Q&A: Madoff Whistle-Blower Harry Markopolos Sounds Off
In 1999, a securities analyst in Boston named Harry Markopolos discovered that one of the most powerful and respected figures on Wall Street, Bernie Madoff, was committing monumental fraud.
Over the next nine years, Markopolos and his small team of investigators went through what he describes as a “Twilight Zone” case, alerting the Securities and Exchange Commission (SEC) to the fraud on five separate occasions, including in a 21-page document titled “The World’s Largest hedge Fund is a Fraud.”
But, the warnings fell on deaf ears, as the title of Markopolos’s 2010 book indicates: “No One Would Listen: A True Financial Thriller.” That is until the market collapsed and Madoff was forced to turn himself in in 2008.
Shortly afterward, Markopolos’s testimony helped restructure the SEC, which he says still needs a lot of work, along with the entire bank regulatory system. He’s been hailed as a “modern greek hero” by Congresswoman Jackie Speier, but he views his inability to bring Madoff to justice before the financial meltdown as more of a multi-billion dollar tragedy.
Markopolos, now a prominent private fraud investigator, is the subject of a documentary, “Chasing Madoff,” by filmmaker Jeff Prosserman. The will begin its theatrical run this Friday, Aug. 26, in New York City.
MetroFocus spoke with Markopolos about the film, his regrets, why financial regulators must be paid as well as Wall Street executives, his current career path and the psychology of the man he calls “a stone cold financial predator.”
Q: You’ve refused Hollywood the rights to your story in the past, but then you said yes to Jeff Prosserman when he approached you about making a documentary. Why?
A: I had about 30 movie offers flood in during the first 45 days after the case became public in December 2008. About half of them were from documentary producers. Some of them were credible producers and the other half were from Hollywood studios. And I couldn’t respond because I was preparing to testify before Congress. So I put it all on the back burner and what happened was my lawyer, Gaytri Kachroo, grew up with Jeff Sackman, the executive producer, who watched Jeff Prosserman grow up from birth. Jeff Prosserman was always interested in making films and he wanted to make this movie, so that’s how he got selected. The only thing I did know was that I didn’t want to go with a Hollywood studio, because they make Wall Street look honest by comparison.
Q: How does “Chasing Madoff” differ from your book “No One Would Listen?”
A: Well there is new information. A lot of the big banks that were involved have been revealed publicly, and we put them front and center in the film. They all get exposed. You see them tied into the Madoff network, where in the book it wasn’t public information yet, and I didn’t want to reveal it, because I wanted to give law enforcement an even playing field to investigate from. So I didn’t expose them as well in the book as I did in the movie.
Trailer for “Chasing Madoff.” The film’s theatrical screening begins August 26.
Q: Have you seen the final cut?
A: I have. I saw the rough cut the previous July and it was horrible. So bad my team and I went out drinking that night, we drank ourselves silly. So I was prepared for a bad film, but then I saw a very different film in May at the Toronto Film Festival. It’s a very fast-paced film. This was the “Twilight Zone” of cases, and you can see that in the film and it’s going to continue. I mean, Ruth Madoff is finally leaving Bernie. I don’t think it’s going to fade from public view any time soon. And I’m hopeful that we’re going to get several more arrests from the feeder fund operators. Only nine people have been arrested. It was more than nine people who pulled this off, and in the film we point out that there was hundreds. It was nothing more than an organized crime ring.
Q: You spent years telling the SEC that Madoff was committing massive fraud right under their noses, yet they failed to act. What do you make of how the SEC has been restructured since?
A: It’s a work in progress. You don’t turn a battleship around in just two and half short years but they’ve made remarkable progress. They’ve sent away over 800 staff members to become certified fraud examiners so at least they know how to conduct a proper fraud investigation. They know the sequencing of the investigative stuff, where before that planning was totally lacking within the agency. They also realized that they need to take Ponzi cases a lot more seriously. Before, they put them on the after-burner, and now they put them to the forefront because they realized that every time a family becomes ensnared in one it’s devastating for that particular family and it just destroys wealth and it destroys confidence in the American way of doing business. You can’t have that. Their investigative manuals were totally lacking in the proper steps to take. They never would check with third parties to investigate if there was trading. And of course in a Ponzi scheme there is no trading. And one of the first things you want to do is check with third-party sources to find it if there’s trading, because if there isn’t — get the handcuffs out because it’s a Ponzi scheme.
Q: If you could change four things about the SEC what would they be?
A: One, move the SEC from Washington to New York City. Wall Street is where the battlefield is. The SEC says it’s not a political regulator. Well, let them prove it by moving out of Washington. And I would make the same challenge to the banking regulators. Why are they in Washington? Why is the Federal Reserve in Washington? Why are the Office of the Comptroller of the Treasury and the Federal Trade Commission in Washington? They should be in New York, that’s where the big banks are. They all say they’re not political, and yet they prove by their headquarter location that they are.
Another thing I would do is have no more than one securities lawyer for the five commissioners for the SEC. I would have people with industry experience serve in those positions. People that have sat on trading desks. People who have done investment banking. People who understand the capital markets, because there’s a lack of understanding of finance at the highest levels of the SEC. It’s dominated by lawyers. Lawyers call all the shots at the SEC and I don’t believe they have the mathematical or finance backgrounds to comprehend the new frauds of the 21st century that involve complex derivative instruments. My feeling is that lawyers become lawyers because they’re bad at math. If you’re good at English and logic you go to law school, and if you’re good at math you probably go to finance. It’s a different skill set that’s required to police Wall Street.
The third thing I would do is give the SEC control of their own budget. Every time a security gets sold a fee goes to the general treasury and the SEC has to beg Congress for a budget. I’d like to have the SEC set their own budget by charging the industry user fees called SEC fees, which they charge now, but have control of them so they could do multi-year budgeting.
And also, I’d have them increase the salaries at the SEC so they could pay comparable to Wall Street. That would put them on a level playing field in terms of hiring and retaining talent. Also, allow them to pay bonuses similar to Wall Street so if they do a big successful case they can share the monetary rewards.
Q: That would be an unprecedented amount of money for government jobs.
A: It would be. But if you’re regulating an industry with that much power and that much money you want to put them on a level playing field. Because if you do not, if you’re pennywise but pound foolish, if you do not pay them salaries and bonuses commensurate with Wall Street, you’re going to end up losing the battle for talent. You’re going to have frauds occur that cost America trillions of dollars, like the banking crisis in 2008. All those mortgage-backed securities were falsified and it was trillions of dollars of bad mortgages. And no one policed that. You can’t afford to have third-rate talent for a financial regulator, because it ends up costing the taxpayers way too much money.
The crisis of 2008 is something that not only we will be paying for, but our children will be paying for. This year, their [the SEC's] budget is forecasted to be $1.1. billion. That’s not enough, they were supposed to have $1.25 billion. To put that in perspective, one hedge fund manager last year, John Paulson, earned $5 billion in personal income. He earned his money honestly, but I’m just pointing out that you can’t have such a disparity in resources. Otherwise, if Americans lose confidence in their capital markets, it increases the cost of doing business in the U.S. It makes us a less competitive country. Look at the securitization markets. There is no securitization market, because no one trusts the regulatory agencies. Right now, we’re in a liquidity trap. From 2008 to the present, what’s our economy been doing? Not much. Certainly nothing good. You’ve got what? 15 million people out of work and probably several million more who have stopped looking. You short change the regulators, you can see what happens.
Regulators need to be held accountable. You can’t allow people to resign in disgrace and join a private practice and make a lot more money when you should be firing them. There were a lot of people allowed to resign from the SEC in the wake of the Madoff case that should have been fired for not doing their jobs. No one’s holding those banking regulators accountable. The banking regulators especially should have been fired. They didn’t do their damn jobs.
Q: After you went public everyone called you a hero, but you’ve been very hard on yourself in the media. Is there anything you wish you’d done differently?
A: Yeah. On December 17, 2002, I went to hear then-Attorney General Elliot Spitzer speak. Keep in mind at the time he was, in fact he still is, the best crime fighter of our generation. He held Wall Street accountable when the federal government would not. He restored tens of billions of dollars to investors with his cases. I submitted an anonymous package to one of his staffers to give to him. I didn’t know any better, because it was my first fraud investigation. Anonymous packages usually aren’t received very well by recipients. So, he didn’t take it seriously, nor should he have. I had twins about to be born three months later, so I was a little afraid. I wish I could have confronted him and told him who I was, told him how Madoff was a fraud and how I could prove that he was a fraud. The math doesn’t lie.
I had cocktails with him a few weeks ago out in Los Angeles and I told him this story, and he said “I wish you had. Together we would have changed history.” You’re never going to have a perfect fraud investigation. That’s my biggest regret about the case. I could have ended it in 2002. But you never really understand your case until it’s over.
Q: You alleged that the Wall Street Journal killed a story by one of their top reporters who you’d tipped off. Was it too threatening to their reputations?
A: I don’t think they took the case seriously because it was too big. It might have been that. If they were wrong they could be sued. But if they’re right it’s a Pulitzer. The main factor was that he was several times larger than the largest known hedge fund, and no one knew he was running money. And he was former chairman of NASDAQ, sat on all the right industry boards and was trading five to 10 percent of the daily stock exchange volume in the United States, so everybody at the Wall Street Journal and the New York Times assumed, “well, he’s so rich he doesn’t need to steal.”
Q: People have called Madoff a sociopath, but it’s also been noted that he expressed a keen concern for his family, and that doesn’t really express sociopathic behavior. What’s your ultimate assessment of him?
A: I think he was a man without a soul, and without a conscience. He was a stone cold financial predator.
Q: Was it just greed, or was there something else?
A: Oh, it was greed. And I think you’d have to go back into his history. The three Madoff biographies that were published in August 2009 all point to his family. His parents were caught running a boiler room in the early ’60s and were shut down by the SEC, so you’d have to say that he was born of a poisonous family tree. And that was probably all he ever knew. It had a lot do with upbringing I suspect.
Let me explain what some of the victims have told my team and I. Bernie Madoff would come up to them at Bar Mitvahs and Bat Mitzvahs and say, “I’ll let you in.” He would go to weddings and funerals and hunt for victims. He’d bring a nice gift and everybody would say, “There’s Uncle Bernie, what a swell guy.” He’d go up to the grieving widows at funerals and say, “I’m so sorry for your loss. I’ll take care of you. Just give me all your money and I’ll manage it for you.” And of course he did take care of them. He wiped them out.
Q: How are you doing now?
A: I’ve got massive cases against the banks. The bank foreign exchange pension custody cases. Those are cases I developed about eight years ago. The state of Virginia intervened in my case last week for $931 million vs. Bank of New York Mellon. For $11 million the state of Florida intervened. And I’m doing cases against State Street Bank and Bank of New York for multiple billions each for pension fraud. They stole 1 percent for every currency trade for pension funds.
I’m a self-proprietor. I typically investigate large, billion dollar plus financial fraud schemes against investors.
Q: Have other whistle-blowers come to you for advice?
A: Yes. On occasion they’ll contact me. I’m not a lawyer, I can’t give legal advice. But I can give them advice about what it’s like to be a whistle-blower. Usually you get discriminated against, there could be retaliation, you could face job loss. You have to be very careful about how you blow the whistle. If your employer finds out about it, you’re going to have a tough life. My advice to whistle blowers is always a good whistleblower is like a good fart: silent but deadly.
Q: How has your life changed since this all began?
A: Well, I can’t do cases undercover anymore. I usually meet with witnesses after hours. Often I seek out restaurants that have particularly bad food, because I know other people won’t patronize them. I’ve learned to enjoy eating bad food.
MetroFocus Multimedia Editor John Farley conducted this interview, which has been edited and condensed.