That immediately lead Markopolos to suspect that Madoff might not have ever even traded shares at all but was simply managing a tremendous Ponzi scheme, disguising the dispensation of new clients' money as dividends and investment income paid out to exiting clients (Markopolos, et al., 2010).
However, Markopolos also suspected that Madoff was involved in an illegal operation for a reason entirely distinct from any of the sophisticated mathematical methods that he used to analyze the supposed trading strategy itself. Specifically, he suspected Madoff because his professional behavior was so bizarre: Madoff, head of a prominent New York brokerage firm, would maintain a secretive money management business operation "on the side" of his mainstream business and why he would furnish his hedge fund management services to his hundreds of wealthy investors without ever charging a fee for his services (LeBor, 2010; Markopolos, et al., 2010).
Markopolos's Multiple Unsuccessful Attempts to Alert the Authorities
Markopolos contacted the federal authorities about Madoff for the first time in 2000, filing a formal complaint with the SEC field office in Boston (LeBor, 2010; Markopolos, et al., 2010). When that complaint failed to generate a formal investigation by that agency, Markopolos followed up with a much more extensive report in 2001 in which he detailed his suspicions and demonstrated the mathematical impossibility of the returns claimed by Madoff. In that second complaint, Markopolos also offered to conduct an undercover mission to secure records directly from Madoff's firm for comparison to records of the Options Price Reporting Authority (OPRA), which would have established conclusively whether or not Madoff had executed the trades that he claimed to have executed and actually generated the dividends he purportedly had been paying out. That complaint was also ignored by the SEC (LeBor, 2010; Markopolos, et al., 2010).
After that second attempt to alert the SEC to Madoff's operation, Markopolos then traveled to Europe to and had the opportunity to interview more than a dozen hedge fund managers, each of whom then believed that his fund was the only fund feeding Madoff new money (one from which Madoff was taking new money (LeBor, 2010; Markopolos, et al., 2010). That confirmed Markopolos's suspicions that Madoff's operation was nothing more complicated than a classic Ponzi scheme (Markopolos, et al., 2010).
Markopolos eventually compiled an even more extensive presentation that consisted of twenty-one pages and was entitled the World's Largest Hedge Fund is a Fraud, which he furnished to the SEC in 2005 (LeBor, 2010; Markopolos, et al., 2010). That report detailed a decade and a half's worth of Madoff's supposed trades during which Madoff reported only four months of losses. Incredibly, the SEC again failed to take appropriate action or to launch an official investigation of any kind based on the extensive information and analyses furnished by Markopolos.
In retrospect, it has been suggested that internal politics and rivalries in connection with the reluctance of SEC headquarters to take action based on information forwarded from its Boston field office played a substantial role in the administrative and investigative inefficiency of the agency (LeBor, 2010; Markopolos, et al., 2010). In that regard, the Boston SEC Bureau Chief met with Markopolos and indicated that but for the fact that crimes committed in the New York region were out of his jurisdiction to investigate, he would have taken immediate action. He shared Markopolos's frustration that the 2005 the World's Largest Hedge Fund is a Fraud report furnished to the SEC's New York office was ignored (LeBor, 2010; Markopolos, et al., 2010).
The Madoff scandal destroyed the lives of hundreds of individuals who trusted Madoff with their life savings. It also bankrupted hundreds of pension funds, charitable, and philanthropic institutions worldwide. In addition to its importance as a lesson in criminal financial investment fraud, the refusal of the principal regulatory agency, the SEC, to respond appropriately to independent investigative research furnished by Harry Markopolos stands as an unfortunate testament to bureaucratic inefficiency and failure to fulfill its primary mission and purpose as a government organization.
Diana B. Henriques. The Wizard of Lies Bernie Madoff and the Death of Trust. New York: Henry Holt & Co. 2011.
Andrew Kirtzman. Betrayal: The Life and Lies of Bernie Madoff. New York: