He told me that there was an annual conference of whistleblower attorneys and fraud investigators—like me—who met to exchange information and receive updates on new case law. Eventually I went to my first conference and I began learning about the False Claims Act, the law that hopefully would allow me to eventually earn a living. The False Claims Act is the statute that allows anyone to bring legal action against contractors who are cheating the federal government. If the government agrees to prosecute, under the qui tam provision the person filing the case is entitled to a reward that is usually between 15 and 25 percent. Qui tam is a Latin phrase meaning that person “who brings forth a case on behalf of our lord the King, and for himself.” There are “relators,” as the person who finds the case and brings it to the government is known, who have earned many millions of dollars.
The False Claims Act was originally passed by Congress in 1863 to reward people for warning the Union government about dishonest suppliers who were selling them sick horses and mules, spoiled food, and faulty weapons. It became known as the False Claims Act because it was intended to stop people from submitting false claims for government payment, but it also covered several other areas of fraud against the government. It has been strengthened several times since its original passage and is the primary tool used by whistleblowers. The federal government has recovered more than $25 billion in the past two decades. The government accepts only between 15 and 20 percent of the best cases submitted for intervention and, hopefully, a reward. Through Pat Burns I was to become very familiar with all the provisions of this act. I had to; my future depended on it.
Obviously Madoff didn’t fit under this provision (he was cheating everybody except the government), but Pat Burns certainly took an interest in the case. He understood immediately the risks that I was taking. I had seen enough movies in which people are in jeopardy because they have some information that someone wants to keep private, and I would sit there in the audience wondering why the person in jeopardy didn’t simply tell a reporter and get the story published. Once it was published, theoretically at least his life would be saved because the secret would be out and the spotlight would be on the bad guy. That strategy had always made sense to me, but in May 2001 two stories had been published by respected magazines within the span of six days, and it hadn’t done any good at all. For some reason I just couldn’t figure out, journalists didn’t seem to understand the magnitude of this story. Through the years Mike Ocrant had been approached several times by journalists from various publications who were interested in pursuing the story. But mostly they wanted him to hand it to them. Mike, who had left journalism in 2003, had continued to urge other reporters to pursue the story. Any diligent financial reporter should have been able to use the information already made public as a foundation for their own investigation. But finding a news peg, something new that would excite editors, remained elusive.
In late 2005 a reporter from the hedge fund magazine Absolute Return, another publication owned by the company that would later acquire the parent company of MARHedge, got hold of a copy of my 2005 Securities and Exchange Commission (SEC) submission. Ironically, Mike had gone to work at the company, Institutional Investor, after leaving MARHedge. Mike hadn’t given it to him, and he was reluctant to ask this reporter about his source. We had all agreed that we would keep the identities of everyone—except mine—secret. There is no reason to believe that reporter knew that Mike and I were working together, and Mike didn’t even want to hint at it.
The reporter had come to Mike because he had written the original Madoff piece and was wondering if there was a new way to approach it. “He’s looking for a new angle,” Mike told me. “He wants to do another piece, but he needs something to make it newsworthy. He says that a lot of the stuff in the submission has already been reported, and what’s new isn’t a game changer. Is there anything else we should give them?” It was not news that Madoff was managing a lot of money, the reporter had told Mike, and the new red flags in the submission were certainly more detailed than Ocrant had written almost five years earlier, but mostly these things had already been reported.
Sometimes I wondered what world these people were living in. Didn’t anyone want to win a Pulitzer Prize?
The team batted around some ideas that might convince them to do the story. We had heard a rumor, literally nothing more than a rumor and I don’t remember the source, that based on my submission the SEC had opened an informal inquiry. That was considerably less than a formal investigation, but it was more than twiddling their thumbs and singing “Home on the Range.” Mike finally told the reporter, “I’ve been told, but I can’t tell you my source, that the SEC has opened up an informal inquiry. If you can get somebody to confirm that, that’s probably a pretty good angle.”
Apparently the SEC refused to confirm that information. Without this new peg, the reporter went to look for a story that would be more pertinent for the magazine’s hedge fund readership.
By this time I don’t think I was capable of being surprised or disappointed by anything that happened in this investigation. Ocrant and Barron’s reporter Erin Arvedlund had done their job in 2001-they’d exposed Madoff. So I understood the way journalists were thinking now; if nobody had been outraged by those stories, they needed much stronger ammunition before going after Madoff. What was so obvious to me and my team was obviously confusing to the media.
It was Pat Burns who convinced me not to give up on the media. “Go public and finish this guy,” he said. “If investors read the story, he’s going to collapse and he’s going to end up behind bars. Once he’s behind bars you’re safe.”
Pat is an arranger; he has tremendous contacts throughout the entire financial industry and enjoys bringing people together for their common benefit. So not only did he urge me to go public, but he also introduced me to John Wilke, an investigative reporter at the Wall Street Journal whom he greatly respected. “This is the guy,” he told me. “This is the guy.”
Pat Burns made the initial contact with Wilke. In preparation for that I sent him a one-page memo suggesting a three-part package for the Journal, which that paper could promote as “the largest hedge fund blowup since that of Long-Term Capital Management in August-October 1998. And, in reality, since it will likely involve hundreds of billions in selling pressure, the losses to investors will be akin to the largest company in the S&P 500, General Electric (with a market capitalization of $373 billion) suddenly collapsing.” I sat in my office late into the night, and as I wrote this I could almost feel the hope igniting inside me again. I included everything I could think of to make this reporter understand how important this story would be. “Therefore,” I wrote, believing completely that this was true, “this is a much bigger story than the falls of Enron and WorldCom, and truly is the biggest finance story since LTCM’s demise that almost led to a systemic collapse of the world’s financial system.”
What reporter could resist that pitch?
There were actually three stories in this package, I pointed out to Pat. The first one would require “calling the senior equity derivatives folks on Wall Street for their opinion on BM’s strategy.... An earthquake will soon follow.”
The second story would be tracking the complete destruction of Madoff’s empire that would inevitably follow the first story. And the third story would highlight the complete ineptitude of the SEC, which would include “the fact that the SEC’s Section 21A(e) bounty program has paid bounties to whistleblowers only twice in its 71-year history and that the bounty only pays rewards for information related to insider-trading cases. General securities fraud is not rewarded.... The lack of a meaningful bounty program allows and encourages small frauds into becoming large frauds.”
Pat e-mailed me the day he met with Wilke: “This reporter is a repeat player and he understands we are elephant hunting. If he can get a clear shot at the target he will bag this trophy story... [but] the Wall Street Journal is always cautious....”
Wilke w
as interested, Pat reported after their meeting. He’d like to talk to me.
“I’m a senior investigative reporter,” John Wilke explained when we spoke for the first time. His tone was courteous and professional, and maybe a little bit dubious. “I don’t pump out stories on a daily basis like a lot of guys. I do in-depth reporting and sometimes a story’ll take me several months. So if you’re in a hurry, I’m probably not the right person for you to be talking to.
“On the other hand, when I do land a story it usually ends up on the front page.” As I found out, John Wilke was one of the best investigative reporters in the newspaper business. He wrote about antitrust cases, crooks in Congress malfeasance, the Chinese vitamin industry, and corruption in the financial industry. He had put people in jail. After our first conversation I began following his stories, and he turned up on the Journal’s front page so often that I nicknamed him Front Page Wilke, which he loved.
It was clear to me that Pat Burns was right: Wilke was obviously the right reporter for this story. He had reliable sources inside the financial industry, so he could do the necessary background investigation; he knew the difference between puts and calls and had law enforcement connections who would act on his reporting; and he was based in Washington, D.C., rather than New York. That made me feel a lot safer. I had been taught in the army to camouflage the direction of the main attack, so if a Washington-based reporter broke the story, hopefully Madoff would be looking south and never suspect that the article had originated northward from Boston. Finally I sent him all my material.
We spoke on the phone often, and finally he decided to pursue the story. John never made a commitment that the story would run, but certainly he gave me every indication he was going to investigate and see where the facts took him. Eventually I went to a Taxpayers Against Fraud conference in Washington and snuck out to meet secretly with him at a local bar—naturally.
We sat in a corner for several hours. Wilke asked all the right questions, the questions the SEC had failed to ask: Who is involved? How do you know? Where did you go to find out? Who did you speak to? Who, what, when, where, and how much? (Especially how much?) Finally, as I wrote to the team, “Right now he’s jammed with a front page story exposing fraud by a major mutual fund family which involves an aerobics instructor (sounds like it’ll be sex with financial fraud so it’ll be juicy). Once that story hits, Bernie is next.”
Based on the discussions I’d had with Wilke, I continued, “The current thinking is that this story can’t just be a rehash of the Ocrant article in MARHedge and the Barron’s article which Madoff somehow survived. They’re going to want to dig deep, real deep, and it looks like they’re going to investigate BM’s entire 40-year career looking for dirt. This could take several weeks.”
Bernie is next; that’s what Wilke had told me. And if Charlie Brown’s Lucy had been standing there holding the football right in front of me I couldn’t have been more confident we finally were going to take down Bernie Madoff.
What I did not know for sure at that time was that the SEC had finally decided to investigate Madoff. As I’d told Ocrant, I’d heard rumors that something was happening, but no one—and that includes Ed Manion and Mike Garrity—would provide any details. The report issued in September 2009 by the SEC’s inspector general, David Kotz, confirmed many of my suspicions—as well as my worst fears—about what was going on inside the SEC. Whereas Garrity had sent my report forward and stated that it was about the most complete filing he’d ever seen, and in the Boston office I was regarded as a “credible” person, the New York office treated me and my submission with disdain. Basically, according to this 477-page report, Meaghan Cheung’s team was incapable of winning a game of Clue if they were given all the answers, which is pretty much what happened in this situation. For example, the only thing about my red flags that concerned Doria Bachenheimer, the assistant director of enforcement, was the fact that Madoff’s earnings were so consistent. As she told Kotz, “I was trying to come up with a theory of what he was doing, so I was thinking was this like an accounting case, is this like cookie-cutter reserves, does he have money somewhere else? When he said he had these other accounts, I just thought let’s get the records and see if there is some way he’s smoothing earnings. I don’t even know if you can do that. I was wondering.”
Once again, your tax dollars at work.
Bachenheimer sent my submission to Simona Suh, an attorney on the enforcement staff. Suh had even less experience in this area than Bachenheimer; in fact, this was the first time she had led an investigation. She had never been involved in a Ponzi scheme and had no idea how to proceed. So I guess this was on-the-job training to prepare her if a really big case came in.
Bachenheimer told the inspector general that she didn’t really think I was credible because I didn’t work for Madoff and hadn’t invested with him. As she said, Markopolos “was not an employee and, as far as I knew, received no information from Madoff.” In other words, Madoff didn’t tell me he was running a Ponzi scheme. As for all the red flags in my report, she thought they were only “theories” and that “it wasn’t something we could take and bring a lawsuit with.... We had to test it and substantiate it.”
This was from the assistant director of enforcement. What did she think enforcement meant?
As Bachenheimer explained, “It’s very challenging to develop evidence that something is going wrong until the thing actually falls apart.”
In case you’re wondering, I am quoting word for word from the inspector general’s report.
Cheung claimed she was skeptical about my claims because “I remember thinking 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.”
The inspector general did confirm that at least part of Cheung’s reluctance to accept my offer to help may have come from the fact that she simply didn’t like me. Simona Suh told David Kotz that she didn’t know why Cheung disliked me. Asked why Meaghan Cheung refused to meet with me, she said, “I don’t know what her reasons were. I knew her general impression of him was she was skeptical of him, but I don’t know what her reasons for not meeting with him were.” Later she added, “I remember hearing that she thought he was kind of condescending to the SEC.”
Certainly one reason that office paid so little attention to my submission is that they believed my motive for pursuing Madoff was to collect a big reward. Bachenheimer described me to SEC Inspector General David Kotz as “a competitor of Madoff’s who had been criticized for not being able to meet Madoff’s returns, and that he was looking for a bounty”—information she probably got from my previous public testimony. She added, “If the first thing I hear from someone is what’s in it for me, then it raises my antenna a little bit.”
As it should—although she didn’t bother to add that I wrote in the submission that I believed Madoff was running a Ponzi scheme, and therefore I would not be able to collect any reward. But probably because these people weren’t smart enough to understand my message, they decided the problem had to be with the messenger. The fourth member of the SEC’s investigation unit was Peter Lamoure, who agreed with Cheung. “In short,” he wrote in an e-mail, “these are basically the same allegations we have heard before. The author’s motives are to make money by uncovering the alleged fraud. I think he is on a fishing expedition and doesn’t have the detailed understanding of Madoff’s operations that we do, which refutes most of his allegations.”
Simona Suh also admitted later that the staff had been skeptical of my claims because Madoff “didn’t fit the profile of a Ponzi schemer, at least as we—in the world that we knew then.” The prime requisite for someone to successfully run a Ponzi scheme is to not look like they are running a Ponzi scheme. I can’t even imagine what a profile of a Ponzi schemer would look like.
The real problem was that too many of the SEC’s investigators were lawyers, so they were expecting me to pro
vide legal proof, which basically is the lowest standard beyond which you go to jail. Certainly a math proof is a much higher level of proof than a legal proof. In a legal case, two juries hearing precisely the same evidence can easily reach two different verdicts; but with a math problem there is only one correct answer. Two people or two hundred thousand people can do that math problem, and there still is only one correct answer. It’s an absolute answer, and even the greatest lawyers who have ever lived couldn’t change it; it isn’t trying to determine if the glove fits or find the legal definition of is. There is only one answer to an equation. For example, a man claims he is trading $30 billion in options and there is only $1 billion of these options in existence. There is an answer for that: It’s impossible. The math doesn’t work. This one red flag should have been sufficient evidence for the SEC to launch a full investigation of Madoff. But there were so many others. A split-strike strategy by definition couldn’t produce the returns Madoff was delivering. His basket of stocks had to have a reasonable mathematical correlation to the exchange on which the stocks were traded, and they did not. It shouldn’t have mattered whether the SEC liked me. Meaghan Cheung and her team just weren’t smart enough to understand that.
I never learned very much about the actual investigation, except for the fact that according to the FBI, Madoff operated his hedge fund on the 17th floor and his broker-dealer on the 18th and 19th floors of the same building, and the SEC team went to the wrong floors. As the agent told me, “They were conducting an investigation for two years and never even figured out there was a seventeenth floor; that’s how dumb they were. You really shouldn’t give them any more of your cases. Your quality of work is way beyond the SEC’s capabilities. From now on when you have a case, just give us a call.” After reading my entire submission the SEC officially opened a Matter Under Inquiry (MUI) of Madoff’s broker-dealer business to determine if he was in violation of government regulations by operating as an investment advisory service, a hedge fund.
No One Would Listen: A True Financial Thriller Page 20
