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Authors: Harry Markopolos
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working on it. I had a lot of responsibilities at Rampart. But Dave Fraley kept banging on me hard. He saw only the big picture: “Thierry can raise a hell of a lot of money. He’s got $300 million invested with this guy. So whether he’s real or not, if Thierry’s clients want to buy something like this, let’s find something we can deliver to them that’s pretty close. They want to diversify away from Madoff, and if we’re there maybe we can gather in some of these clients.”
Finally, one afternoon as he walked past my desk I stopped him. “Hey, Dave, you know what? I think I’ve got it figured out. I know how we can duplicate it.”
“Okay,” Fraley said, sitting down at my desk. “How’s it work?”
“Well, actually we have a choice. We can either front-run our order flow or just type in our returns every month. It’s probably a Ponzi scheme, and that’s the only way we can compete with him.” Fraley stood up. “What?” I’d done what they had asked. I’d figured out Madoff’s magic formula, but they didn’t believe me. There were people in management who suspected I just wasn’t good enough at the math to figure it out, that Madoff really was superior. They thought I was blowing smoke with my accusations.
I know how frustrated Frank Casey was. He once told someone that working with me required pinning my shoulders down with his knees and then prying out my teeth. He kept challenging me, asking in what I hoped was a joking manner, “How come you can’t figure out Madoff?”
I thought I’d already done that. I was really starting to get pissed off. Neil and I had no doubt that Madoff was running some kind of scam, but at least two of the three principals in the firm and maybe Frank Casey weren’t so sure. My pride was at stake. I knew my math was better than Bernie’s, but even then, even at the very beginning, people just refused to believe me. This was the legendary Bernie Madoff we were talking about. And I was just the slightly eccentric Harry Markopolos.
From the day Frank came back from Access with Bernie’s numbers, Neil and I continued talking about it. We spent every day looking across the width of two desks at each other. We became so close that when one of us breathed out the other one breathed in. So unraveling Madoff became the subject of a lot of conversations. We started throwing numbers into the Bloomberg terminals, which allowed us to download a basket of stocks to create models. It wasn’t really rocket science, but it required some technical ability. From the beginning we created different scenarios: How do we construct this so we succeed regardless of whether the market goes up, goes sideways, or goes down? We reached the inescapable conclusion that the only possible way to do it was to have perfect market timing ability. You had to be able to forecast the direction of the market, and you had to be right about it almost every time.
At that point I still had no idea how much money Madoff was handling or for how many clients. Nobody did. As we rapidly discovered, that secrecy was key to his success. Because this operation was so secret, everybody thought they were among a select few whose money he had agreed to handle. Madoff had not registered with the SEC as an investment advisory firm or a hedge fund, so he wasn’t regulated. He was simply a guy you gave your money to, to do whatever he wanted to do with it, and in return he handed you a nice profit. He was the Wizard of Oz, and he made everybody so happy that they didn’t want to look behind the curtain.
Madoff practically swore his investors to secrecy. He threatened to give them back their money if they talked about him, claiming his success depended on keeping his proprietary strategy secret. Obviously, though, his goal was to keep flying below the radar. Madoff’s clients believed he was exclusive to only a few investors, and that he carefully picked those few for their
Finally, one afternoon as he walked past my desk I stopped him. “Hey, Dave, you know what? I think I’ve got it figured out. I know how we can duplicate it.”
“Okay,” Fraley said, sitting down at my desk. “How’s it work?”
“Well, actually we have a choice. We can either front-run our order flow or just type in our returns every month. It’s probably a Ponzi scheme, and that’s the only way we can compete with him.” Fraley stood up. “What?” I’d done what they had asked. I’d figured out Madoff’s magic formula, but they didn’t believe me. There were people in management who suspected I just wasn’t good enough at the math to figure it out, that Madoff really was superior. They thought I was blowing smoke with my accusations.
I know how frustrated Frank Casey was. He once told someone that working with me required pinning my shoulders down with his knees and then prying out my teeth. He kept challenging me, asking in what I hoped was a joking manner, “How come you can’t figure out Madoff?”
I thought I’d already done that. I was really starting to get pissed off. Neil and I had no doubt that Madoff was running some kind of scam, but at least two of the three principals in the firm and maybe Frank Casey weren’t so sure. My pride was at stake. I knew my math was better than Bernie’s, but even then, even at the very beginning, people just refused to believe me. This was the legendary Bernie Madoff we were talking about. And I was just the slightly eccentric Harry Markopolos.
From the day Frank came back from Access with Bernie’s numbers, Neil and I continued talking about it. We spent every day looking across the width of two desks at each other. We became so close that when one of us breathed out the other one breathed in. So unraveling Madoff became the subject of a lot of conversations. We started throwing numbers into the Bloomberg terminals, which allowed us to download a basket of stocks to create models. It wasn’t really rocket science, but it required some technical ability. From the beginning we created different scenarios: How do we construct this so we succeed regardless of whether the market goes up, goes sideways, or goes down? We reached the inescapable conclusion that the only possible way to do it was to have perfect market timing ability. You had to be able to forecast the direction of the market, and you had to be right about it almost every time.
At that point I still had no idea how much money Madoff was handling or for how many clients. Nobody did. As we rapidly discovered, that secrecy was key to his success. Because this operation was so secret, everybody thought they were among a select few whose money he had agreed to handle. Madoff had not registered with the SEC as an investment advisory firm or a hedge fund, so he wasn’t regulated. He was simply a guy you gave your money to, to do whatever he wanted to do with it, and in return he handed you a nice profit. He was the Wizard of Oz, and he made everybody so happy that they didn’t want to look behind the curtain.
Madoff practically swore his investors to secrecy. He threatened to give them back their money if they talked about him, claiming his success depended on keeping his proprietary strategy secret. Obviously, though, his goal was to keep flying below the radar. Madoff’s clients believed he was exclusive to only a few investors, and that he carefully picked those few for their
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