During 1999, Markopolos learned that one of Rampart's frequent trading partners,
Access International Advisors, was dealing with a
hedge fund manager who consistently delivered net returns of 1% to 2% a month. Frank Casey, one of Rampart's principals, met with Access CEO
René-Thierry Magon de La Villehuchet, and learned the manager was Bernie Madoff, who was operating a
wealth management business in which his clients essentially gave him
carte blanche to invest the money as he saw fit, in a set of securities. Casey and Rampart's managing partner, Dave Fraley, asked Markopolos to try to design a product similar to Madoff's
split-strike conversion, in hopes of luring away Access from investing in Madoff. Despite this, Markopolos's bosses at Rampart asked Markopolos to deconstruct Madoff's strategy to see if he could replicate it. He could not simulate Madoff's returns, using information he had gathered about Madoff's trades in stocks and options. For instance, he discovered that for Madoff's strategy to work, he would have had to buy more options on the
Chicago Board Options Exchange than actually existed. Michael Ocrant, editor-in-chief of
MARHedge, joined the effort to publicize Madoff's questionable actions. Casey surprised Ocrant with information that Madoff, whom Ocrant only knew to be one of the largest
market makers on
NASDAQ and one of the largest
brokers on the
New York Stock Exchange, actually ran a secretive multi-billion dollar hedge fund, directly managing investors' money. Ocrant investigated and wrote an article, "Madoff tops charts; skeptics ask how", published May 1, 2001, questioning Madoff's returns. Markopolos sent a more detailed submission to the SEC a year later. He also offered to let the SEC send him to Madoff's headquarters undercover, obtain the trading tickets, and compare them with the
Options Price Reporting Authority tape. By then, Markopolos was convinced that Madoff was not really trading. He believed that his trading tickets would not match the OPRA tape, which would have been hard proof that Madoff was a fraud. This submission also passed without action from the SEC. Markopolos persevered, even though he felt that it created a considerable risk to his own safety. He learned during his European tour that a large number of funds invested with Madoff operated
offshore. To his mind, this was evidence that the
Russian mafia and Latin-American drug cartels were invested with Madoff, and might want to silence anyone who threatened the viability of the hedge funds. On December 17, 2002, Markopolos came up with a plan to deliver an investigative file anonymously to an aide of then
Attorney General of New York Eliot Spitzer as Spitzer delivered a speech at the
John F. Kennedy Library in Boston. He put on a pair of white gloves to prevent leaving fingerprints, and wore an oversize coat. Even after leaving Rampart in 2004, frustrated that he was in a business that had to compete with cheats and lawbreakers, In the document Markopolos states: Although Madoff's scheme did not collapse until 2008, Markopolos believed that Madoff was on the brink of insolvency as early as the summer of 2005, when Casey found out that at least two banks were no longer lending money to their clients to invest with Madoff. This prompted Madoff to seek loans from banks. In June 2008 – six months before Madoff's scheme imploded – Markopolos's team uncovered evidence that Madoff was accepting
leveraged money. In his book, Markopolos wrote that this was a sign Madoff was running out of cash and needed to increase his intake of new funds to keep the scheme going.
Congressional testimony On February 4, 2009, Markopolos testified before the
United States Congress' House Financial Services Committee's capital markets panel and on March 1, appeared on
CBS's
60 Minutes. Markopolos harshly criticized the SEC for ignoring his warnings about Madoff. "Nothing was done. There was an abject failure by the regulatory agencies we entrust as our watchdog," he said in 65 pages of prepared testimony. He said that his original 2000 complaint gave the SEC enough evidence to stop Madoff when he was supposedly managing as little as $3 billion. Describing Madoff as "one of the most powerful men on Wall Street", Markopolos stated that there was "great danger" in investigating him: "My team and I surmised that if Mr. Madoff gained knowledge of our activities, he may feel threatened enough to seek to stifle us." He testified that he feared for his, as well as his family's safety, until after Madoff's arrest, when the SEC finally acknowledged that it had received "credible evidence" of Madoff's Ponzi scheme years before. After the SEC did not respond, Markopolos was fearful of taking his complaints to the industry's self-regulatory authority, the National Association of Securities Dealers (since succeeded by the
Financial Industry Regulatory Authority (FINRA)). He not only feared the power of Madoff's brother, Peter, had in that organization (he is a former Vice Chairman), but also feared that Madoff might have had associations with Russian and South American organized crime. Markopolos believed the
FBI would reject his allegations without the SEC staff's endorsement. He testified he gave details about the case during 2005 to
John Wilke, an investigative reporter for
The Wall Street Journal, but that it was never pursued. Markopolos testified he (anonymously) sent a package of documents concerning Madoff to former New York Attorney General
Eliot Spitzer, who had successfully prosecuted a number of securities fraud cases, but that Spitzer apparently did not act, either. Spitzer's family firm had invested in Madoff's business. "Government has coddled, accepted, and ignored
white-collar crime for too long," he testified. "It is time the nation woke up and realized that it's not the armed robbers or drug dealers who cause the most economic harm, it's the white collar criminals living in the most expensive homes who have the most impressive resumes who harm us the most. They steal our pensions, bankrupt our companies, and destroy thousands of jobs, ruining countless lives." He testified to Rep.
Gary Ackerman (D-NY) that he had never been compensated for his efforts. "I did it for our flag, for patriotism." Markopolos presented recommendations to improve the SEC's operations, which included mandatory department standards: good ethics, full transparency, full disclosure, and fair dealing for all. The SEC must establish a unit to accept "whistleblower" tips, and move its activity closer to financial centers away from
Washington, D.C. He disclosed information regarding a dozen as-yet-unknown foreign Madoff
feeder funds, "hiding in the weeds" in Europe, the victims of which likely included
Russian mafia and
drug cartels, "dirty money" investors. The Williams Report questioned Kotz's work on the Madoff investigation, because Kotz was a "very good friend" with Markopolos. Investigators were not able to determine when Kotz and Markopolos became friends. A violation of the ethics rule would have taken place if the friendship had been concurrent with Kotz's investigation of Madoff.
Other statements In his interview with
Steve Kroft of
60 Minutes, Markopolos said the biggest warning he noticed during his initial 1999 analysis of Madoff was that he reported losing months only four percent of the time. To Markopolos's mind, no one could possibly be that good, given the volatility of the markets. "As we know, markets go up and down, and his only went up," he said. Markopolos noted that during his tenure at Rampart, he traded with some of the biggest derivatives companies in the world, and none of them dealt with Madoff, because they didn't think his numbers were real. He admitted that he had some financial incentive to eliminate Madoff, as the two competed against each other from 2000 to 2004. However, he said, he felt compelled to pursue it, because "when someone's competing on your playing field, who's a dirty player, you want him tossed off the field." He assailed the SEC once again for ignoring his warnings, saying that the only reason Madoff was caught was that he ultimately collapsed under the weight of his own lies. == General Electric fraud allegation ==