No One Would Listen: A True Financial Thriller (43 page)

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Authors: Harry Markopolos

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David Kotz and each of his staff members were well prepared for this meeting. You can tell from the questions how serious the people asking them are, and the inspector general’s office was serious. Rather than simply responding yes or no, I was giving lengthy, detailed answers to those questions. I wanted to shed light on this entire investigation. The people who had things to hide were in his agency, and I didn’t want to leave any dark corners for them to hide in. Kotz’s people didn’t challenge my answers; they were probing to find out why the SEC had failed, who was responsible, and what should be done to make certain that nothing like this ever happened again. I began to feel like we shared common objectives. I went through my red flags with them. They had a whiteboard in the room, and several times I got up and showed them the math. The inspector general brought in a camera and took pictures of each of my formulas, explaining that they intended to hire a forensic accounting firm to review my math for accuracy. That seemed like the best way to handle it.
 
At one point late in the morning, Phil Michael took the unusual step of asking Kotz if he could step in and take over the questioning. He said, “I want to run by some points that we’re not hitting.” Phil had spent decades involved in criminal investigations and he knew the entire story, so he made sure we got out the pertinent information. After finishing his questions, he left the meeting to get a midafternoon train back to New York. As soon as he walked out the door, I knew there was going to be a problem. Somehow it seems that every time Phil leaves a meeting something dramatic happens. This time was no exception.
 
We had been working late into the afternoon when David Kotz asked me to explain how the total damages could be assessed and calculated. That actually was a difficult question because it had several answers. There were several different formulas that could be used to determine that, I explained, and all of them were correct. It was really a question of what counted as a loss. Is it simply the actual dollars handed over to Madoff minus the money he returned? What about the interest that supposedly was accruing—does that count as a loss? This was a decision the SEC had to make. Then Noelle Frangipane asked me, “When you made your first submission to the SEC, how big did you estimate Madoff was?”
 
I said, “We had him at somewhere between three billion dollars and seven billion dollars.”
 
“And how big was he when he finally turned himself in?”
 
“His number was fifty billion dollars.”
 
“And so if the SEC had acted in 2000, when you made your first submission, how much money would have been saved?”
 
“We could have shut them down at under seven. So forty-three billion dollars.”
 
“So forty-three billion dollars would have been saved if the SEC had listened to you in May of 2000?”
 
“Correct.”
 
A split second later I heard a loud thud. I turned to Noelle. Her head was down on the table and she was sobbing uncontrollably. During my long pursuit of Bernie Madoff I’d seen a lot of strange things, but this certainly was one of the most unusual. It was an incredibly human moment, and I think we were all touched by it. Across the table from me was a gorgeous, talented deputy inspector general crying her eyes out, but I had no idea what it was all about. Again, I knew collapsing and crying were not on the approved list of interviewing techniques, at least not as I was taught. The investigator is definitely not supposed to have an emotional breakdown and cry in front of the witness. Gaytri responded, saying, “I’m taking my client outside for a sidebar.” It was the only decent thing to do.
 
We walked down a very long corridor until we reached a public area, and sat down. “Harry,” she said, “did you see the same thing I did? Noelle just collapsed.”
 
I nodded. “Oh, yes, she did. What do you think that was all about?”
 
“It think it’s a liability issue,” she said. “Noelle is obviously a really sharp attorney, and she realizes that the government may have some culpability.”
 
That didn’t make sense to me. “No, you can’t sue the government. It has sovereign immunity.” The rule of law, you can’t sue the king, prevents citizens from bringing legal action against the state.
 
Gaytri disagreed. “That’s what most people believe. But the courts can make law, especially the Supreme Court. There’s nothing to prevent people from suing. I guarantee you, there’s going to be a lawyer out there who is going to file a lawsuit against the government, against the SEC. They know they’re going to lose in federal district court; they’re going to plan on losing in the circuit court on appeal; and then they’re going to hope that the Supreme Court takes their case. The Supreme Court can make law or it can change law. Sovereign immunity may not hold up, because the SEC is clearly so negligent in this case the court could say, ‘We are liable and the victims should get their money back.’
 
“And this certainly is an international case. Once all the national remedies have been exhausted, it wouldn’t surprise me to see people trying to take it to the International Court of Justice. I’m sure the international community isn’t that happy with the United States after this whole financial crisis. I think that’s what Noelle is afraid of.”
 
Maybe. It also could have been that, just like me, Kotz’s staff had been working so hard for so long that they were all worn down, and Noelle simply had an emotional outburst—much like mine when Frank told me that Thierry was dead. Sometimes it just gets to be too much. Whatever it was, Noelle’s response showed us how seriously she cared about reforming her agency. Ironically, it had a very positive effect on the rest of the afternoon’s questioning. It removed any doubts that Kotz’s team intended to follow the evidence wherever it led. This wasn’t going to be a whitewash.
 
We all calmed down and the questioning continued, hour after hour. We were there for six hours. This was as much a military-style debriefing as testimony. Kotz’s questions made it obvious that he was trying to discover whether his agency was simply incompetent or it was also corrupt. He asked a lot of questions about possible interference in the investigation, ranging from asking me if I knew anything about the phone call supposedly made by Senator Schumer—I didn’t—to the possibility that Madoff had bribed team members. Among the questions he asked, for example, was: “If a person with a hedge fund background was on the SEC’s examination team that went into the Madoff operation, should he have been able to miss all the red flags you pointed out?”
 
That required only a one-word answer. “No.” Actually, months earlier I had accepted the fact that the SEC was not corrupt. If it had been, my name would have come out and I might be dead. “No,” the agency wasn’t corrupt at the team and branch levels. Down at those levels they were incompetent, just incredibly incompetent. This wasn’t a bad apples case; it was a systemic failure.
 
The meeting continued through the day into the late afternoon. By the time we left, I was exhausted. Whatever excitement I’d felt a day earlier had been thoroughly washed out of me. But we had bonded with Kotz’s team and felt confident they were going to produce the thorough, honest report he had promised. Before we left, I warned the inspector general’s team that this investigation was going to be a trip through the Twilight Zone, and that nothing they were going to see would make any sense whatsoever. In fact, I told them, if it made sense that’s how you knew it wasn’t part of this case, because nothing we had encountered had ever made sense. I told them that what they were going to discover would traumatize them—because they were about to see the worst sort of human behavior. I cautioned them that they were going to have two choices every day while investigating this case: They could either cry themselves into depression or laugh themselves silly. I urged them to laugh, because that was going to be the only way they were going to get to the other side of their investigation. In the months afterward I’d make sure to call with positive messages to boost the team’s morale. I knew the debilitating effect the Madoff case would have on their team because I had seen what this case had done to my team.
 
David Kotz followed up by interviewing the three other members of my team, each of whom had his own important story to tell about his role in this investigation. Assistant Inspector General David Fielder and Senior Counsel David Witherspoon traveled to Boston to interview employees of the SEC’s New England office, as well as Frank Casey in person and Neil Chelo on the phone. They met with Frank and Gaytri, who was there to provide legal guidance for Frank and Neil, in a conference room at McCarter & English. Frank was ... frank. He took them through the entire story, from the day he discovered Bernie until Thierry’s suicide. He told them how he learned to recognize Bernie’s footprint in documents and then tracked down funds invested with him. He re-created the conversations he’d had with Thierry and others in the industry and his strange encounter with a victim’s son-in-law. He gave them the European background, then brought them inside the financial services industry. He explained to them the accepted methods of conducting due diligence, which obviously the SEC should have known, and what Access International had done. But then he went further, speculating that the SEC’s failure to stop Madoff was more than just incompetence. “The first two years after Harry submitted his initial report, I figured they were just complacent,” he told the investigators. “The next two years I began to believe that they were structurally incompetent. But after that, given Harry’s submission, there is very little doubt in my mind that they were somehow complicit.”
 
Neil gave them a quant’s point of view of the financial industry, providing a considerable amount of information that wasn’t in our documents, including best practices and, unfortunately, the commonly seen worst practices. He discussed in far more detail than I had the numerous interviews he’d conducted with fund managers, in particular his long interview with Fairfield Greenwich’s chief risk officer, Amit Vijayvergiya, and how he had validated my theories and discovered additional red flags. Just as I had done, Neil emphasized the fact that there are no incentives for people inside the industry to report unethical or illegal activities. In fact, there are disincentives. Many of the large institutional investors in Madoff were also Neil’s competition. Neil was actually better off watching his competition make the horrendous mistake of investing in a Ponzi scheme. But for Neil, exposing Madoff was simply the right thing to do.
 
As Gaytri walked out of the session, she noticed a tall, lanky man waiting in the reception area. He turned out to be Grant Ward, the SEC’s former New England director of enforcement—the person I’d sent my first submission to in 2000. It was ironic; the investigation had finally come full circle. Incredibly, during his sworn testimony that afternoon Ward told Kotz’s investigators that he did not remember meeting me in 2000—a statement that later was directly contradicted by Juan Marcelino, the former regional administrator of the SEC’s Boston office. Marcelino testified that he had spoken with Grant the day after I had appeared in front of Kanjorski’s subcommittee, and Grant had told him he “remembered meeting with Markopolos but didn’t feel he had done anything wrong.” David Kotz eventually concluded that “Ward’s testimony was not credible,” and that he had “told Manion that he had referred the complaint to NERO [the SEC’s Northeast Regional Office in New York] but never did.”
 
Mike Ocrant was interviewed in New York by Kotz and Senior Counsel Heidi Steiber. He provided the reporter’s point of view, telling them how meeting Frank in a Barcelona taxi led to his interview with Madoff, but he also told them about his many conversations with other knowledgeable people in the industry. It seemed to be the general consensus in the industry, he explained, that SEC investigative teams too rigidly followed a checklist in their search for paper violations, rather than digging deep and actually trying to figure out what was going on. A primary reason for that, he suggested, was that the investigators lacked experience and real knowledge of brokerage operations. Additionally, he pointed out that it was well known in the industry that the greatest desire of many, if not most, SEC employees was to obtain a job inside the securities industry. A stint at the SEC was simply an important addition to their resumes before moving on to join the industry that they were supposed to regulate.

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