the SEC to the world. Unless it could prevent me from getting my documents published, the reputation of that agency was going down in flames, and careers were going to end that day. Those papers were sitting in folders in my house. I realized I had to get them out of the house right away, before anyone could get a court order to stop me. And I had to get them published. I’ll call Wilke, I thought. I’ll bet he’s gonna want ’em now.
BOOK: No One Would Listen: A True Financial Thriller
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