No One Would Listen: A True Financial Thriller (16 page)

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Authors: Harry Markopolos

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Madoff didn’t hesitate. If he was hiding, Ocrant thought, he was doing it in plain sight. “Why don’t you come down today?”
 
Ocrant was incredulous. It had been his experience that CEOs did not often agree to spontaneous meetings, that their days were usually carefully scheduled. But Madoff acted like he had nothing else to do. “Now?” Madoff couldn’t possibly mean right at that moment.
 
“Does this afternoon work for you?”
 
It happened so fast that Ocrant only had time to make a quick call to Frank. “Good luck,” Frank told him. “Ask him if he’s running $10 billion.”
 
Ocrant actually had met Madoff a couple of times and spoken with him to get comments while covering other market stories. In Ocrant’s experience, he had always been accessible and he always responded to questions with colorful answers. That history, his reputation, and the fact that he had immediately agreed to the interview caused Ocrant to wonder if there might be more to the numbers than he had seen.
 
By the time he got to Madoff’s office in the Lipstick Building, on Third Avenue between 53rd and 54th Streets in Manhattan, the trading day was over and the office was quiet. Most of the traders and Madoff’s secretary were gone. Madoff invited him into his office, offered him something to drink, and sat down at his desk. The office was surprisingly nondescript. A large window allowed Madoff to watch the activity on the trading floor. He leaned back comfortably, his body language certainly not indicating he was hiding a great secret, and invited Ocrant to ask his questions.
 
“He was very generous with his time,” Ocrant remembered. “It was obvious he intended to sit there until I ran out of questions. One by one I went through all the questions that people had raised about his strategy, the lack of volatility in his returns, and the fact that his trading activity didn’t show up in the listed market.
 
“He had an answer for everything. He said he did a lot of his trading over-the-counter, so it wouldn’t necessarily show up on the exchange. He just dismissed the idea that somehow the volume was missing. He responded directly to every one of my questions, not always with an answer that made perfect sense, but in many instances they had a degree of plausibility. When he claimed, for example, that he was using a ‘black box’ strategy—meaning some sort of proprietary computer program—developed over a long period of time, based on his knowledge of the market and his experience, it made sense; it was well known that Madoff Securities had tremendous market knowledge, and it also had a reputation for developing and using proprietory technology. So what he was saying wasn’t completely unreasonable.
 
“When I asked for more details about this ‘black box,’ he smiled and refused to answer. ‘I’m not going to give information that can help my competitors. Why should I do that?’ Within the hedge fund industry that is quite a plausible answer. A lot of hedge funds would respond the same way.
 
“It wasn’t just the signals from the ‘black box,’ he emphasized. The system he had set up relied on the input from his professional traders. He wanted them to use their gut feelings. ‘I don’t want to get on an airplane without a pilot in the seat,’ he said. ‘I only trust the autopilot so much.’
 
“It didn’t matter what question I asked him—there was at least an element of plausibility to every answer. Several times when I wasn’t completely satisfied with his answer I asked the same question a different way. He never complained, and he was responsive to every question. When I said that it appeared that he was managing as much as $8 billion, he admitted that he had at least $7 billion and then shrugged, meaning maybe it was a little more. And he did it without hesitation.
 
“He confirmed that Fairfield Sentry was a feeder fund, he confirmed that he was using a split-strike conversion strategy, and he confirmed that he often placed his assets in Treasury bills while he waited for specific market opportunities. He denied that he subsidized the down months by using profits from the market-making operation, and when I pressed him he explained, as if there was nothing else to say, ‘The strategy is the strategy and the returns are the returns.’
 
“It wasn’t so much his answers that impressed me, but rather it was his entire demeanor. It was almost impossible to sit there with him and believe he was a complete fraud. I remember thinking to myself,
If Frank is right and he’s running a Ponzi scheme, he’s either the best actor I’ve ever seen or a total sociopath.
There wasn’t even a hint of guilt or shame or remorse. He was very low-key, almost as if he found the interview amusing. His attitude was sort of ‘Who in their right mind could doubt me? I can’t believe people care about this.’
 
“Overall he seemed like a very personable, nice, straightforward guy.”
 
The only question that Ocrant had decided not to ask directly was: ‘Are you running a massive Ponzi scheme?’ He was afraid those words might end the interview. Instead he danced around it, asking him about front-running—which Madoff denied, naturally.
 
Years later, after Madoff had surrendered and his Ponzi scheme had collapsed, people would wonder how Madoff could have fooled so many people for so long. This interview provides a good answer to that question. Mike Ocrant is a very good investigative reporter. He has uncovered other Ponzi schemes, he has broken numerous other important stories, and he has won prestigious awards; in his career he has conducted a thousand interviews with powerful executives trying desperately and forcefully to convince him to accept their positions. And Bernie Madoff snowed him. There is a reason Madoff was able pull off the largest financial crime in history. Madoff was so smooth, so convincing, that even an experienced journalist like Mike Ocrant came away from that interview doubting what he had believed to be true.
 
As soon as he got back to his office he called Frank. “Are you guys really sure about this?” he asked. “Because I gotta tell you, Frank, this guy was as cool as can be. I mean, I didn’t see the slightest indication that anything was wrong. In fact, rather than worrying about the story I was writing, he acted like he was inviting me over for Sunday tea.
 
“He doesn’t act like he’s got something to hide. He spent more than two hours with me. He showed me around the whole operation. He even offered to answer any other questions. Guilty people usually don’t act this way.”
 
The numbers don’t lie, Frank emphasized.
 
Ocrant wasn’t so sure of that. “Is it possible we’re missing something?” he wondered aloud. While writing his story, Ocrant reviewed the facts countless times. Madoff had been firm in his explanations: “Listen, we’ve got great market intelligence,” he’d pointed out. “We’ve got an incredible infrastructure. We’re well known as being on the leading edge of technology, and we’ve got 40 years of experience in the market.”
 
It made sense. All of it made sense. All of it except those numbers.
 
In addition to his face-to-face interview with Madoff, while working on the story Ocrant had spoken with him several times on the telephone to clarify certain points. Madoff was always friendly and forthcoming, and if he was nervous about this forthcoming article, Ocrant never heard a hint of it in his voice.
 
Mike Ocrant’s story was published in
MARHedge
on May 1, 2001. It was a very low-key story, extremely well written, simply laying out the facts and offering Madoff’s explanations. He wrote that Madoff’s $6 billion to $7 billion in assets “would put it in the number one or two spot in the Zurich (formerly MAR) database of more than 1,100 hedge funds, and would place it at or near the top of any well-known database in existence defined by assets.
 
“More important, perhaps, most of those who are aware of Madoff’s status in the hedge fund world are baffled by the way the firm has obtained such consistent, non-volatile returns month after month and year after year.”
 
Point by point Ocrant laid out the arguments we’d made. “Skeptics who express a mixture of amazement, fascination, and curiosity about the program wonder, first, about the relative complete lack of volatility in the reported monthly returns.
 
“But among other things, they also marvel at the seemingly astonishing ability to time the market and move to cash in the underlying securities before market conditions turn negative; and the related ability to buy and sell the underlying stocks without noticeably affecting the market.
 
“In addition, experts ask why no one has been able to duplicate similar returns using the strategy and why other firms on Wall Street haven’t become aware of the fund and its strategy and traded against it, as has happened so often in other cases; why Madoff Securities is willing to earn commissions on the trades but not set up a separate asset management division to offer hedge funds directly to investors and keep all the incentive fees for itself, or conversely, why it doesn’t borrow money from creditors ... and manage the funds on a proprietary basis.”
 
And then he presented Madoff’s responses, describing him as appearing “genuinely amused by the interest and attention aimed at an asset management strategy designed to generate conservative, low-risk returns that he notes are nowhere near the top results of well-known fund managers on an absolute return basis.
 
“The apparent lack of volatility in the performance of the fund, Madoff says, is an illusion based on a review of monthly and annual returns. On an intraday, intraweek, and intramonth basis, he says, ‘the volatility is all over the place, with the fund down by as much as 1 percent.”
 
An illusion? Only magicians do illusions. Maybe that was right—magic was as good an explanation for his returns as anything he said. As Ocrant wrote, “Market timing and stock pricing are both important for the strategy to work, and to those who express astonishment at the firm’s ability in those areas, Madoff points to long experience, excellent technology that provides superb and low-cost execution capabilities, good proprietary stock and options pricing models, well-established infrastructure, market making ability, and market intelligence derived from the massive amount of order flow it handles each day.”
 
And how does he make his massive stock and options moving invisible so that no one ever sees it? “Avoiding market impact by trading the underlying securities, he says, is one of the strategy’s primary goals. This is done by creating a variety of stock baskets, sometimes as many as a dozen, with different weightings that allow positions to be taken or unwound slowly over a two-week period.
 
“Madoff says the baskets comprise the most highly capitalized liquid securities in the market, making entry and exit strategies easier to manage.”
 
And why doesn’t he simply open a hedge fund, which would enable him to make even bigger profits? He even had an answer for that one: “Setting up a division to offer funds directly, says Madoff, is not an attractive proposition simply because he and the firm have no desire to get involved with the administration and marketing required for the effort, nor to deal with investors.”
 
“Many parts of the firms’ operations could be similarly leveraged, he notes, but the firm generally believes in concentrating on its core strengths and not overextending itself.”
 
Finally, as for all the rumors in the industry about the way he conducts his business, he dismissed them completely: “[T]hose who believe there is something more to it and are seeking an answer beyond that are wasting their time.”
 
As Frank, Neil, and I read Ocrant’s article, we started high-fiving each other. We’d gotten him! We were certain there was no way SEC investigators could read it without opening an investigation. I was ecstatic, but Frank was exuberant because once Madoff was gone he had a clear path to Thierry’s $300 million. “This is it,” Frank said. “The SEC’s gonna ride into town with a posse and they’re gonna shut him down!”
 
Hidden within the story was even more evidence of Madoff’s deception. He had admitted for the first time that he was running as much as $7 billion, which meant he had to have an established line of credit from some bank, and there wasn’t a bank in the world that was going to give a multibillion-dollar line of credit to a single broker-dealer without equity and without completely revealing the nuts and bolts of the entire operation.

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