Harry Markopolos is being called the Deep Throat of the Bernard Madoff scam. He describes himself as “the boy who cried wolf.”
In his case, the wolf was real, and no matter how many times Markopolos cried out, the Securities and Exchange Commission did little.
Not until his sons turned him in was Bernard Madoff arrested on charges of conducting a $50 billion swindle defrauding banks, hedge funds, nonprofits and individual investors worldwide.
In the succeeding weeks, Markopolos, a former investment officer with Rampart Investment, has become known as a financial Cassandra for his repeated warnings about Madoff’s operations.
He began complaining years ago, his insights culminating in May 2005, with what financial writer Michael Lewis and hedge fund manager David Einhorn described in the New York Times Saturday as a “devastatingly persuasive 17-page letter” to the SEC.
Either Madoff was front-running customer orders - essentially taking orders, assigning winners to the Madoff company portfolio and passing losing investments to the customer.
Or Madoff was conducting what Markopolos labelled “the world’s largest Ponzi scheme.” It appears that scenario two, which Markopolos described as “highly likely” was Madoff’s mode of operation.
Markopolos used mathematics to dissect Madoff’s investment strategy, and concluded that it couldn’t possibly work. He also questioned the secrecy surrounding the Madoff operation.
“Only Madoff family members are privy to the investment strategy,” he noted in his 2005 letter to the SEC. “Name one other prominent multi-billion dollar hedge fund that doesn’t have outside, non-family professionals involved in the investment process. You can’t because there aren’t any.
“…Either (Bernard Madoff) is the world’s best stock and options manager that the SEC and the investing public has never heard of or he’s a fraud.”
The SEC did follow up on Markopolos’ tips, investigating Madoff, but it found no evidence of front running or of a Ponzi scheme. It found a few technical violations, which Madoff reportedly corrected.
In his 2005 letter, Markopolos predicted the likely fallout if Madoff Investments turned out to be a Ponzi scheme, likening it to a category 2-3 hurricane. The storm, he said, would include panic selling, implosion of hedge funds and damage to European markets because of the number of French and Swiss banks investing in Madoff.
There’s a slight trace of crackpot in Markopolos’ writing style. Indeed, there was so much money to go around in the boom years that few but the eccentrics complained. And few regulators paid any attention.
However, Markopolos backed up his claims with facts and he took care to mention a May 2001 Barron’s article by reporter Erin E. Arvedlund that raised questions about Madoff’s secretive investment methods.
He also cited a variety of off-the-record financial community sources who reportedly had steered clear of Madoff.
“I kept firing bigger and bigger bullets but I couldn’t stop him,” he told the Wall Street Journal. His frustration finally ended with Madoff’s arrest on Dec. 18.
Muckety writer A. James Memmott contributed to this story.
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