Harry Markopolos is the financial analyst and Certified Fraud Examiner (CFE) who uncovered the largest Ponzi scheme in history, and as a result Bernie Madoff is sitting in prison for 150 years. But Markopolos, who spoke on July 14 at the 20th annual conference of the Association of Certified Fraud Examiners (ACFE) isn’t rubbing his hands together; instead, he said the case was “gut-wrenching” and he feels “tremendous sadness for the victims”, who count charities and other non-profits, institutional investors, foreign investors and individuals in their ranks, some of whom lost most or all of their financial holdings.
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Markopolos was a portfolio manager for an equity derivatives asset management firm located in Boston back in the late 1990s when he was asked to analyze and essentially reverse-engineer the spectacular performance of Bernard Madoff’s hedge fund in the stock market. Instead, he compiled compelling evidence that Madoff was running a massive Ponzi scheme – using funds from new investors to pay off early investors – and that the losses to the last ones in would be devastating.
Some of the red flags that Markopolos and his team found proving Bernie Madoff’s hedge fund was a sham and not the darling of Wall Street are listed here:
- Bernie Madoff only picked winners and break-even stocks. Warren Buffett and other
great investors will say that’s impossible; even the experts lose.
- The performance charts for Madoff showed a straight 45 degree line of returns, also
impossible.
- Bernie Madoff allowed feeder funds, funds that bring in new investors, to earn the bulk
of his fees.
- Madoff never had stocks or options in the market at year-end.
- Bernard Madoff claimed a steady 16% profit and a 12% net.
- Bernard Madoff went “auditor shopping”; he used a different auditor for his hedge fund
every year so that the current auditors did not know what the previous auditors had
done or concluded.
- Madoff indicated some of his funds were invested in T-bills, which obviously don’t pay
16%.
In his speech to the ACFE, Markopolos characterized the feeder funds as the “tentacles of the octopus”: they pretended to do their due diligence but they lied in order to collect 3-4% fees. This comes out to 300-950% returns for their efforts, according to Markopolos. In contrast, Madoff only received 1% for creating and managing his Ponzi scheme.
Who were some of the larger investors who placed their money with Bernard Madoff? According to Harry Markopolos, there were 339 funds spread across three dozen countries, including the United States, as well as organized crime in Latin America and Russia.
Markopolos started out as an analyst and ended up both a whistleblower, the David who was – and is – willing to take on Goliath. Regarding his dogged, almost 10 year battle to unmask Bernard Madoff, he said that “fear was my constant companion” due to concerns for the personal safety of himself and his team.
Speaking as a whistleblower, Markopolos expressed harsh condemnation of the U.S. Department of Justice, which has a 90% conviction rate. Accusing them of cherry picking easy cases, he said those cases for the most part “don’t matter”. “Madoff was the largest case failure in history”.
When he first tried to alert authorities as to Madoff’s Ponzi scheme in 2000, Markopolos was hoping to stop what he already believed were phenomenal losses; instead, he said that the losses due to the DOJ and SEC’s apathy and incompetence will mount as high as $65 billion. In fact, Markopolos reserved his strongest criticism against the SEC, which he said “roars like a mouse and bites like a flea”. In its current form the SEC as a federal watchdog is “poorly trained and ill-equipped. They have too many lawyers, too many CPAs, not enough CFEs, and not enough investigators”. He further called the SEC a “national disgrace” and said that if they didn’t wake up and start seeing “the elephants” (Madoff and other large-scale frauds), then all 35,000 employees of the SEC “should be fired”.
In his parting comments, Harry Markopolos said that the imprisonment of Bernard Madoff is not the end of the case, not by a long-shot. There are active investigations by our asleep-at-the-wheel SEC and other federal agencies, as well as civil lawsuits by scammed investors. He also said a book and documentary film are in the works.
Note: photo of Harry Markopolos should be credited to the Association of Certified Fraud Examiners (ACFE).
For more info:
Association of Certified Fraud Examiners
Institute of Alternative Investments
California Real Estate Fraud Report
Comments
The article about Bernie Madoff fraud scheme has provided some facts about people and organizations are responsible for financial crisis. However, there are others including government agencies like, SEC and Credit Rating companies were helping to artificially inflate the Market, were not mentioned. Also, the article has shown that those who became Certified Fraud Examiners have learned about the operations by being involved with responsible agencies previously. When you try to dig out for warms, snakes come out of the holes. My opinion is not directed to any particular individual or organization, but it is the fact about our system.
excellent piece
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