Double Shot Interview: Harry Markopolos - fraud investigator with Bernard Hickey

hello I'm Burt hickey from Atrisco and welcome to another an hour double-shot interviews and this one is we've got Harry Markopolos who is the fund manager - in fraud investigator who discovered Bernie Madoff eight years before he turned himself in and over there eight years he made five solutions to the Securities and Exchange Commission and others including other media and no one would listen he's written this book no one would listen which is just a cranking ring about how to discover a Ponzi scheme and why sometimes the Redeemers regulators and the audience's why discover the media so here we are Harry Markopolos Harry how did you feel through that eight years of frustration frustrated obviously for the first two and a half years and then it became I've came terrified because I realized that Madoff was stealing from the Russians and the Colombians and if they found out he was doing that to them he was certainly gonna be killed tell us about the things you were doing personally to protect yourself after June 2002 when I went to Europe and I met with 20 hedge fund of funds 14 of which had Madoff and I realized they were taking money from offshore sources organized criminal sources mainly the Russians and the Colombians that's when I came back to the States and started carrying a gun every day I wouldn´t get into any to my vehicle without checking for bombs first because there's a moment in your book where you talk about speaking to your local policeman and explaining this situation which for most normal people would seem extraordinary like something from a throw yet he sitting and listened can you talk us through that that time what was police constable sergeant Harry Bates and now retired from the force but he had over 35 years of law enforcement experience at that time and I came and told him about what I had uncovered and I was going to the authorities repeatedly I was going to the press and I was taking risks and he advised me to carry a weapon make sure that I was carrying it lawfully even he was the one that licensed me he also licensed my wife I sent her away for shooting lessons so the cheek also carry a weapon and then what we also did was he said you should try on this bulletproof vest and I did and it was it was too heavy it was gonna slow me down and I realized the people that were gonna come after me we're gonna put two here or two in the back of my head they were gonna be professionals and so the bulletproof vest wasn't really gonna help me much so I declined his kind offer he tried to build up my morale and of course at the end of the case he said herring I never thought you were gonna survive this case let's just sit back a bit and try and explain to our viewers how you became an involved in this because you didn't work for Bernie Madoff you were in a way another options fund manager who had heard about Madoff's amazing strategy and tried to replicate it can you explain how you got involved in this I was a portfolio manager in Boston Massachusetts in the USA I had to compete against Madoff he was pretending to use a strategy similar to my firms strategies his numbers were clearly unbelievable off the charts he never went down only up so I knew that was impossible and in five minutes I literally knew it was a fraud and then spent about four hours modeling it his poorness numbers to prove that it was a fraud and it's it's quite shocking to see that but then you took a little bit further partly because your employers wanted you to replicate well that's what got me into this case my employers were pressuring me to replicate that strategy and I would tell them it's a fraud he's either front-running which is an illegal activity that would put him in prison or it's a Ponzi scheme also an illegal activity and they said no no he's a reputable firm he's trading five to ten percent of the daily stock exchange volume in the United States he's well regarded he's the two-time past chairman of Nasdaq one of our stock markets he couldn't be a crook you're just not good enough at math or finance to understand what he's doing and so it was a blow to my pride so I wanted to prove him wrong and so I kept turning him in to the Securities and Exchange Commission our financial regulators because it's not fair for me to have to compete against somebody who's a crook the amazing thing is reading your book you talk about meeting some of the people associated with the feeder funds who had gathered together the money and put it through to Bernie Madoff to manage you've got to know them quite well and in some cases you actually met some of the bait that the investors they're on a trip to Europe it struck me reading the book how did how did you stop yourself from shaking them by the shoulders and saying do you know this guy's a fraud well in Europe it was very dangerous for me to do that I realize that Madoff was stealing from the Russians the Colombians and if they found out they were gonna kill him and so there was so much risk there I couldn't warn them I had a family at that point I was about to start a family at that point in time and was just too much risk I did warn one of the feeder funds and sort of my compatriots in this case and he refused to listen eleven days after Madoff turned himself in in December 2008 he committed suicide the most gruesome fashion in his Madison Avenue office in New York City tell us about that time when you were giving information to the SEC what was the initial responses you got from from the SEC the regulator who should really have pursued this and and prosecuted Bernie Madoff back in 2000 2005 2006 2007 what was the responses you the initial response was blank stares and dumb looks and it was I met with a senior enforcement official in Boston was a lawyer by training did not understand finance it was supposed to forward my submission to the New York regional office because Madoff stand in New York now he's not in Boston and instead just put it in a circular file basically in the trash can and never forwarded it to New York another year went by I resubmitted at the urging of an SEC official in Boston and Mannion kept asking me to resubmit the case I did that when dad actually made it to New York where a high-ranking official there looked at it put it in the trash can immediately because everybody knows Madoff in the industry he's a respected Titan on Wall Street he owns a midsize broker dealer he's a big name in the industry he can't be a Ponzi scheme why would he need to steal yes so much money seemingly he wouldn't be a truck but of course he was it wasn't until 2005 at the urging of ed Manion at the SEC office in Boston that I finally got traction I meant enough enforcement attorney there at mid-level enforcement attorney named Mike Garrity and he followed everything I said I spent hours with mr. Garrity diagramming the scheme out in the cash flows and he understood it and he said herrings I promise you a quick and thorough investigation and I'll be back to you very quickly with a response and the week later he called me and said I'm not at liberty to tell you what I found but I found some very disturbing things I want to forward this to New York with an urgency and I allowed him to do so and at that moment he put me in touch with New York and the investigation was off course on day one because once it got to New York to a woman I understand called Megan Chun Cheung she essentially let it drop how did you feel when that happened because some deer in New York were the ones who were supposed to prosecute Madoff who was based in New York well there was no two-way communication and I offered two way communication I offered to assist but she still clearly didn't want any assistance they felt that they did not need assistance from a whistleblower and they also didn't think how I could be a whistleblower because I never worked for Madoff and I wasn't an investor of Madoff so how would I know but I was a competitor so they thought I was a jealous competitor and it was a matter of sour grapes because the performance was so much better than mine and once there had happened once it had fallen on deaf ears at the ECC my thought when reading the book was well why didn't Harry go and talk to the media because what once this is exposed any typical Ponzi scheme all it takes is for one exposure to happen and it all falls down tell us about your experience in taking this to the media because it's a very sophisticated to detailed you know financial media in America lots of resources that communists didn't get exposed you know / for him well I actually did we recruited a journalist to our team after a year had gone by of no action at the SEC Frank Casey and one of my team members in this case was in Barcelona Spain attending a hedge fund conference and he happened to share a cab ride with a managing director for the largest hedge fund publication in the world Michael o Kron who joined our team immediately upon hearing from Frank about Bernard Madoff and he wrote an expose that was published on May 1st 2001 that should have ended this scam every professional investor every large bank every investment manager read that publication and no one did anything that was one of the he'd slapping moments and reading the book how come they didn't see this and go whoa something's up here let's do some proper due diligence what we know the due diligence process was circumvented and here's how these big banks the European American and some Asian banks are looking at Madoff and Madoff telling them I'm trading five to ten percent of the daily stock exchanges volume wink wink and so I have access to order flow and I know which way stocks and the stock market's gonna go before anybody else does and so they thought that was a code word for an illegal activity known as front-running that he was stepping in front of his legitimate broker dealer order flow and stealing from those clients to deliver the ill-gotten returns to higher-paying hedge fund investors and they lingly them so they were happy that bernie was a crook because he was a good crook he was stealing on their behalf and giving them these ill-gotten gains and they were happy not to ask any more questions on their due diligence checklist because they didn't want to know the answers they didn't want to find out that bernie was a crook they had satisfied themselves in their mind that he was their crook and said they were happy to do business with him it's what struck me about reading his story it was like watching an eight-year long period when someone clearly had no clothes and no one was willing to to call him on the emperor the king of Wall Street if you like had no clothes did you try to explain to me that that mess was hysteria a groupthink which means that no one was willing to puncture the bubble since there were so many well respected large banks involved and with Madoff everybody said well you know that banks involved that banks involved that person was smarter than me is involved only they would have checked and it was like one of these but of course no one had checked but he looked at the client when they looked at the client roster and said all these sophisticated firms certainly someone would have checked in reality no one did because the returns were so alluring it was a path to riches this was literally the golden goose laying a stream of golden eggs that would make you rich it was a product that sold itself it was so unbelievably good it was a holy grail of investment vehicles because running a Ponzi scheme that the big game is to keep the money coming in to keep it a flood and could you explain how Bernie Madoff did that because on the face of it he didn't seem to be making an awful lot of money out of this he seemed to be giving most of his money back to those for your fund managers that was the beauty of Madoff he wasn't greedy there's a saying in finance that little pigs get fat big pigs get slaughtered and he knew that so he took the smallest piece for himself well less than 10% of the fees went into Madoff own pockets and over 90% I believe went to the feeder funds for marketing it and so he was making them rich beyond their wildest dreams and he was happy to do so because he needed to expand the scheme because he was running out of investors in North America he needed the scheme to go global and so he was certainly bigger in Europe than he was in the United States he was also very big in South America South Africa but he was running out of even Europeans he had pretty much saturated that he had over 200 feeder funds in in Europe versus only 79 feeder funds in North America so was next in the final frontier was certainly gonna be Asia and if it had gone on a little bit longer it certainly would have come to New Zealand and Australia do you think that anyone in New Zealand was trader actually lost money and they may well have I'm just not aware of any feeder funds set up here there was only to set up in mainland China I think one or two in Hong Kong one in Singapore one in Taiwan he had some good connections in Japan marketing for him but he hadn't made it to Indonesia New Zealand the Philippines or Australia as far as I'm lawyer so what eventually brought him down here because all of the usual protections the regulator's freepress hadn't seemed to bring down what was the thing that eventually caught up with it because it any ponzi scheme will eventually collapse under its own point the financial collapse in 2008 investors wanted their money they wanted their money back quickly Bernie was the only steady source of returns because his product was up for the year everybody else was down in panicking he had insurance products protecting his portfolio has to be told investors and so investors used him as an ATM machine to withdraw cash no one else was offering liquidity you couldn't get out of other markets but Bernie would give you your money like that and so he's watching his cash count go down to zero and he knew once it went to zero the handcuffs were gonna come on and he would be arrested so he had weeks foreknowledge to turn himself out in at a time in place of his own choosing so I boonie has turned himself in he's things essentially confessing his crimes eventually and he was asked the question what about Harry Markopolos and and what he discovered about you what did you think of Harry Markopolos what struck me in the book and in reading some of the comments that he's made since to various people he remains incredibly arrogant man and he described what you are doing as a joke when you found out about that what was your thoughts I laughed I know he's a sociopath he's a psychopath he's a stone-cold ruthless financial killer predator he destroyed thousands of families he took them literally from riches to rags overnight and he insults his victims he said I carried them for decades and this is the gratitude I get and that's typical of a white-collar criminal they always rationalize their behavior and they feel no remorse and reading through the book it's it struck me that as someone involved in the investment industry it must have been amazing to be talking to people who put their money in do you still trust the US investment industry I don't trust the money center banks the ones that had to be rescued by the citizens and taxpayers of the United States no no one's been put to jail and certainly many deserve to be put to jail the shareholders have not suffered greatly enough they should have been wiped out and the bondholders should have been told to recapitalize the company and that didn't happen in the United States there were bailouts and rescue plans and so all those financial predators on top of the big banks in the United States kept their jobs and didn't go to jail so they're still in place so how could you trust the system say okay we do you put you money I keep my money and my wife's investment firm I'm forced to but it's a good firm and I'm very happy of the results there and I put it I like you lose index funds and exchange-traded funds and just looking at the what we learned from this crisis what do you think regulators should do or how should they prepare themselves to make sure they catch the next Bernie Madoff the trouble with regulators catching Ponzi schemes is the Ponzi operators don't ever register with the authorities as a registered investment advisor and so they're beneath the radar screen they're not even on the regulator's radar screen and the only way the regulator's can find out about a Ponzi scheme is for a check not to be paid where the Ponzi operators running short of funds and payments and promised payments are not made and at that point the regulator's get a call and they get notified well well that but that time it's too late the Ponzi operator has done his damage and so the only way for them to find out about it is through disgruntled investors and it's very hard for regulators to discover these however some of the Ponzi operators tipped themselves off on the Internet and all people will forward those unbelievable performance numbers to the regulator it'll start an investigation and say well this person is not registered and once they once the regulators find out about a Ponzi operator nowadays they're very quick to prioritize that activity and investigate whereas before it was sort of at the bottom of the pecking order and now I'd say it's a very high priority and I think regulators across the world I've learned how to do Ponzi investigations they're so easy there's Trading so you go in and say give us the trading records and of course there won't be any and from an investor's point of view how do you know when you're being marketed to a ponzi how do you know when you're in a ponzi if the returns are steady and every year is up or if there is a down year it's not by much and if it seems very steady and you don't exactly understand what the investment manager is doing and if your statements if you can't read your statements or you're not getting statements or if you look at your statements you should check the prices did those prices trade in the market that day at that price or didn't they and you should also look and see the assets are really there where are they housed are they housed at a custody bank if they are called a bank this is my account number can you verify this amount of money in the account if they can't that's a big problem now after the Madoff was exposed you testified to congressional hearings there were reforms at ECC just finally looking back three years after now do you think that the regulators in the United States the auditors the trustees the watchdogs have reformed enough to stop this happening well the Security and Exchange Commission certainly did reform it's probably our best law enforcement agency in the United States this was a near-death experience for that regulator four years ago and so they went to the very bottom this is the worst point in their history and so they knew they needed to reform are they going to be put out of business and so they did and they actually prioritize Ponzi schemes they wrote a 457 page report on this case and it was a litany of what not to do and so they've retrained their people they've sent several hundred away to become trained as Certified Fraud examiner's they've reorganized their Enforcement Division they get it unfortunately the bank regulators do not get it no one got fired at the banking regulators unfortunately and they really have not reformed and I would say the accounting firms are as sad as ever I don't trust any accounting firm audits I just don't think I don't think auditors are competent whatsoever I just finally what are you up to these days because there was a period reading the book where you weren't actually making any money you were investigating these things but there was no way for you to make money you were no longer working as a fund manager I mean what do you do for a living these days Certified Fraud examiner I deal in large multi-billion dollar financial fraud schemes I investigate turn them in to the United States government they pay rewards from 10 to 30 percent for successful prosecutions I recruit teams of whistleblowers once I figure out the fraud mathematically I go inside the company pull out people that are willing to talk and turn over state's evidence and operate undercover for the government if need be if requested and when the case is successful we get paid right well good luck to you Harry thank you very much appreciate your time today there we are Harry Markopolos the author of no one would listen I thoroughly recommend it as an investor as a regulator anyone trying to understand how to stop malfeasance in the financial sector would a stop being hurt like I'm burnin icky that was another in our series of double shadow to use for interest codes

Channel: ofInterestNZ

Views: 19,713

Rating: 4.8217821 out of 5

Keywords: Interest.co.nz, Bernard Hickey, New Zealand, Harry Markopolos, Double Shot Interview, No one would listen, top2013

Id: d7F3NkVZ4Ww

Length: 20min 48sec (1248 seconds)

Published: Thu Feb 07 2013