Pursuer of Madoff blew a whistle for nine years

— -- Executives at Rampart Investment Management huddled nine years ago when Frank Casey, the firm's marketing vice president, obtained marketing documents for a little-known financial firm that reported unusually steady returns.

Harry Markopolos, a Rampart portfolio manager, and Neil Chelo, his top assistant, examined the numbers with surprise. Regardless of market conditions, the returns resembled a line heading straight up, at a 45-degree angle.

"It seemed impossible. The guy had perfect market timing for years," recalls Chelo. "Our bosses looked at it and said, 'Why don't you guys reproduce this strategy, and we'll get into this business?' "

About four hours later, Markopolos finished a series of financial calculations and announced his conclusion: The reported results were bogus, and the company was a fraud.

Only those in the room knew it at the time, but a Markopolos-led campaign to stop Bernard Madoff — now accused as the architect of what may be the largest Ponzi scheme ever — was about to begin.

It was a crusade that involved nine years of warnings to the Securities and Exchange Commission and efforts to publicize investment community skepticism about Madoff's operations.

It was a crusade that Markopolos, 52, says made him fear for his life as he secretly blew the whistle on the renowned former Nasdaq Stock Exchange chairman and founder of a top firm that electronically matches stock buyers with sellers.

And it was a crusade that ultimately failed.

It took the deepest recession in generations to topple Madoff, whose company collapsed in December amid billions of dollars in redemption requests, victimizing celebrities, charities, hedge funds, banks and average investors worldwide in a still unfolding financial shock.

"It's really sad, because he could have been stopped," says Casey, now the North American president for a British hedge fund advisory firm. "Harry was like the preacher in The Beatles song Eleanor Rigby, 'writing the words to a sermon that no one will hear.' "

And, adds Casey, still quoting the lyrics, "No one was saved."

Details of the crusade, pieced together from Markopolos' recent 375-page congressional testimony, interviews with three teammates who assisted him and a review of court and government records, show the effort began in 2000 at Rampart, a Boston-based firm that specializes in options trading.

Markopolos studied the strategy Madoff purportedly used to produce almost uniformly positive returns. Known as split-strike conversion, it is a limited-risk, limited-reward tactic in which a trader invests in stocks from a benchmark index while buying and selling options against those stocks.

"The reason I was immediately suspicious was that I had run a slightly similar, but actually functional, product," Markopolos, who declined a USA TODAY interview request but provided contact information for some of his teammates, said in his prepared congressional testimony. "As good as this product was, it often lagged the market, whereas Bernard Madoff's was always doing well under all market conditions."

He suspected that Madoff was running a Ponzi scheme, in which money from new investors is used to pay prior investors. Based on the Madoff marketing data he'd seen, he estimated the scheme at the time involved roughly $3 billion.

Not giving up

Markopolos wrote an eight-page summary of his suspicions and took it to the SEC's Boston office. Although he got no formal response after explaining his conclusions, he didn't give up.

"Harry was the lead crusader who kept bringing it to the SEC," says Chelo. "He's an honest guy who didn't want to see investors get hurt."

Encouraged by Ed Manion, a chartered financial analyst in the SEC's Boston office, Markopolos submitted an updated warning in 2001. Now, he estimated the suspected Madoff scheme had grown to as much as $7 billion. But he heard back only from Manion, who "was frustrated because the case didn't seem to be getting traction," Markopolos said in his testimony.

The team also tried to raise public questions about Madoff. Casey mentioned him to Michael Ocrant, an investigative reporter at MarHedge, a publication that covered the hedge fund industry.

Intrigued, Ocrant interviewed hedge fund managers, quantitative analysts and others about Madoff's reported results. None disagreed with Markopolos' conclusion. Ocrant phoned Madoff, who immediately invited him to his Manhattan offices in the Lipstick Building for an interview.

"He was very confident, not worried at all," by questions about his investment results, says Ocrant, recalling Madoff seemed "as relaxed as can be, like having Sunday tea or something."

Ocrant wrote a May 2001 story that described financial experts as "baffled by the way the firm has obtained such consistent, non-volatile returns month after month and year after year." A Barron's reporter saw the MarHedge report and wrote a similar story, titled "Don't Ask, Don't Tell: Bernie Madoff is so secretive, he even asks his investors to keep mum," one week later.

"We thought the articles would get the SEC's attention," and Madoff "would finally go down," says Chelo.

But there was no sign of public action.

Markopolos escalated his warnings in 2005, contacting Meaghan Cheung, the branch chief of the SEC's New York division. In a November e-mail to Cheung, he attached a 21-page report explaining "why I believe that Madoff Investment Securities LLC is the world's largest Ponzi scheme."

Now, about $30 billion was at risk, Markopolos estimated. But, again, he was frustrated by what he views as the SEC's failure to act.

"I'm suggesting that if you flew the entire SEC staff to Boston, sat them in Fenway Park for an afternoon, that they would not be able to find first base," he said during his Feb. 4 testimony.

Cheung, who has since left the SEC, declined to comment about Markopolos' warnings and complaints about the agency. "Ethically, there's nothing I can say. I can't respond," said Cheung, citing Madoff-related investigations.

They include an SEC inspector general's office investigation of the agency's handling of repeated allegations about the financier. In December, then-SEC chairman Christopher Cox said he was "gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them." Cox later softened his criticism.

Markopolos feared that Madoff would somehow learn about his repeated warnings to the SEC and retaliate with force. "My safety is in jeopardy," he wrote in a 2005 memo after contacting Cheung.

If faced with disgrace and prison, Madoff would "face little to no downside to removing the threat that we posed," Markopolos testified during his congressional testimony.

"It certainly crossed my mind," agrees Chelo.

Seeking another public outlet, Markopolos contacted the Taxpayers Against Fraud Education Fund, a non-profit organization that battles fraud against the federal government. In late 2005, Patrick Burns, the group's communications director, forwarded the written warnings and Markopolos' contact information to John Wilke, a prize-winning investigative reporter at The Wall Street Journal.

Markopolos and Wilke discussed Madoff extensively, the whistle-blower's records show. But The Wall Street Journal didn't publish an account of Markopolos' warnings until after Madoff's arrest.

"They realize that if they print Madoff on the front page, they have to be right as rain, because of the fallout," Markopolos wrote in a 2006 e-mail to Casey.

The following year, he sent yet another warning to the SEC. Now, he estimated that as much as $50 billion was involved.

"When Madoff finally does blow up, it's going to be spectacular," Markopolos wrote in a June 2007 e-mail to Cheung.

But, again, there was no public action by the SEC. The years of silence, combined with Madoff's continuing steady reports of investment success, made Chelo wonder whether the teammates had been mistaken.

"I began to think there was a 1% or 2% chance that he was a genius … the Warren Buffett of hedge funds," Chelo said.

Close to giving up

By 2008, the team had all but abandoned their crusade. Markopolos, who now works as a financial expert for attorneys who sue under the False Claims Act for alleged frauds against the federal government, explained in his testimony he "was busy investigating other large financial fraud cases."

His e-mail correspondence shows he'd given up earlier hope that his warnings could qualify him for a federal reward payment as a whistle-blower.

On the evening of Dec. 11, as Markopolos attended his children's martial arts lesson, his cellphone buzzed with two new messages. Madoff had been arrested in New York. The arrest came after he told senior employees — later identified as his sons — that his business was "all just one big lie," and "basically, a giant Ponzi scheme," according to a federal court complaint.

Virtually overnight, Markopolos morphed from ignored Cassandra to lionized financial hero. Hoping to take advantage of the impact, he gave exclusive interviews to The Wall Street Journal, National Public Radio's Boston affiliate and CBS' 60 Minutes.

The strategy was aimed at avoiding "a large number of confusing 15-second sound bites that misinformed victims and investors," Markopolos explained in a summary of his testimony.

What does the future hold?

Ocrant says he and Casey are thinking about writing a book. Once the publicity dies down, Chelo, now research director at Benchmark Plus, a $1 billion-plus fund of funds, says he'll return to "making money for my investors."

And what about Markopolos, who brushed off an impromptu Senate suggestion that he join the federal government and help overhaul the SEC from the inside?

"I think he'll go on investigating frauds" and make a deliberate return to anonymity, Chelo predicts.