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Double Shot Interview: Harry Markopolos - fraud investigator with Bernard Hickey — Transcript

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0:00hello I'm Bernard hickey from in.co and
0:02welcome to another in our double shot
0:04interviews and this one is a Piller
0:07we've got Harry marus who is the uh fund
0:10manager turned fraud investigator who
0:13discovered Bernie made off 8 years
0:17before he turned himself in and over
0:19that 8 years he made five submissions to
0:22the Securities and Exchange Commission
0:24and others including other media and no
0:26one would listen and he's written this
0:28book no one would listen
0:30which is just a cracking read about how
0:32to discover a Ponzi schema and uh why
0:36sometimes the regular regulators and the
0:38Auditors won't Discover it or the media
0:40for that matter so here we are Harry
0:43marip uh Harry how did you feel through
0:46that eight years of
0:48frustration frustrated obviously for the
0:52first 2 and a half years and then it
0:53became I became terrified because I
0:55realized that M off was stealing from
0:57the Russians and the Colombians and if
1:00they found out he was doing that to them
1:02he was certainly going to be killed tell
1:04us about the things you were doing
1:06personally to um protect
1:08yourself after June 2002 when I went to
1:11Europe and I met with 20 hedge funo
1:15funds 14 of which had made off and I
1:18realized they were taking money from
1:20offshore sources organized criminal
1:23sources mainly the Russians and the
1:24Colombians that's when I came back to
1:26the States and started carrying a gun
1:28every day I wouldn't get into any to my
1:30vehicle without checking for bombs first
1:32cuz there's a moment in your book where
1:34you talk about speaking to your local
1:36policeman and explaining this situation
1:38which for for most normal people would
1:40seem extraordinary like something from a
1:43a thriller uh yet he he sat and listened
1:47can you talk us through that that time
1:48well it was police Constable Sergeant
1:50Harry Bates now retired from the force
1:52but he had over 30 5 years of law
1:54enforcement experience at that time and
1:56I came in told him about what I had
1:58uncovered and I was going to the the
2:00authorities repeatedly I was going to
2:01the press and I was taking risks and he
2:05advised me to carry a weapon make sure
2:07that I was carrying it lawfully he he
2:08was the one that licensed me he also
2:10licensed my wife I sent her away for
2:12shooting lessens so that she could also
2:13carry a weapon and then what we also did
2:16was he he said you should try on this
2:17bulletproof
2:19vest and I did and it was it was too
2:21heavy it was going to slow me down and I
2:23realized the people that were going to
2:24come after me were going to put two here
2:26or two in the back of my head they were
2:27going to be professionals and so a buet
2:29V wasn't really going to help me much so
2:31I declined his kind offer he tried to
2:33build up my morale and of course at the
2:35end of the case he said Harry I never
2:38thought you were going to survive this
2:40case now let's just step back a bit and
2:42try and explain to our viewers how you
2:46became involved in this because you you
2:48didn't work for Bernie maof you were in
2:51a way another uh options fund manager
2:55who had heard about mof's amazing
2:58strategy and tried to replicate it can
3:00you explain how you got involved in this
3:04I was a portfolio manager in Boston
3:05Massachusetts in the USA I had to
3:08compete against mid off he was
3:09pretending to use a strategy similar to
3:11my firm's strategies his numbers were
3:14clearly unbelievable off the charts he
3:16never went down only up so I knew that
3:19was impossible and in 5 minutes I
3:21literally knew it was a fraud and then
3:22spent about 4 hours modeling it his
3:24performance numbers to prove that it was
3:26a
3:26fraud and um that's that's um quite
3:30shocking to see that but then you took
3:32it a little bit further um partly
3:35because your employers wanted you to
3:38replicate well that's what got me into
3:40this case my employers were pressuring
3:42me to replicate that strategy and I
3:44would tell them it's a fraud he's either
3:46front running which is an illegal
3:48activity that would put him in prison or
3:49it's a Ponzi scheme also an illegal
3:51activity and they said no no he's a
3:54reputable firm he's trading 5 to 10% of
3:56the daily stock exchange volume in the
3:58United States he's is well regarded he's
4:01the two-time past chairman of NASDAQ one
4:03of our stock markets he couldn't be a
4:05crook you're just not good enough at
4:07math or Finance to understand what he's
4:10doing and so it was a blow to my pride
4:12so I wanted to prove him wrong and so I
4:14kept turning him in to the Securities
4:16and Exchange Commission our financial
4:18Regulators because it's not fair for me
4:20to have to compete against somebody
4:21who's a crook the amazing thing is um
4:24reading your book you talk about uh
4:26meeting some of the people associated
4:28with the feeder funds who had gathered
4:30together the money and put it through to
4:33uh boy mof to to manage and you got to
4:35know them quite well and in some cases
4:38you actually met some of the B the
4:40investors there on a trip to Europe um
4:44it struck me reading the book how did
4:47how did you stop yourself from shaking
4:48them by the shoulders and saying do you
4:50know this guy's a fraud well in Europe
4:53it was very dangerous for me to do that
4:54I realized that mid off was stealing
4:56from the Russians the
4:57Colombians and
5:00they found out they were going to kill
5:01him and so there was so much risk there
5:04I couldn't warn them I had a family at
5:06that point I was about to start a family
5:08at that point in time and it was just
5:10too much risk I did warn one of the
5:13feeder funds and so did my compatriots
5:16in this case and he refused to listen 11
5:19days after mid off turned himself in in
5:21December 2008 he committed suicide in
5:24the most gruesome fashion in his Madison
5:26Avenue office in New York City tell us
5:30about that time when you were um giving
5:33information to the
5:34SEC uh what was the initial responses
5:37you got from uh from the SEC the
5:40regulator who should really have um
5:43pursued this and and prosecuted Bernie M
5:45off back in 2000 2005 2006 2007 what was
5:50the responses you were getting the
5:51initial response was blank stairs and
5:53dumb looks and it was uh I met with a
5:55senior enforcement official in Boston
5:58who was a lawyer by training did did not
6:00understand Finance who was supposed to
6:02forward my submission to the New York
6:03regional office because made off down in
6:05New York now he's not in Boston and
6:07instead just put it in a circular file
6:09basically in the trash can and never
6:11forwarded it to New York uh another year
6:14went by I resubmitted at the urging of
6:16an SEC official in Boston Ed Manion he
6:19kept asking me to resubmit the case I
6:21did that went that actually made it to
6:23New York where a high ranking official
6:25there looked at it put it in the trash
6:27can immediately because everybody knows
6:29off in the industry he's a respected
6:31Titan on Wall Street he owns a midsize
6:33broker dealer he's a big name in the
6:35industry he can't be a Ponzi scheme why
6:38would he need to steal he has so much
6:39money seemingly he wouldn't be a crook
6:42but of course he was it wasn't until
6:442005 at the urging of Ed Manion at the
6:47SEC office in Boston that I finally got
6:50traction I met an enforcement attorney
6:52there a mid-level enforcement attorney
6:53named Mike G and he followed everything
6:57I said I spent hours with Mr G
7:00diagramming the scheme out and the cash
7:02flows and he understood it and he said
7:04Harry I promise you a quick and thorough
7:06investigation and I'll be back to you
7:08very quickly with a response and a week
7:11later he called me and said I'm not at
7:13Liberty to tell you what I found but I
7:15found some very disturbing things I want
7:17to forward this to New York with an
7:19urgency and I allowed him to do so and
7:22at that moment he put me in touch with
7:24New York and the investigation was off
7:26course on day one because uh when it got
7:29to New York to a woman I understand
7:32called uh Megan ch ch um she
7:36essentially Let It Drop how did you feel
7:40when that happened because um Theory New
7:43York were the ones who were supposed to
7:44prosecute um made off who was based in
7:46New York well there was no two-way
7:48communication and I offered uh two-way
7:50communication I offered to assist but
7:52she sh clearly didn't want any
7:54assistance they felt that they did not
7:56need assistance from a whistleblower and
7:58they also didn't think how I could could
7:59be a whistleblower because I never
8:00worked for made off and I wasn't an
8:02investor of moffs so how would I know
8:05but I was a competitor so they thought I
8:06was a jealous competitor and it was a
8:09matter of sour grapes because his
8:10performance was so much better than
8:12mine and uh once that had happened once
8:15it had fallen on De at the ECC my
8:18thought when reading the book was well
8:20why didn't um Harry go and talk to the
8:22media because once once this is exposed
8:25any typical Ponzi scheme all it takes is
8:28for uh exposure to happen and it All
8:30Falls Down uh um tell us about your
8:33experience in taking this to to the
8:35media because there's a very
8:36sophisticated detailed you know
8:38Financial media in America lots of
8:41resources how come this didn't get
8:43exposed you know beforehand well it
8:45actually did uh we recruited a
8:46journalist to our team after a year had
8:48gone by of no action at the
8:50SEC Frank hay one of my team members in
8:53this case was in Barcelona Spain
8:55attending a hedge fund conference and he
8:57happened to share a cab ride with a
8:59managing director for the largest hedge
9:00fund publication in the world Michael
9:03Oak who joined our team immediately upon
9:07hearing from Frank about Bernard mol and
9:09he wrote an expose that was published on
9:12May 1st 2001 that should have ended this
9:15scam every professional investor every
9:17large Bank every investment manager read
9:20that
9:21publication and no one did anything that
9:23was one of the heads slapping moments in
9:25reading the book how come they didn't
9:27see this and go whoa something's up here
9:29let's do some proper due diligence what
9:31went on the due diligence process was
9:34circumvented and here's how these big
9:37Banks the European American and some
9:39Asian banks are looking at Ma off and
9:42made off's telling them I'm trading 5 to
9:4410% of the daily stock exchange volume
9:46wink wink and so I have access to order
9:49flow and I know which way stocks and the
9:51stock market's going to go before
9:52anybody else does and so they thought
9:55that was a code word for an illegal
9:56activity known as front running that he
9:58was stepping in front of his legitimate
10:00broker dealer order flow and stealing
10:02from those clients to deliver the
10:05ill-gotten returns to hire paying hedge
10:08fund investors namly them so they were
10:11happy that Bernie was a crook because he
10:13was a good crook he was stealing on
10:14their behalf and giving them these ill
10:16gotten gains and they were happy not to
10:19ask any more questions on their due
10:20diligence checklist because they didn't
10:22want to know the answers they didn't
10:23want to find out that Bernie was a crook
10:25they had satisfied themselves in their
10:27mind that he was their crook and said
10:29they were happy to do business with him
10:31that's what struck me about reading a
10:32story it was like watching a a a an
10:368year long period when someone clearly
10:39had no clothes and no one was willing to
10:42to call them on it the emperor the king
10:44of Wall Street if you like had no
10:45clothes could you try and explain to me
10:47that that sort of mass almost hysteria a
10:51group think which means that no one was
10:53willing to puncture the bubble since
10:56there were so many well respected large
10:58Banks
10:59involved in with made off everybody said
11:02well you know that bank's involved that
11:04bank's involved that person who's
11:06smarter than me is involved certainly
11:07they would have checked and it was like
11:09one of these but of course no one had
11:10checked but they looked at the client
11:12they looked at the client roster and
11:13said all these sophisticated firms
11:15certainly someone would have checked in
11:16reality no one did because the returns
11:18were so alluring it was a path to riches
11:21this was literally the Golden Goose
11:22laying a stream of golden eggs that
11:24would make you rich it was a product
11:26that sold itself it was so unbel
11:29believably good it was a holy grail of
11:30investment vehicles because running a
11:33Ponzi scheme the big game is to keep the
11:35money coming in uh to keep it afloat and
11:38could you explain how bnie medof did
11:41that because on the face of it he didn't
11:44seem to be making an awful lot of money
11:45out of this he seemed to be giving most
11:47of his money back to those feda fund
11:48managers that was the beauty of M off he
11:50wasn't greedy there's a saying in
11:52finance that little pigs get fat big
11:56pigs get slaughtered and he knew that so
11:59he took the smallest piece for himself
12:01well less than 10% of the fees went into
12:03mid off's own pockets and over 90% I
12:06believe who went to the feeder funds for
12:08marketing it and so he was making them
12:10Rich beyond their wildest dreams and he
12:13was happy to do so because he needed to
12:15expand the scheme because he was running
12:17out of investors in North America he
12:19needed the scheme to go Global and so he
12:21was certainly bigger in Europe than he
12:23was in the United States he was also
12:24very big in South America South Africa
12:27but he was running out of even European
12:29he had pretty much saturated that he had
12:30over 200 feeder funds in in Europe
12:33versus only 79 feeder funds in North
12:35America so his next and final frontier
12:37was certainly going to be Asia and if it
12:39had gone on a little bit longer it
12:41certainly would have come to New Zealand
12:43and Australia do you think that anyone
12:45in New Zealand and Australia actually
12:46lost money in in the in the madeof uh
12:49Scandal they may well have I'm just not
12:51aware of any feeder funds set up here
12:53there was only two set up in mainland
12:55China I think one or two in Hong Kong
12:57one in Singapore one in in Taiwan he had
13:00some good Connections in Japan marketing
13:02for him but he hadn't made it to
13:04Indonesia New Zealand the Philippines or
13:07Australia as far as I'm aware so what
13:10eventually brought him down in the end
13:12because all of the usual protections The
13:15Regulators the Free Press hadn't seen to
13:19bring him down what was the thing that
13:21eventually caught up with him because
13:23any Ponzi scheme will eventually
13:24collapse under its own weight a but we
13:27Haven
13:29the financial collapse in
13:312008 investors wanted their money and
13:33they wanted their money back quickly
13:36Bernie was the only steady source of
13:37returns because his product was up for
13:40the Year everybody else was down and
13:41panicking he had Insurance products
13:44protecting his portfolios that's what he
13:45told investors and so investors used him
13:48as an ATM machine to withdraw cash no
13:51one else was offering liquidity you
13:52couldn't get out of other markets but
13:54Bernie would give you your money like
13:55that and so he's watching his cash count
13:57go down to zero and he knew once it went
13:59to zero the handcuffs were going to come
14:01on and he would be arrested and so he
14:03had weeks for knowledge to turn himself
14:05out in at a time in place of his own
14:07choosing so Bernie has turned himself in
14:10he's essentially confessing his crimes
14:12eventually and he was asked the question
14:15what about Harry Mar capus and and what
14:19he discovered about you what did you
14:20think of Harry Mar capus what struck me
14:23in the book and in reading some of the
14:25comments that he's made since to various
14:27people he remains an incredibly arrogant
14:30man and you described what you were
14:31doing as a joke when you found out about
14:34that what was your thoughts I laughed I
14:37know he's a sociopath he's a psychopath
14:39he's a stone cold ruthless Financial
14:42killer and Predator he destroyed
14:44thousands of families he took them
14:46literally from riches to rags overnight
14:48and he insults his victims he said I
14:50carried them for decades and this is the
14:53Gratitude I get and that's typical of a
14:55white collar criminal they always
14:56rationalize their behavior and they feel
14:58no
14:59remorse and reading through the book
15:02it's it struck me that um as someone
15:04involved in the investment industry it
15:07must have
15:08been uh amazing to uh be talking to
15:13people who put their money in do you
15:15still trust the US investment
15:18industry I don't trust the money center
15:20Banks the ones that had to be rescued by
15:23the citizens and taxpayers of the United
15:24States no no one's been put to jail and
15:28certainly many deserve to be put to Jail
15:30uh the shareholders have not suffered
15:31greatly enough they should have been
15:32wiped out and the bond holders should
15:34have been told to recapitalize the
15:37company and that didn't happen in the
15:38United States there were bailouts and
15:39rescue plans and so all those financial
15:42Predators on top of the big banks in the
15:44United States kept their jobs and didn't
15:45go to jail so they're still in place so
15:48how could you trust the system so on
15:51that where do you put your money I keep
15:53my money uh at my wife's investment firm
15:56I'm I'm forced to but it's a good firm
15:58uh and uh I'm very happy with the
16:00results there and I I put it I I like
16:04use index funds and exchange traded
16:06funds and just um uh looking at uh the
16:10what we learned from this crisis what do
16:14you think um Regulators should do or how
16:19should they prepare themselves to make
16:20sure they catch the next Bernie made off
16:22the trouble with Regulators catching
16:24Ponzi schemes is the Ponzi operators
16:26don't ever register with authorities as
16:29an registered investment adviser and so
16:32they're beneath the radar screen they're
16:33not even on the regulator's radar screen
16:35and the only way The Regulators can find
16:37out about a Ponzi scheme is for a check
16:40not to be paid where the Ponzi operator
16:42is running short of funds and payments
16:44or promis payments are not made and at
16:46that point The Regulators get a call and
16:48they get notified well that but that
16:50time it's too late the Ponzi operator
16:52has done his damage and so the only way
16:55for them to find out about it is through
16:57uh disgruntled investors
16:59and it's very hard for Regulators to
17:00discover these however some of the Ponzi
17:03operators tip themselves off on the
17:05internet and all people will forward
17:08those unbelievable performance numbers
17:11to the regulator and they'll start an
17:12investigation say well this person is
17:14not registered and once the once The
17:16Regulators find out about a Ponzi
17:17operator nowadays they're very quick to
17:19prioritize that activity and investigate
17:22whereas before it was sort of at the
17:23bottom of the pecking order and now I'd
17:25say it's a very high priority and I
17:26think Regulators across the world have
17:28learned how to do Ponzi investigations
17:30they're so easy there's no trading so
17:32you go in and say give us the trading
17:34records and of course there won't be any
17:36and from an Investor's point of view how
17:38do you know when you're being marketed
17:41uh to a Ponzi or how do you know when
17:43you're in a Ponzi if the returns are
17:46steady and every year is up or if there
17:49is a down year it's not by much and if
17:51it seems very steady and you don't
17:53exactly understand what the investment
17:55manager is doing and if your statements
17:58if you can't read your statements or
17:59you're not getting statements or if you
18:01look at your stat you should check the
18:02prices did those prices trade in the
18:04market that day at that price or didn't
18:07they and you should also look and see if
18:10the assets are really there where are
18:12they housed are they housed at a custody
18:14bank if they are call the bank this is
18:18my account number can you verify this
18:20amount of money in the account if they
18:22can't that's a big problem now after um
18:25Bernie M was exposed you testified um to
18:28Congressional hearings there were
18:30reforms at the
18:31SEC just finally looking back 3 years
18:34after now do you think that the
18:37Regulators in the United States the
18:39Auditors the trustees the Watchdogs have
18:43reformed enough to um stop this
18:45happening again well the Security and
18:47Exchange Commission certainly did reform
18:49it's probably our best law enforcement
18:51agency in the United States this was a
18:52near-death experience for that regulator
18:54four years ago and so they they went to
18:56the very bottom this was the the worst
18:57point in their their history and so they
19:00knew they needed to reform or they going
19:01to be put out of business and so they
19:03did and they actually prioritized finds
19:05these schemes they wrote a 457 page
19:07report on this case and it was a Litany
19:11of what not to do and so they've
19:13retrained their people they've sent
19:14several hundred away to become trained
19:16to certified fraud examiners they've
19:18reorganized their enforcement division
19:20they get it unfortunately the bank
19:22Regulators do not get it no one got
19:25fired at the banking Regulators
19:26unfortunately and they really have not
19:28reformed and I would say the accounting
19:30firms are as sad as ever uh I don't
19:34trust any accounting firm audits I just
19:36don't think audit I don't think Auditors
19:38are competent whatsoever wow and just
19:41finally Harry um what are you up to
19:43these days because there was a period
19:45reading the book where you weren't
19:46actually making any money you were
19:47investigating these things but there was
19:49no way for you to make money you were no
19:52longer um working as a fund manager I
19:54mean what do you do for a living these
19:55days I'm certified fraud examiner I deal
19:58and large multi-billion dollar financial
20:01fraud schemes I investigate turn them
20:03into the United States government they
20:04pay rewards from 10 to 30% for
20:07successful prosecutions I recruit teams
20:09of whistleblowers once I figure out the
20:11fraud mathematically I go inside the
20:13company pull out people that are willing
20:15to talk and turn over State's evidence
20:17and operate undercover for the
20:18government if need be if requested and
20:21when the case is successful we get paid
20:24great well good luck to you Harry thank
20:26you very much appreciate it appreciate
20:28you
20:28time today there we are Harry mollus the
20:31author of no one would listen I
20:33thoroughly recommend it as an investor
20:36as a regulator anyone trying to
20:38understand how to stop Mal feance in the
20:41financial sector or to stop being hurt
20:43by it I'm burand hickey that was another
20:45in our series of double shot interviews
20:47for interest.co.nz

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