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  • Slide 1
  • Chasing Bernie Madoff Harry Markopolos, CFA, CFE Chartered Financial Analyst Certified Fraud Examiner 0
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  • The Human Cost 1.Thousands of direct victims 2.Suicides, depression, mistrust 3.Families who invested 100% with Madoff are now impoverished from riches to rags 4.Millions of indirect victims: A. Charitable services eliminated B. Medical care not being provided C. Medical research eliminated C. Scholarships eliminated 1
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  • Reality Im no hero Im not an accountant, Im a CFA and CFE Im not an army special ops commando, I was reserve civil affairs officer I did not pay my way through college, my parents did I really said The SEC roars like a mouse and bites like a flea 4 ordinary men faced with an extraordinary challenge Unfortunately, we were the only thing standing between Madoff and his victims because the SEC was non-functional Madoffs organization was too large & powerful for us to stop alone The investigation was highly successful, we proved Madoff was a Ponzi But the case was a $65 billion failure I feel horrible about the results 2
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  • The Investigative Team Frank Casey, North American CEO, London based Fortune Asset Management (Boston) Neil Chelo, CFA, FRM, CAIA; Director of Research, Benchmark Plus (Tacoma) Harry Markopolos, CFA, CFE (Boston) Michael Ocrant; Director of Conferences Group, Institutional Investor (New York) 3
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  • 3 Places where the $65 Billion went 1. Most went to pay off Old Investors who were receiving 12% / year on average 2. 4% went to luring in new victims: Feeder Funds, Fund of Funds & Private Client Banks 3. Way less than 1% / year went to Madoff 4
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  • Obvious Red Flags Part I Ultra-low 6% correlation to the OEX S&P 100 stock index BM was 7 65 times the trading size of the OEX index options market at various points in time Wall Street Firms never saw his trading volume BM only picked stocks that went up or stayed the same > 96% of months were positive BMs performance chart was upward 45 degree straight line Why did BM allow the Feeder Funds, FOFs & Banks earn the 1% & 20% hedge fund fees when all they did was market? BM in T-bills for most of the year but T-bills never yielded 16% 5
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  • Obvious Red Flags II BM couldnt afford Put options he said he bought BM stock picks would have had to be > 30% per year Feeder Funds said BM subsidized down months but this would have been illegal Feeder Funds said BM benefited from his broker-dealer arms trading volume which was code for illegal front-running Feeder Funds said that BM had perfect market-timing ability thanks to his access to his B/Ds order flow BM never allowed outside audits BM self-custodied assets 6
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  • Fund of Funds Source: Who Invested with Madoff? by George A. Martin; Journal of Alternative Investments; Summer 2009 339 Fund of Funds via 59 Management Cos invested USA: 79 of 740 (10.7%) Switzerland: 77 of 267 (28.8%) UK: 52 of 546 (9.5%) Italy: 27 of 77 (35.1%) Brazil: 25 of 68 (36.8%) Germany: 24 of 145 (16.6%) 7
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  • Feeder Funds = Pure Evil Madoffs accomplices were the Feeders Madoff was the octopuses body & head The Feeders were Madoffs tentacles & they spanned the globe Without the Feeders Madoff would have collapsed long ago All pretended to conduct due diligence They lied to clients about who was managing their money Some pretended to be multi-strategy but were 100% Madoff They received 3% - 4% per year in fees to not ask questions None asked tough questions None questioned the obvious Now were finding out that some received 300% - 950% returns Hedge Fund investors need to be more wary & less trusting 8
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  • Dont Blame the Victims 30 35 Blue Chip companies that you would be proud to own GM, Citigroup, Bank America, AIG, Fannie Mae, Freddie Mac, Merrill Lynch, Lehman, Bear Stearns, Wachovia. BM said he held OEX stock index put options to protect against market crashes Earned only 1% a month Most individual investors were not finance people and did not know these sorts of returns did not exist Lessons Re-Learned: 1. 0 25% is the proper allocation to hedge funds 2. Never put all of your eggs in one basket 9
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  • 1998 - 1999 1998: My Firm discovers Bernie Madoff Late 1999: I am asked to reverse engineer Madoffs returns 10
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  • 2000 I knew he was a fraudster in 5 minutes 4 hours of mathematical modeling proved he was a fraud May: 8 page submission to SEC Boston Regional Offices Director of Enforcement with 12 Red Flags 11
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  • 2001 JAN: Casey recruits Ocrant onto team in Barcelona, Spain March: SEC Submission includes 1 st submission + 3 additional pages of how I think hes running the scheme + 2 pages on the Madoff investment process I offer to go under-cover to assist the SEC APRIL: Ocrant interviews Madoff May 1 st : MAR Hedge publishes Madoff expose, Madoff Tops Charts; skeptics ask how May 7 th : Barrons publishes, Dont Ask, Dont Tell: Bernie Madoff is so secretive, he even asks investors to keep mum SEP: Boston SECs Ed Manion asks me to re-submit case 12
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  • 2002 JUNE: Key trip to UK, France & Switzerland Met with 20 Fund of Funds & Private Client Banks 14 have Madoff All 14 report special access to Madoff 2 have admitted Madoff losses Dexia Asset Management & Fix Family Office 12 have not admitted Madoff losses All 12 turned into SEC Chairwoman 02/05/2009 Off-Shore funds attract 3 types of investors who wont report losses or file SIPC claims with the US government 13
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  • 2003 - 2004 Investigation continues at same pace E-mail records of investigation lost Attempting to recover data from non-functioning hard drives Information from 2003-2004 builds the 2005 SEC Submission 14
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  • 2005 JUNE: Casey discovers Madoff attempting to borrow $ from European banks (1 st sign that Madoff scheme is in trouble) OCT: Boston SECs Ed Manion arranges for 3 rd SEC Submission OCT: I meet with Boston SEC Branch Chief Mike Garrity OCT: Garrity quickly investigates, finds irregularities, & forwards my submission to SECs New York Office NOV: Boston Whistleblower calls NYC Branch Chief Meaghen Cheung & reveals his identity NOV: 29 Red Flags submitted DEC: I doubt NYC SECs ability, fear for my life, contact Wall Street Journal 15
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  • 2006 JAN: Integral Partners $40 Million derivatives Ponzi Scheme goes to trial, 5 years & 5 months after discovery causing us to further doubt SEC competence MAR: 5 minute call with NYC SECs Meaghen Cheung SEP: Chicago Board Options Exchange VP tells me that several OEX option traders also think Madoff is a fraudster. If SEC had called the CBOEs marketing office, they would have cooperated. SEC never calls. Madoff scheme continues. 16
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  • 2007 FEB 28 th : Chelo obtains a Madoff portfolio which shows zero ability to earn a return JUNE: Casey obtains Wickford Fund LP prospectus showing Madoff is short of cash & offering 3:1 leverage via bank loans JUNE: Wickford Fund LP Prospectus e-mailed to NYC SEC Branch Chief Meaghen Cheung JULY: Chelo obtains Fairfield Greenwich Sentry LP financial statements for 2004 2006; 3 years with 3 different auditors! AUG: Chelo conducts 45 minute telephone interview with Fairfield Greenwichs head of risk management AUG: Hedge funds all lose money except for Madoff! 17
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  • 2008 Financial markets in turmoil, team loses interest, no activity until APRIL: Jonathan Sokobin, SECs Director of Risk Assessment calls me per a recommendation from a mutual friend APRIL 2 nd : Undelivered E-mail to Sokobin entitled, $30 Billion Equity Derivatives Hedge Fund Fraud in New York FALL: Stock Markets crumble, panicked investors rush to redeem December 11 th : Madoff runs out of money, turns himself in 18
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  • 2009 FEB 4 th : Hearing with myself followed by SECs senior staff and FINRA acting CEO; 375 pages of my testimony is available at under House Financial Services Committee, 111 th Congress, Archived Hearings, Feb 4, 2009 along with over 2 hours of video or you can go to FEB 5 th : I provided a day of sworn testimony to the SECs IG MAR 10 th : I meet with SEC Chairwoman Mary Shapiro SEP 4 th : 477 Page SEC IG Report on the Madoff Fiasco released SEP 10 th : I testify before US Senate Banking Committee with SEC IG 19
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  • SEC Investigative Errors I Little or No Industry Experience 1.SEC Mission is to protect investors yet almost none of the staff were Certified Fraud Examiners or trained in investigations! 2.The junior most examiner sat on an options trading desk for a while but didnt have much experience in industry or at the SEC 3.None of the senior examiners or enforcement attorneys had any asset management or trading experience! 4.SEC sent intellectual equivalent of guppies to chase sharks 5.SEC staff did not know how to use the Wall Street Journal, Bloombergs or OPRA tapes to track trading volumes 6.SEC staff did not know that Over-the-Counter (OTC) derivatives are more expensive to trade and that the hedging takes place in the listed markets 20
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  • SEC Investigative Errors II Unwillingness to obtain 3 rd party verification 1.New York SEC never asked me or other BM whistleblowers any questions 2.SEC never phoned a


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