No One Would Listen: A True Financial Thriller

by Harry Markopolos

  “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 S
EC’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.

  Between the three of them, they provided a clear picture of the way the financial industry is supposed to function, the level of awareness inside the industry of Madoff’s operations, and why almost no one other than us felt compelled to try to expose him.

  Kotz’s investigation would continue for several more months. On occasion he would call Gaytri or me with a specific question. It certainly looked like he was doing a Herculean job. I know that eventually he conducted 140 interviews—including a jailhouse interview with Madoff—and examined more than 3.7 million e-mails. This was to be the definitive report on what went wrong and how to correct it, and we all waited patiently to see what conclusions Kotz would reach. The inspector general’s team knew they were writing a report not only to Congress and the victims but also for the history books. It was obvious even back in February that this would be the most widely read inspector general’s report in many years.

  I wasn’t done telling my story. In early March I was invited to meet with the new head of the SEC, Mary Schapiro. Actually, Gaytri had set up this meeting. She had contacted Schapiro’s office to see if the SEC wanted to participate and support the ideas of the Global Financial Alliance that were being formed to discuss how markets could better be regulated through international cooperation. During that conversation she asked Schapiro’s assistant if she wanted to meet with me. I think we would have understood if that meeting was not exactly a priority for her, but in fact she responded enthusiastically.

  Mary Schapiro had been in charge of the SEC for less than two months when we met. Prior to that she had had a long career in financial industry regulation. Under President Clinton she had served briefly as acting chairperson of the SEC. In 1996 she’d been appointed president of NASD Regulation, and in 2006 she became chairman and CEO of that organization, which had become the Financial Industry Regulatory Authority (FINRA). I hadn’t been impressed by her leadership; at FINRA she had earned a reputation for avoiding big cases and failing to find fraud, and I hadn’t found any reason to disagree with that reputation. My opinion was that FINRA served the needs of the industry rather than protecting investors from the predatory practices of the industry.

  It promised to be an uncomfortable meeting. After my participation in the Madoff investigation became widely known, a considerable number of people in the media suggested that President-elect Obama name me the new head of the SEC. In the congressional hearings I had been asked if I would head an SEC whistleblowers division if it were created. My answer had consistently been thank you very much, but no thanks. I had a number of whistleblower teams taking risks in too many cases to even consider accepting any other job. They were owed my loyalty, and I couldn’t leave them exposed without support. But the thought was out there and it certainly was possible it would make Mary Schapiro uneasy.

  We met in her new office. It was large, comfortably decorated, and brightly lit. Rather than sitting at her desk or around a conference table, we joined Chairman Schapiro, her newly appointed general counsel, David Becker, and another attorney, Steve Cohen, in a casual seating area. It was sort of like a living room. It was a nice setting, but the atmosphere in the room was very tense. It wasn’t exactly like signing a treaty of surrender on the deck of the Missouri, but there was an uncomfortable feeling in that office.

  Mary Schapiro immediately made it clear that she intended to do whatever was necessary to restore public confidence in the SEC. The SEC that I had fought was out of business. It was going to be replaced by a tougher, more aggressive organization. If anything at all positive had come out of the Madoff disaster, this was it. Sitting there, I didn’t feel like I had won anything. I certainly didn’t gloat, but at least my overwhelming sense of frustration was gone. I liked Mary Schapiro’s words, but until she followed up by making real changes, those words meant nothing. And if she was asking for my help in transforming the SEC, well, I was very pleased to offer it. As my team well knew, I did have an opinion about the SEC.

  After a brief discussion about the Global Financial Alliance, we began talking about Mary Schapiro’s desire to create a serious whistleblower program. I handed her a copy of the Certified Fraud Examiners’ 2008 Report to the Nation on white-collar fraud that proved the effectiveness of whistleblowers. She picked up the report and quickly read through the whistleblower data. “We need to do more of this,” she said. “We need to reach out to whistleblowers to get the big cases to show the public we’re serious about fighting fraud.”

  Well, I certainly agreed with that. “Yes, you do.”

  The difficulty, she explained, was that the SEC received as many as 800,000 tips a year. Although the majority of them were along the lines of “I think my broker is stealing from me because my account was down 20 percent last month” while the entire market was down 20 percent, there was no standard for separating the frivolous from the Madoffs. There were just too many tips and not enough people to follow up. In response, Gaytri recommended at information technology (IT) solution using keywords to limit the number of leads the SEC staff should pursue. Mary Schapiro said she was in the process of hiring a consultant to try to find a workable technological solution.

  That was impressive. Clearly she was in a crisis response mode. I recommended several people I knew who had successfully developed whistleblower programs. Obviously Pat Burns was at the top of that list. When I mentioned one woman whom I greatly respected, Mary Schapiro’s face lit up and she told me, “I know her—she’s actually a friend of mine.”

  Then I explained that the best way to attract those big cases is to create a whistleblower program similar to those of the Department of Justice and the Internal Revenue Service that makes the guilty companies pay the government back treble damages and pays the whistleblowers between 15 percent and 30 percent of the settlement amount. And those bounty payments should not come out of the government’s pocket. They should always be paid by the bad guys.

  Until that point the meeting had been going very well. She had agreed that the SEC needed to develop a whistleblower program and needed to offer an incentive for people to take the risks. But then I told her that I had developed several whistleblower cases involving securities, and given my history with the SEC I had decided to file them with the Department of Justice, the IRS, or other government agenc
ies.

  David Becker interrupted, “You’re telling me you know about securities law violations and you’re withholding evidence from a government agency?”

  “No,” I responded. “I’m just withholding them from the SEC. I’m a citizen and I turn in my cases to the agency I think can best handle them, and at this point that’s not the SEC. The government has the information, but it’s just with another agency. If they’re not bringing you into the case they have their reasons. Maybe they’ve lost confidence in you, too.”

  Becker was visibly angry. Until that moment he hadn’t said a word. I began to discuss the specific reason I hadn’t brought a case to the SEC, and I used another case as an example. When I mentioned a key player in that case, Becker put up his hands. “I have to stop you,” he said. “I can’t talk about this because I may have a conflict here.”

  I heard him, but it didn’t really register. This was a case I had nothing to do with. It had been reported on extensively. I thought maybe the problem was the way I had described it, so I tried again.

  Becker stopped me again. “I’ve already told you, you really need to stop because I may have a conflict here.”

  Mary Schapiro didn’t say a word. At that moment, and it turned out that Gaytri felt the same way, it appeared to me that David Becker was really the person in charge of this meeting. Gaytri spoke up, saying, “I’m not sure what the problem is. I think he’s just giving you an example. This isn’t anything we need to get involved in.” She looked at me. “Harry, I think you should just go on to something else.”