After settling in the front seat, Michael Ocrant introduced himself. “I’m from Managed Accounts Reports,” he said, reaching across the seatback and shaking hands.
“I’m with Rampart,” Frank responded. “We’re an options management house,” he continued, explaining his product. Frank and Mike Ocrant were doing the industry dance, learning as much about each other as quickly as possible, calculating to see if there was a common ground on which they might meet for some mutual benefit. Frank Casey assumed that Ocrant knew a lot of the fund managers and might well be able to make some valuable introductions. Ocrant was a reporter, continually building a deep reservoir of sources and information, always searching for his next big story—although it’s doubtful he realized his next big story was sitting in the backseat of this cab. Finally Frank asked, “And what do you do for MAR?”
“I’m the editor-in-chief, but I also do some investigative reporting on a selective basis,” Ocrant said, in a way that Frank remembered was self-assured but not overbearing. As they began talking, Ocrant explained that he had been the reporter who uncovered the Hillary Clinton cattle-trading scam. He said, smiling, “I’ll bet you didn’t know that Hillary was the world’s best cattle trader.”
In 1994, as Ocrant explained to Frank and his wife, the New York Times had revealed that in 1978 Hillary Clinton, at that time the wife of the governor of Arkansas, had successfully turned a $1,000 investment in cattle futures into $100,000 in only a year. In 1978 $100,000 was a substantial sum of money. Just after the story was published, Ocrant had been at a cocktail party at the Futures Industry Association conference in Boca Raton, Florida. A well-known futures industry executive had whispered in his ear, “Look at the broker,” then walked off. Ocrant did his homework, discovering through research and sources that a corrupt broker had been allocating his trades, giving the successful trades to his friends and most important clients, while giving the bad trades, the losers, to people who never realized what he was doing. In response to the initial reports Hillary had claimed she made that money by reading the Wall Street Journal.Unlikely, Ocrant thought, and had spoken to the chairman of a commodities exchange, an older, completely bald man. “I said to him,” Ocrant told Frank Casey, “‘What are the chances that she’s telling the truth—that it really happened that way?’
“And he responded, ‘About the same as me waking up tomorrow with a full head of hair.”’ Mike Ocrant’s story was carried around the world, and he later received the National Press Club’s annual award for breaking news.
It was sometime during this long drive to the hotel that it occurred to Frank that Ocrant could be a very valuable ally in the pursuit of Madoff.
He heard the opening he was looking for when Ocrant began discussing the hedge fund industry, claiming that he knew most of the major players in the business. MARHedge maintained a database that tracked about three-quarters of the fund managers. There weren’t that many of them. At that time you could count on your fingers the number of funds running even $2 billion in assets.
Frank listened politely, then said, “Tell you what, Mike. I’ll bet you dinner in Barcelona for my wife and myself that I can name a hedge fund manager that you don’t know anything about, and he’s running more money than anyone you’ve got in your database.”
“That’s impossible,” Ocrant responded. “I know about everybody in that world on that level. Most of them I know personally.”
Frank held up his hands. “There’s an out for you because technically he’s not a hedge fund, but there are funds that have been formed for the sole purpose of giving him money. He might be running upwards of seven billion dollars.”
Ocrant nodded. “Okay, it’s a bet. Who is it?”
Frank said quietly, “Bernie Madoff.”
Ocrant whipped his head around in surprise. “Bernard Madoff Securities? The market maker?”
“Yep.”
“No, that’s not possible. He’s not running hedge funds.”
“I told you that was your out. But we know that he’s running seven billion worth of hedge fund money given to him basically as a loan to his broker-dealer. He’s got full discretion; he can do anything he wants with it.”
Frank and his wife had a lovely dinner in Barcelona with Mike Ocrant. By that time they shared an objective: Frank wanted Ocrant to write about Madoff, hoping the publicity would expose the scam. And Ocrant didn’t need much convincing; the fact that a well-known market maker was quietly running the biggest hedge-fund-like operation in the world was major news for that industry.
It was during their dinner that Frank revealed the details of the investigation. His whole operation was a scam, he said. Madoff was either front-running or it was the biggest Ponzi scheme in history. Like a good reporter, Ocrant casually absorbed the information. He didn’t really respond, but in fact his reaction was typical; he had a tough time believing that Bernard Madoff was running a Ponzi scheme. His professional experience had shown him how difficult it is to sustain a Ponzi scheme for even a couple of years, so it was hard for him to accept the claim that this had been going on for at least a decade. But more than that, he got hung up on the lack of a motive. Once again, it made no sense. If Madoff was going to take a risk, he thought, it would be the type of crime that might cost him a million-dollar fine and might hurt his reputation—but why would he take a risk that if discovered would put him in jail for money he seemingly didn’t need?
Ocrant said he’d like to pursue the story, but admitted it would be difficult for him to investigate Madoff, because he knew very little about the options business.
“That’s okay,” Frank said quickly. “We’ll educate you.” Mike Ocrant turned out to be the perfect person to become the fourth member of our team. Unlike the rest of us, he had grown up with a con man and had already exposed a major Ponzi scheme.
Mike Ocrant had been born in Chicago but had moved with his parents to a suburb of Denver, where they had decided to open what was probably the city’s first Jewish deli. Mike’s parents knew absolutely nothing about the restaurant business and their concept of Judaism was eating lox and bagels on Sunday, so naturally they opened a Jewish deli. It closed in less than a year and his parents lost everything.
Also living in Denver at that time was his father’s half-brother, a man who had one great similarity to Madoff—neither one of them had a conscience. “He was so smooth,” Mike remembered. “He had so much confidence. He was only five feet two but he insisted he was five feet ten. That was his skill; he had the ability to deny the undeniable.”
His uncle, while brilliant, was also ambitious and craved financial success to prove his own worth. On several occasions he was accused of unauthorized trading in customer accounts to generate commissions. In one instance he went into the account of a relative and lost her entire nest egg—and never showed the slightest remorse.
It was at the University of Colorado at Denver that Mike decided to become a business journalist. He had a professor, a Marine veteran named Greg Pearson, who taught him that whatever story he was working on, it would eventually come back to the money. Money linked everything together. Follow the money.
After working at several trade publications, among them Mass Market Retailers, he became a reporter at McGraw-Hill’s Securities Week— eventually rising to managing editor—covering the commodities markets. As he learned quickly, commodities is the contact sport of finance. “These are the elbow-in-the-face sort of guys, who came from the streets of New York and Chicago,” he explained. “A lot of them are without college educations. They’re very smart, most of them, just not book smart, and they know how to make trades. And nothing stands in their way, or if it does, it doesn’t remain standing. It’s a great place to learn about the ruthlessness of the financial industry.”
When he moved to MARHedge in 2000, he knew almost nothing about the hedge fund industry, but he learned quickly. In fact, at one point he got a tip about New Jersey currency traders who were regularly returning a
s much as 20 percent a month. It had all the hallmarks of a classic Ponzi scheme. After gathering evidence that this was indeed a scam, he phoned the company and requested an interview with either or both of the two principles running the firm. “I could tell immediately from the secretary’s reaction that something was very wrong,” Michael remembered. “There was a lot of nervousness in her voice, a lot of anxiety. At first she said they would call me back, but later they started making excuses, telling me they were going to be out of town for a while.”
Ocrant reported this company to the Commodity Futures Trading Commission, the regulator for the futures market, which almost immediately began an investigation and shut down the company. This company had cheated investors out of several hundred million dollars, making it one of the largest frauds in New Jersey history.
After this scheme had collapsed, several of the victims had contacted Ocrant to tell him their stories. An older woman who had been using the returns to care for her retarded brother had lost everything; she didn’t know where the two of them would live. A CPA on Long Island had lost both his and his wife’s retirement funds as well as their children’s college funds. “I just got those redemptions and kept investing more. After a while I never took anything out,” he said, casually defining the horror of a Ponzi scheme. There was nothing Ocrant could do but listen and sympathize.
So while I talked about Madoff’s Ponzi scheme in the abstract, Mike Ocrant knew what a real Ponzi scheme smelled like, and he knew the human damage it did.
To Ocrant, this just didn’t smell like a Ponzi scheme. He didn’t know exactly what it was, possibly front-running, but he just couldn’t believe the evidence. When he returned to New York he began his education, spending several hours on the phone with Frank, learning the language of options, and like any good reporter, trying to punch holes in our theory. But he also quietly initiated his own investigation of Madoff. If we were right and he could prove it, this was potentially a career-changing story.
He began by asking the managing editor, who reported to him, as well as the president of the company, if they’d ever heard any rumors about Bernie Madoff managing money. Madoff, the market maker? No, neither of them knew anything about it. They had been working in the industry for years, but had never heard a word about Bernie Madoff’s money management operation.
That’s sort of strange, he thought. Then he expanded his investigation, casually questioning several knowledgeable contacts in the business. And all the evidence he compiled seemed to confirm that Casey was right. One contact, a serious quant who had managed a billion-dollar portfolio for the Tiger Fund, explained to Ocrant that when he made a small trade, for example half a million dollars in a stock or option, that trade would cause the market to change. The pros would see it and react; you literally could see the fluctuations. “With the amount of trading Madoff would have to do,” he told Ocrant, “you’d see those fluctuations—and they aren’t there.”
Point by point Ocrant confirmed Frank’s claims about Madoff. And just as had happened to us, the more he learned the more intrigued he became. Madoff’s name began slipping into most of his conversations. He was on the phone one afternoon with Hunt Taylor, the former chairman of the Cotton Exchange who was then managing the family office for the Stern family, owners of Hartz Mountain. Whatever the original purpose of the call, eventually Ocrant found himself asking the now-familiar question: “Have you ever heard about Bernie Madoff managing money?”
“God,” Taylor responded. “It’s funny you should mention that, because I just came back from a conference, and me and a bunch of guys were sitting around the table talking about that. One of them told me he knew someone who had three hundred million dollars with Madoff. Somebody else said he knew someone who had more than that. Before we knew it we were up to six or seven billion dollars.”
Ocrant was careful to hide his surprise. If this group could account for at least six billion, how much money was Madoff managing? More and more it seemed like Casey was right, that this was potentially the largest fraud in history.
While Mike Ocrant was working on the story, we continued to compile as much evidence as possible. This investigation wasn’t our primary objective, because we all had paying day jobs to do, but whenever possible we asked the right questions and collected the documents. In March 2001, one member of the team (truthfully, I have no record of the source—it could have been Frank or my brother or someone we’d spoken with) faxed me the “Use of Proceeds and Investment Program Offered by Fairfield Sentry,” and managed by Bernie Madoff. Obviously, I don’t know where the source got it, but it was easily available. From that time forward we continually tracked this fund. Why not? Fairfield had an amazing product to sell. The document included Fairfield’s pitch to potential investors as well as charts of the fund’s return stream. It was typical Bernie. Everybody is a winner!
Inside the SEC Boston district office (or BDO, as it was referred to officially back then), Ed Manion was growing increasingly frustrated. As we later discovered, my report had not been forwarded to the SEC’s Northeast Regional Office (NERO) in New York. Grant Ward hadn’t understood it and just dropped it. Almost a year had passed since our meeting, and Manion urged me to resubmit my report. I added some of the new information we had gathered from the feeder funds and prepared an analysis comparing Madoff’s returns to the market. During the period for which I had returns, the market had 26 down months, whereas Bernie had three. In his worst month he was down 0.55 percent, whereas in its worst month the market was down 14.58 percent. As I wrote, “His numbers really are too good to be true.”
Included in this March 2001 submission was an offer. If the SEC couldn’t prove Madoff was a fraud, I would do it for them. “I can provide you with detailed questions for your audit team,” I wrote. “In fact, I would be willing to accompany a team undercover under certain conditions (new identity, disguise, proper compensation) ... and serve under the command & control of the SEC. In return, I would take a leave of absence from my firm....”
It was a no-cost offer with 100 percent upside and no downside. I was confident I could walk into Madoff’s office and within a few minutes prove he was a complete fraud. I didn’t think it would take me more than five or six of the right questions and one hour of my time. If SEC investigators weren’t capable of figuring out this operation, than I would do it for them. Now, I don’t know if I ever seriously believed they might actually take me up on this offer, but I did walk myself through my plan if I ever did get inside. I was going to ask Madoff’s people to take me directly to his derivatives trading desk. That was all I needed to do. Chances were they would have looked at me as if I was the crazy one. Madoff wasn’t making any trades, so there was no reason for him to maintain an equity derivatives trading desk. But assuming he had prepared for this investigation and had set up a Potemkin trading desk, meaning a phony front, I would have asked for copies of trading tickets. These fake tickets were the center of gravity. They were the hard evidence that would prove his operation was nothing more than a house of cards. Once I had those, he would be toast.
I knew the trading tickets existed, because he supplied copies of them to his clients. Somebody somewhere was sitting in a back room making them up and printing them out. Once I had them, I would go to a Bloomberg terminal or some other data vendor and get copies of the Option Price Reporting Authority (OPRA) tape. The OPRA tapes are the permanent record of every trade. Madoff’s trading tickets would not match up with the OPRA tapes. Once I proved to the SEC that he had falsified those trading tickets, it would be game over, case closed, sayonara.
This was in early 2001, when we estimated he was running less than $20 billion. When he surrendered in 2008, it was estimated he was running roughly $65 billion. You do the sad math.
About three years later Neil confirmed this to be a viable scenario. By that time he was working at Benchmark Plus in Tacoma, Washington. His employer was friendly with an extraordinarily successful investor named Edward T
horp, who had conducted due diligence on behalf of another institution many years earlier. As he told Neil’s boss, he’d gotten ahold of some of Madoff’s trade tickets and compared them to OPRA tapes. He was nice about it, but said he found some discrepancies— meaning he was unable to match all the reported trades against the OPRA data. Thorp promptly advised his clients and anyone in his network to stay away from Madoff, but didn’t take it any further. And this is why self-regulation doesn’t work. If industry practitioners don’t report suspected fraud, nor have any meaningful incentive to do so, and if government agencies don’t have systems set up to take in, evaluate, and investigate whistleblower tips—then self-regulation can never work.
I never got a response from the SEC for this second submission, either. It wasn’t until September 2009 that I finally found out what had happened to it. David Kotz, the SEC inspector general, who was charged with trying to figure out why the agency had proved to be completely dysfunctional, reported, “Although this time the BDO did refer Markopolos’ complaint, NERO decided not to investigate the complaint one day after receiving it. The matter was assigned to an Assistant Regional Director in Enforcement for the initial inquiry, who reviewed the complaint, determined that Madoff was not registered as an investment advisor and the next day sent an e-mail stating, ‘I don’t think we should pursue this matter further.’ The OIG could find no explanation for why Markopolos’ complaint, which the Enforcement Attorney and the former head of NERO acknowledged was ‘more detailed than the average complaint’ was disregarded so quickly.”
No One Would Listen: A True Financial Thriller Page 10