Harry Markopolos
Encyclopedia
Harry M. Markopolos is a former securities industry executive and independent financial fraud
investigator for institutional investors and others seeking forensic accounting
expertise. He has received public acclaim for uncovering evidence over a period of nine years that Bernard Madoff
's wealth management business was actually a massive Ponzi scheme
. Madoff was ultimately sentenced to 150 years in prison after admitting to operating the biggest Ponzi scheme in history. In March 2010 his book on uncovering the Madoff fraud was published titled, No One Would Listen: A True Financial Thriller
. It was ghostwritten by David Fisher and reportedly has a first-hand account of uncovering the Madoff fraud and Markopolos's experience repeatedly tipping off the SEC, as well as explaining how Madoff duped his victims.
In a 2010 media interview Markopolos was scathing in his criticism of the US Securities & Exchange Commission (SEC)
for both failing to uncover the Madoff fraud in spite of repeated tips, and also for failing to investigate the larger firms under their supervision. He also described the "private moments" he's had with victims of the Madoff fraud as: "Heartfelt, gut-wrenching things. People trying to commit suicide or losing loved ones who’ve died of heartbreak."
in Erie, Pennsylvania
in 1974. He received an undergraduate degree in Business Administration from Loyola College in Maryland in 1981 and an M.S. in finance from Boston College
in 1997.
In May 1978 he received a reserve commission as a 2nd Lieutenant, Infantry, in the US Army from Loyola College ROTC. Markopolos is a graduate of several Army post-graduate schools including Infantry Officer’s Basic and Advanced Courses, the Civil Affairs Officers Advanced Course and US Army Command & General Staff College. He has commanded troops at every rank from 2nd Lieutenant to Major during 17 years of part-time reserve component service in the Army National Guard
and Army Reserve. He left the Army Reserve in April 1995 to apply for and enter graduate school at Boston College the following September.
Markopolos began his career on Wall Street in 1987 as a broker with Makefield Securities, a small Erie-based firm partly owned by his father. In 1988, he moved to Darien Capital Management in Darien, Connecticut
as an assistant portfolio manager.
He then worked at Boston
-based options trader Rampart Investment Management from 1991 through 2004, ultimately becoming its chief investment officer, and is a past president of Boston Security Analysts Society Inc. He holds the Chartered Financial Analyst
(CFA) designation and is a Certified Fraud Examiner
(CFE). He now works, with a certain degree of anonymity, as a forensic accounting
analyst for attorneys who sue companies under the False Claims Act
and other statutes, focusing on tips that lead to continuing investigations into medical billing, Internal Revenue Service
, and United States Department of Defense
frauds,
where a whistleblower would be compensated.
On February 11, 2009, the Boston Security Analysts Society honored him with a silver whistle in recognition of his efforts to expose Madoff.
manager who consistently delivered net returns of 1-2 percent a month. Frank Casey, one of Rampart's principals, met with Access CEO Thierry de la Villehuchet, and found out the manager was Bernie Madoff, who was secretly operating a wealth management business in which his clients essentially gave him carte blanche to use the money however he wanted. Casey and Rampart's managing partner, Dave Fraley, asked Markopolos to try to design a product similar to Madoff's split-strike conversion in hopes of getting Access to diversify away from Madoff.
When Markopolos got his hands on a copy of Madoff's revenue stream, he suspected problems almost immediately. To his mind, Madoff's strategy was so poorly structured that on paper, it couldn't possibly make money. Additionally, his return stream rose upward with only a few downticks--a nearly perfect 45-degree angle. Markopolos knew that the markets were too volatile even in the best of conditions for this to be possible. He believed there were only two ways to explain the figures--either Madoff was running a Ponzi scheme (by paying established clients with newer clients' money) or front running
(buying stock for his own account based on knowledge about his clients' orders). Either way, Markopolos believed there was no legal way for Madoff to deliver his purported returns. Markopolos later said that he knew within five minutes that Madoff's numbers didn't add up. It took him another four hours to prove that they could have only been obtained through fraud.
Despite this, Markopolos' bosses at Rampart asked Markopolos to deconstruct Madoff's strategy to see if he could replicate it. Again and again, he could not simulate Madoff's returns, using information he had gathered about Madoff's trades in stocks and options. For instance, he discovered that for Madoff's strategy to work, he would have had to buy more options on the Chicago Board Options Exchange
than actually existed. He also couldn't find any evidence the market was responding to any Madoff trades, even though by his estimate Madoff was running as much as $6 billion--far more money than any known hedge fund even then. In Markopolos' mind, this suggested that Madoff wasn't even trading.
With the help of several colleagues at Rampart, Markopolos continued to probe into the Madoff operation. What they found out concerned him enough that he filed a formal complaint with the Boston office of the SEC in the spring of 2000. However, the SEC took no action. Markopolos sent a more detailed submission to the SEC a year later. He even offered to go to Madoff's headquarters undercover, obtain the trading tickets and compare them with the Options Price Reporting Authority
tape. This submission also passed with no action.
Shortly after his second submission, Markopolos traveled to Europe with Villehuchet to help get investors for an alternative product to Madoff that he'd developed for Rampart. On this trip, Markopolos found out that 14 funds were invested with Madoff--and each manager believed his fund was the only one from which Madoff was taking new money. Markopolos believed from the beginning that Madoff was running a Ponzi scheme, given his voracious appetite for cash. However, he had been willing to accept the possibility that it was actually front-running (as some of his colleagues believed), because on paper it made no sense for Madoff to risk his reputation by essentially stealing billions that he really didn't need. His conversations with the European managers, though, revealed a classic "robbing Peter to pay Paul" scenario. Villehuchet committed suicide shortly after Madoff's scheme blew up, having lost $1.5 billion.
Even after leaving Rampart, Markopolos persevered, driven by the intellectual challenge of cracking a Wall Street legend, and the ongoing encouragement from a Boston SEC staffer, Ed Manion. He also did so at considerable risk to his own safety; he'd found out on his European trip that a large number of funds invested with Madoff operated offshore
--making it a near-certainty that the Russian Mafia
and Latin-American drug cartel
s had money with him.
The culmination of Markopolos' analysis was a 21-page memo sent in November 2005 to SEC regulators, entitled "The World's Largest Hedge Fund is a Fraud." It outlined his suspicions in more detail and invited officials to check his theories. Markopolos outlined 30 red flags that proved Madoff's returns could not possibly be legitimate. His analysis was based on over 14 years of Madoff return numbers. In that time, Madoff reported only four losing months--an implausible scenario that Markopolos said could only be achieved through fraud. In the document Markopolos states:
On June 3, 2009 Markopolos told a conference at Boston College
, his graduate-school alma mater, that he believes Madoff personally kept less than 1 percent of the $65 billion reported stolen, and will probably lose what remains of his cut to money launderers. Markopolos estimates that $35 billion to $55 billion of the money Madoff claimed to have stolen never really existed, simply fictional profits he reported. Markopolos believes that his customers lost $10 billion to $35 billion, most of which went to early investors. "Madoff will wind up in a special prison designed as much to keep the crook’s victims out as Madoff in. He’s a guy who can’t afford not to be in prison,” he said.
' House Financial Services Committee’s capital markets panel and on March 1, appeared on CBS
's 60 Minutes
.
Markopolos harshly criticized the SEC for ignoring his warnings about Madoff. “Nothing was done. There was an abject failure by the regulatory agencies
we entrust as our watchdog,” he explained in 65 pages of prepared testimony. He also said that his original 2000 complaint gave the SEC enough evidence to shut Madoff down when he supposedly had as little as $3 billion under management.
Describing Madoff as “one of the most powerful men on Wall Street,” Markopolos stated that there was “great danger” in raising questions about him: "My team and I surmised that if Mr. Madoff gained knowledge of our activities, he may feel threatened enough to seek to stifle us.” He testified that he feared for his, as well as his family's safety, until after Madoff's arrest, when the SEC finally acknowledged that it had received "credible evidence" of Madoff's Ponzi scheme years before. He explained that Madoff's "math never made sense," that his "return stream never resembled any known financial instrument or strategy," and that Madoff wasn't making the volumes of trades he claimed.
According to Markopolos, the biggest red flag about Madoff came during his initial analysis of 87 months (a little over seven years) of Madoff trades. In that time, Madoff reported only three losing months. By comparison, the S&P 500
reported 28 losing months during this same period. He likened Madoff's purported returns to a baseball player batting .966 for the season "and no one suspecting a cheat."
Markopolos had originally concealed his identity from SEC regulators in May 1999, although he did meet face-to-face with SEC officials in Boston in 2000 and 2001. After the SEC did not respond, Markopolos was fearful of taking his complaints to the industry's self-regulatory authority, the National Association of Securities Dealers (since succeeded by the Financial Industry Regulatory Authority
(FINRA)). He not only feared the power Madoff's brother, Peter, had in that organization (he is a former Vice Chairman), but also feared that Madoff may have had ties to Russian and South American organized crime. Markopolos believed the Federal Bureau of Investigation
would reject his allegations without the SEC staff's endorsement. He believed SEC analyst Ed Manion was one of only two who understood Madoff’s scheme and “the threat it posed to the public.” The only other SEC staffer who realized the scheme's implications was the SEC's Boston branch chief, Mike Garrity. Markopolos met with Garrity in 2005, and said that while Garrity realized almost immediately that Madoff was breaking the law, he could take no action because Madoff wasn't based in New England. Had Madoff been based in New England rather than the New York area, Markopolos said, Garrity "would have had an inspection team inside Madoff's operation the very next day." “My experiences with other SEC officials proved to be a systemic disappointment and led me to conclude that the SEC securities' lawyers, if only through their investigative ineptitude and financial illiteracy, colluded to maintain large frauds such as the one to which Madoff later confessed."
He also added that in 2005 it was Meaghan Cheung, the branch chief of the SEC's New York office, to whom he gave his 21-page report alleging that Madoff was paying off old investors with money from fresh recruits. “Ms. Cheung never expressed even the slightest interest in asking me questions,” Markopolos said. She was too hung up on Markopolos mentioning the possibility of a reward and the fact that he was a competitor of Madoffs. Cheung approved an internal memo in November, 2007 to close an SEC investigation of Madoff without bringing any claim. Subsequently, she left the agency. Markopolos also testified he gave details about the case in 2005 to John Wilke
, a Wall Street Journal investigative reporter, but that it was never pursued. Markopolos testified he (anonymously) sent a package of documents concerning Madoff to former New York Attorney General Eliot Spitzer
, who had successfully prosecuted a number of securities fraud cases, but that Spitzer took no apparent action, either. Spitzer's family trust had invested in Madoff.
"Government has coddled, accepted, and ignored white-collar crime
for too long," he testified. "It is time the nation woke up and realized that it's not the armed robbers or drug dealers who cause the most economic harm, it's the white collar criminals living in the most expensive homes who have the most impressive resumes who harm us the most. They steal our pensions, bankrupt our companies, and destroy thousands of jobs, ruining countless lives." He testified to Rep. Gary Ackerman
-D-NY that he has never been compensated for his efforts. "I did it for our flag, for patriotism." Markopolos presented recommendations to improve the SEC's operations, which included mandatory department standards: good ethics, full transparency, full disclosure
, and fair dealing
for all.
The SEC must establish a unit to accept whistleblower tips, and move its activity closer to financial centers away from Washington, D.C.
His testimony included a reference to another $1 billion Ponzi fraud, which he shared the following day with SEC Inspector General
H. David Kotz
, who gave the tips to SEC Chairman Mary Schapiro
.
He also disclosed information regarding a dozen as-yet-unknown foreign Madoff feeder fund
s, “hiding in the weeds” in Europe, whose silent victims likely included Russian mobsters
and Latin American drug cartels, “dirty money” investors. Markopolos remarked that European royal families had also lost assets.
In his interview with Steve Kroft
of 60 Minutes, Markopolos said the biggest red flag he'd noticed in his initial 1999 analysis of Madoff was that he reported losing months only four percent of the time. To Markopolos' mind, no one could possibly be that good given the volatility of the markets. "As we know, markets go up and down, and his only went up," he said. Markopolos noted that during his tenure at Rampart, he traded with some of the biggest derivatives firms in the world--and to a man, they all felt Madoff's numbers weren't real. He admitted that he had some financial incentive to get Madoff out of the picture, as the two competed against each other from 2000 to 2004. However, he said, he felt compelled to pursue it because "when someone's competing on your playing field, who's a dirty player, you want him tossed off the field." He assailed the SEC once again for ignoring his warnings, saying that the only reason Madoff was caught was because he ultimately collapsed under the weight of his own lies.
As a result of the Madoff scandal, the SEC's chairman Christopher Cox stated that an investigation will delve into "all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by staff regarding the firm." A former SEC compliance officer, Eric Swanson, married Madoff's niece Shana, a Madoff firm compliance attorney.
's Fish and Chips restaurants in Maryland and Delaware. His younger brother Louie once ran the trading desk for a New Jersey brokerage firm. His sister's name is Pam Markopolos.
He and wife Faith, who also works in the financial industry for an investment firm conducting due diligence of portfolio managers, have three sons, two of whom are twins named Harry Louie and Louie Harry.
, was released in March 2010.
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
investigator for institutional investors and others seeking forensic accounting
Forensic accounting
Forensic accounting is the specialty practice area of accountancy that describes engagements that result from actual or anticipated disputes or litigation. "Forensic" means "suitable for use in a court of law", and it is to that standard and potential outcome that forensic accountants generally...
expertise. He has received public acclaim for uncovering evidence over a period of nine years that Bernard Madoff
Bernard Madoff
Bernard Lawrence "Bernie" Madoff is a former American businessman, stockbroker, investment advisor, and financier. He is the former non-executive chairman of the NASDAQ stock market, and the admitted operator of a Ponzi scheme that is considered to be the largest financial fraud in U.S...
's wealth management business was actually a massive Ponzi scheme
Ponzi scheme
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...
. Madoff was ultimately sentenced to 150 years in prison after admitting to operating the biggest Ponzi scheme in history. In March 2010 his book on uncovering the Madoff fraud was published titled, No One Would Listen: A True Financial Thriller
No One Would Listen: A True Financial Thriller
No One Would Listen: A True Financial Thriller is a book by whistleblower Harry Markopolos about his investigation into the Madoff investment scandal and how the U.S. Securities and Exchange Commission failed to react to his warnings....
. It was ghostwritten by David Fisher and reportedly has a first-hand account of uncovering the Madoff fraud and Markopolos's experience repeatedly tipping off the SEC, as well as explaining how Madoff duped his victims.
In a 2010 media interview Markopolos was scathing in his criticism of the US Securities & Exchange Commission (SEC)
United States Securities and Exchange Commission
The U.S. Securities and Exchange Commission is a federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets in the United States...
for both failing to uncover the Madoff fraud in spite of repeated tips, and also for failing to investigate the larger firms under their supervision. He also described the "private moments" he's had with victims of the Madoff fraud as: "Heartfelt, gut-wrenching things. People trying to commit suicide or losing loved ones who’ve died of heartbreak."
Education and career
Markopolos, who comes from a family of Greek-American restaurateurs, graduated from Cathedral Preparatory SchoolCathedral Preparatory School
Cathedral Preparatory School is an all-male college prep school in Erie, Pennsylvania run by the Roman Catholic Diocese of Erie and was established in 1921 by Archbishop John Mark Gannon. The school boasts a 97%-100% college acceptance rate among graduating classes...
in Erie, Pennsylvania
Erie, Pennsylvania
Erie is a city located in northwestern Pennsylvania in the United States. Named for the lake and the Native American tribe that resided along its southern shore, Erie is the state's fourth-largest city , with a population of 102,000...
in 1974. He received an undergraduate degree in Business Administration from Loyola College in Maryland in 1981 and an M.S. in finance from Boston College
Boston College
Boston College is a private Jesuit research university located in the village of Chestnut Hill, Massachusetts, USA. The main campus is bisected by the border between the cities of Boston and Newton. It has 9,200 full-time undergraduates and 4,000 graduate students. Its name reflects its early...
in 1997.
In May 1978 he received a reserve commission as a 2nd Lieutenant, Infantry, in the US Army from Loyola College ROTC. Markopolos is a graduate of several Army post-graduate schools including Infantry Officer’s Basic and Advanced Courses, the Civil Affairs Officers Advanced Course and US Army Command & General Staff College. He has commanded troops at every rank from 2nd Lieutenant to Major during 17 years of part-time reserve component service in the Army National Guard
Army National Guard
Established under Title 10 and Title 32 of the U.S. Code, the Army National Guard is part of the National Guard and is divided up into subordinate units stationed in each of the 50 states, three territories and the District of Columbia operating under their respective governors...
and Army Reserve. He left the Army Reserve in April 1995 to apply for and enter graduate school at Boston College the following September.
Markopolos began his career on Wall Street in 1987 as a broker with Makefield Securities, a small Erie-based firm partly owned by his father. In 1988, he moved to Darien Capital Management in Darien, Connecticut
Darien, Connecticut
Darien is a town in Fairfield County, Connecticut, United States. A relatively small community on Connecticut's "Gold Coast", the population was 20,732 at the 2010 census. Darien was listed at #9 at CNN Money's list of "top-earning towns" in the United States as of 2011...
as an assistant portfolio manager.
He then worked at Boston
Boston
Boston is the capital of and largest city in Massachusetts, and is one of the oldest cities in the United States. The largest city in New England, Boston is regarded as the unofficial "Capital of New England" for its economic and cultural impact on the entire New England region. The city proper had...
-based options trader Rampart Investment Management from 1991 through 2004, ultimately becoming its chief investment officer, and is a past president of Boston Security Analysts Society Inc. He holds the Chartered Financial Analyst
Chartered Financial Analyst
The Chartered Financial Analyst Program is a graduate level self-study program offered by the CFA Institute to investment and financial professionals...
(CFA) designation and is a Certified Fraud Examiner
Certified Fraud Examiner
The Certified Fraud Examiner is a credential awarded by the Association of Certified Fraud Examiners . The ACFE association is the world's largest anti-fraud organization and premier provider of anti-fraud training and education...
(CFE). He now works, with a certain degree of anonymity, as a forensic accounting
Forensic accounting
Forensic accounting is the specialty practice area of accountancy that describes engagements that result from actual or anticipated disputes or litigation. "Forensic" means "suitable for use in a court of law", and it is to that standard and potential outcome that forensic accountants generally...
analyst for attorneys who sue companies under the False Claims Act
False Claims Act
The False Claims Act is an American federal law that imposes liability on persons and companies who defraud governmental programs. The law includes a "qui tam" provision that allows people who are not affiliated with the government to file actions on behalf of the government...
and other statutes, focusing on tips that lead to continuing investigations into medical billing, Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
, and United States Department of Defense
United States Department of Defense
The United States Department of Defense is the U.S...
frauds,
where a whistleblower would be compensated.
On February 11, 2009, the Boston Security Analysts Society honored him with a silver whistle in recognition of his efforts to expose Madoff.
Involvement with Madoff scandal
In 1999, Markopolos found that one of Rampart's frequent trading partners, Access International, was dealing with a hedge fundHedge fund
A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
manager who consistently delivered net returns of 1-2 percent a month. Frank Casey, one of Rampart's principals, met with Access CEO Thierry de la Villehuchet, and found out the manager was Bernie Madoff, who was secretly operating a wealth management business in which his clients essentially gave him carte blanche to use the money however he wanted. Casey and Rampart's managing partner, Dave Fraley, asked Markopolos to try to design a product similar to Madoff's split-strike conversion in hopes of getting Access to diversify away from Madoff.
When Markopolos got his hands on a copy of Madoff's revenue stream, he suspected problems almost immediately. To his mind, Madoff's strategy was so poorly structured that on paper, it couldn't possibly make money. Additionally, his return stream rose upward with only a few downticks--a nearly perfect 45-degree angle. Markopolos knew that the markets were too volatile even in the best of conditions for this to be possible. He believed there were only two ways to explain the figures--either Madoff was running a Ponzi scheme (by paying established clients with newer clients' money) or front running
Front running
Front running is the illegal practice of a stock broker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers...
(buying stock for his own account based on knowledge about his clients' orders). Either way, Markopolos believed there was no legal way for Madoff to deliver his purported returns. Markopolos later said that he knew within five minutes that Madoff's numbers didn't add up. It took him another four hours to prove that they could have only been obtained through fraud.
Despite this, Markopolos' bosses at Rampart asked Markopolos to deconstruct Madoff's strategy to see if he could replicate it. Again and again, he could not simulate Madoff's returns, using information he had gathered about Madoff's trades in stocks and options. For instance, he discovered that for Madoff's strategy to work, he would have had to buy more options on the Chicago Board Options Exchange
Chicago Board Options Exchange
The Chicago Board Options Exchange , located at 400 South LaSalle Street in Chicago, is the largest U.S. options exchange with annual trading volume that hovered around one billion contracts at the end of 2007...
than actually existed. He also couldn't find any evidence the market was responding to any Madoff trades, even though by his estimate Madoff was running as much as $6 billion--far more money than any known hedge fund even then. In Markopolos' mind, this suggested that Madoff wasn't even trading.
With the help of several colleagues at Rampart, Markopolos continued to probe into the Madoff operation. What they found out concerned him enough that he filed a formal complaint with the Boston office of the SEC in the spring of 2000. However, the SEC took no action. Markopolos sent a more detailed submission to the SEC a year later. He even offered to go to Madoff's headquarters undercover, obtain the trading tickets and compare them with the Options Price Reporting Authority
Options Price Reporting Authority
The Options Price Reporting Authority provides, through market data vendors, last sale information and current options quotations from a committee of participant exchanges designated as the Options Price Reporting Authority....
tape. This submission also passed with no action.
Shortly after his second submission, Markopolos traveled to Europe with Villehuchet to help get investors for an alternative product to Madoff that he'd developed for Rampart. On this trip, Markopolos found out that 14 funds were invested with Madoff--and each manager believed his fund was the only one from which Madoff was taking new money. Markopolos believed from the beginning that Madoff was running a Ponzi scheme, given his voracious appetite for cash. However, he had been willing to accept the possibility that it was actually front-running (as some of his colleagues believed), because on paper it made no sense for Madoff to risk his reputation by essentially stealing billions that he really didn't need. His conversations with the European managers, though, revealed a classic "robbing Peter to pay Paul" scenario. Villehuchet committed suicide shortly after Madoff's scheme blew up, having lost $1.5 billion.
Even after leaving Rampart, Markopolos persevered, driven by the intellectual challenge of cracking a Wall Street legend, and the ongoing encouragement from a Boston SEC staffer, Ed Manion. He also did so at considerable risk to his own safety; he'd found out on his European trip that a large number of funds invested with Madoff operated offshore
Offshore fund
An offshore fund is a collective investment scheme domiciled in an Offshore Financial Centre such as the British Virgin Islands, Luxembourg, or the Cayman Islands; it is typically sold exclusively to 'foreign' investors...
--making it a near-certainty that the Russian Mafia
Russian Mafia
The Russian Mafia is a name applied to organized crime syndicates in Russia and Ukraine. The mafia in various countries take the name of the country, as for example the Ukrainian mafia....
and Latin-American drug cartel
Drug cartel
Drug cartels are criminal organizations developed with the primary purpose of promoting and controlling drug trafficking operations. They range from loosely managed agreements among various drug traffickers to formalized commercial enterprises. The term was applied when the largest trafficking...
s had money with him.
The culmination of Markopolos' analysis was a 21-page memo sent in November 2005 to SEC regulators, entitled "The World's Largest Hedge Fund is a Fraud." It outlined his suspicions in more detail and invited officials to check his theories. Markopolos outlined 30 red flags that proved Madoff's returns could not possibly be legitimate. His analysis was based on over 14 years of Madoff return numbers. In that time, Madoff reported only four losing months--an implausible scenario that Markopolos said could only be achieved through fraud. In the document Markopolos states:
On June 3, 2009 Markopolos told a conference at Boston College
Boston College
Boston College is a private Jesuit research university located in the village of Chestnut Hill, Massachusetts, USA. The main campus is bisected by the border between the cities of Boston and Newton. It has 9,200 full-time undergraduates and 4,000 graduate students. Its name reflects its early...
, his graduate-school alma mater, that he believes Madoff personally kept less than 1 percent of the $65 billion reported stolen, and will probably lose what remains of his cut to money launderers. Markopolos estimates that $35 billion to $55 billion of the money Madoff claimed to have stolen never really existed, simply fictional profits he reported. Markopolos believes that his customers lost $10 billion to $35 billion, most of which went to early investors. "Madoff will wind up in a special prison designed as much to keep the crook’s victims out as Madoff in. He’s a guy who can’t afford not to be in prison,” he said.
Congressional testimony
On February 4, 2009, he testified before the United States CongressUnited States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
' House Financial Services Committee’s capital markets panel and on March 1, appeared on CBS
CBS
CBS Broadcasting Inc. is a major US commercial broadcasting television network, which started as a radio network. The name is derived from the initials of the network's former name, Columbia Broadcasting System. The network is sometimes referred to as the "Eye Network" in reference to the shape of...
's 60 Minutes
60 Minutes
60 Minutes is an American television news magazine, which has run on CBS since 1968. The program was created by producer Don Hewitt who set it apart by using a unique style of reporter-centered investigation....
.
Markopolos harshly criticized the SEC for ignoring his warnings about Madoff. “Nothing was done. There was an abject failure by the regulatory agencies
Government agency
A government or state agency is a permanent or semi-permanent organization in the machinery of government that is responsible for the oversight and administration of specific functions, such as an intelligence agency. There is a notable variety of agency types...
we entrust as our watchdog,” he explained in 65 pages of prepared testimony. He also said that his original 2000 complaint gave the SEC enough evidence to shut Madoff down when he supposedly had as little as $3 billion under management.
Describing Madoff as “one of the most powerful men on Wall Street,” Markopolos stated that there was “great danger” in raising questions about him: "My team and I surmised that if Mr. Madoff gained knowledge of our activities, he may feel threatened enough to seek to stifle us.” He testified that he feared for his, as well as his family's safety, until after Madoff's arrest, when the SEC finally acknowledged that it had received "credible evidence" of Madoff's Ponzi scheme years before. He explained that Madoff's "math never made sense," that his "return stream never resembled any known financial instrument or strategy," and that Madoff wasn't making the volumes of trades he claimed.
According to Markopolos, the biggest red flag about Madoff came during his initial analysis of 87 months (a little over seven years) of Madoff trades. In that time, Madoff reported only three losing months. By comparison, the S&P 500
S&P 500
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock...
reported 28 losing months during this same period. He likened Madoff's purported returns to a baseball player batting .966 for the season "and no one suspecting a cheat."
Markopolos had originally concealed his identity from SEC regulators in May 1999, although he did meet face-to-face with SEC officials in Boston in 2000 and 2001. After the SEC did not respond, Markopolos was fearful of taking his complaints to the industry's self-regulatory authority, the National Association of Securities Dealers (since succeeded by the Financial Industry Regulatory Authority
Financial Industry Regulatory Authority
In the United States, the Financial Industry Regulatory Authority, Inc., or FINRA, is a private corporation that acts as a self-regulatory organization . FINRA is the successor to the National Association of Securities Dealers, Inc. ...
(FINRA)). He not only feared the power Madoff's brother, Peter, had in that organization (he is a former Vice Chairman), but also feared that Madoff may have had ties to Russian and South American organized crime. Markopolos believed the Federal Bureau of Investigation
Federal Bureau of Investigation
The Federal Bureau of Investigation is an agency of the United States Department of Justice that serves as both a federal criminal investigative body and an internal intelligence agency . The FBI has investigative jurisdiction over violations of more than 200 categories of federal crime...
would reject his allegations without the SEC staff's endorsement. He believed SEC analyst Ed Manion was one of only two who understood Madoff’s scheme and “the threat it posed to the public.” The only other SEC staffer who realized the scheme's implications was the SEC's Boston branch chief, Mike Garrity. Markopolos met with Garrity in 2005, and said that while Garrity realized almost immediately that Madoff was breaking the law, he could take no action because Madoff wasn't based in New England. Had Madoff been based in New England rather than the New York area, Markopolos said, Garrity "would have had an inspection team inside Madoff's operation the very next day." “My experiences with other SEC officials proved to be a systemic disappointment and led me to conclude that the SEC securities' lawyers, if only through their investigative ineptitude and financial illiteracy, colluded to maintain large frauds such as the one to which Madoff later confessed."
He also added that in 2005 it was Meaghan Cheung, the branch chief of the SEC's New York office, to whom he gave his 21-page report alleging that Madoff was paying off old investors with money from fresh recruits. “Ms. Cheung never expressed even the slightest interest in asking me questions,” Markopolos said. She was too hung up on Markopolos mentioning the possibility of a reward and the fact that he was a competitor of Madoffs. Cheung approved an internal memo in November, 2007 to close an SEC investigation of Madoff without bringing any claim. Subsequently, she left the agency. Markopolos also testified he gave details about the case in 2005 to John Wilke
John Wilke
John Wilke was an Americaninvestigative reporter and news editor in the Washington bureau of The Wall Street Journal for two decades, beginning in 1989 and lasting until his death in 2009.Wilke earned his Bachelor's degree with a double major in psychology and biology from New College in...
, a Wall Street Journal investigative reporter, but that it was never pursued. Markopolos testified he (anonymously) sent a package of documents concerning Madoff to former New York Attorney General Eliot Spitzer
Eliot Spitzer
Eliot Laurence Spitzer is an American lawyer, former Democratic Party politician, and political commentator. He was the co-host of In the Arena, a talk-show and punditry forum broadcast on CNN until CNN cancelled his show in July of 2011...
, who had successfully prosecuted a number of securities fraud cases, but that Spitzer took no apparent action, either. Spitzer's family trust had invested in Madoff.
"Government has coddled, accepted, and ignored white-collar crime
White-collar crime
Within the field of criminology, white-collar crime has been defined by Edwin Sutherland as "a crime committed by a person of respectability and high social status in the course of his occupation" . Sutherland was a proponent of Symbolic Interactionism, and believed that criminal behavior was...
for too long," he testified. "It is time the nation woke up and realized that it's not the armed robbers or drug dealers who cause the most economic harm, it's the white collar criminals living in the most expensive homes who have the most impressive resumes who harm us the most. They steal our pensions, bankrupt our companies, and destroy thousands of jobs, ruining countless lives." He testified to Rep. Gary Ackerman
Gary Ackerman
Gary Leonard Ackerman is the U.S. Representative for , serving since a special election in 1983. He is a member of the Democratic Party...
-D-NY that he has never been compensated for his efforts. "I did it for our flag, for patriotism." Markopolos presented recommendations to improve the SEC's operations, which included mandatory department standards: good ethics, full transparency, full disclosure
Full disclosure
In computer security, full disclosure means to disclose all the details of a security problem which are known. It is a philosophy of security management completely opposed to the idea of security through obscurity...
, and fair dealing
Fair dealing
Fair dealing is a limitation and exception to the exclusive right granted by copyright law to the author of a creative work, which is found in many of the common law jurisdictions of the Commonwealth of Nations....
for all.
The SEC must establish a unit to accept whistleblower tips, and move its activity closer to financial centers away from Washington, D.C.
Washington, D.C.
Washington, D.C., formally the District of Columbia and commonly referred to as Washington, "the District", or simply D.C., is the capital of the United States. On July 16, 1790, the United States Congress approved the creation of a permanent national capital as permitted by the U.S. Constitution....
His testimony included a reference to another $1 billion Ponzi fraud, which he shared the following day with SEC Inspector General
Inspector General
An Inspector General is an investigative official in a civil or military organization. The plural of the term is Inspectors General.-Bangladesh:...
H. David Kotz
H. David Kotz
H. David Kotz is the Inspector General of the U.S. Securities and Exchange Commission since his appointment on December 5, 2007...
, who gave the tips to SEC Chairman Mary Schapiro
Mary Schapiro
Mary L. Schapiro is the 29th chairperson of the U.S. Securities and Exchange Commission .She is the immediate past chairperson and CEO of the Financial Industry Regulatory Authority , the securities industry self-regulatory organization for broker-dealers and exchanges in the United States, and...
.
He also disclosed information regarding a dozen as-yet-unknown foreign Madoff feeder fund
Feeder fund
A feeder fund is an investment fund which does almost all of its investments through a master fund via a master-feeder relationship.It is a situation similar to a fund of funds, except that the master fund performs all the investments....
s, “hiding in the weeds” in Europe, whose silent victims likely included Russian mobsters
Russian Mafia
The Russian Mafia is a name applied to organized crime syndicates in Russia and Ukraine. The mafia in various countries take the name of the country, as for example the Ukrainian mafia....
and Latin American drug cartels, “dirty money” investors. Markopolos remarked that European royal families had also lost assets.
In his interview with Steve Kroft
Steve Kroft
Steve Kroft is an American journalist and a longtime correspondent for 60 Minutes. His investigative reporting has garnered him much acclaim, including three Peabody Awards and nine Emmy awards, one of which was an Emmy for Lifetime Achievement.-Early life:Born on August 22, 1945 in Kokomo,...
of 60 Minutes, Markopolos said the biggest red flag he'd noticed in his initial 1999 analysis of Madoff was that he reported losing months only four percent of the time. To Markopolos' mind, no one could possibly be that good given the volatility of the markets. "As we know, markets go up and down, and his only went up," he said. Markopolos noted that during his tenure at Rampart, he traded with some of the biggest derivatives firms in the world--and to a man, they all felt Madoff's numbers weren't real. He admitted that he had some financial incentive to get Madoff out of the picture, as the two competed against each other from 2000 to 2004. However, he said, he felt compelled to pursue it because "when someone's competing on your playing field, who's a dirty player, you want him tossed off the field." He assailed the SEC once again for ignoring his warnings, saying that the only reason Madoff was caught was because he ultimately collapsed under the weight of his own lies.
As a result of the Madoff scandal, the SEC's chairman Christopher Cox stated that an investigation will delve into "all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by staff regarding the firm." A former SEC compliance officer, Eric Swanson, married Madoff's niece Shana, a Madoff firm compliance attorney.
Personal life
Markopolos is the oldest of three children of Georgia and Louis Markopolos. In his youth, he developed into a skilled hunter and fisherman. His father and two uncles once owned a chain of 12 Arthur TreacherArthur Treacher
Arthur Veary Treacher was an English actor born in Brighton, East Sussex, England.Treacher was a veteran of World War I. After the war, he established a stage career and in 1928, he went to America as part of a musical-comedy revue called Great Temptations...
's Fish and Chips restaurants in Maryland and Delaware. His younger brother Louie once ran the trading desk for a New Jersey brokerage firm. His sister's name is Pam Markopolos.
He and wife Faith, who also works in the financial industry for an investment firm conducting due diligence of portfolio managers, have three sons, two of whom are twins named Harry Louie and Louie Harry.
Biography
Markopolos's account of the Madoff scandal, No One Would Listen: A True Financial ThrillerNo One Would Listen: A True Financial Thriller
No One Would Listen: A True Financial Thriller is a book by whistleblower Harry Markopolos about his investigation into the Madoff investment scandal and how the U.S. Securities and Exchange Commission failed to react to his warnings....
, was released in March 2010.
External links
- Markopolos interview (mp3) King World NewsKing World NewsKing World News is a web portal that produces radio-like interviews and information about financial topics, especially the precious metals markets. Created by financial writer Eric King, the site presents interviews with individuals and weekly wrap-ups about the financial sector The website also...
(May 29, 2009). Retrieved May 10, 2011.