WBUR

Transcript: Curt Nickisch Interviews Harry Markopolos

The Bottom Line’s Curt Nickisch sat down with Madoff whistleblower Harry Markopolos for a three-hour interview in WBUR’s Studio 3. What follows are transcripts of large portions of the interview.

On The Early Years, Getting In Trouble In Catholic School

Harry Markopolos: I grew up in Erie, Penn. I was born there in 1956. I grew up in a small duplex: lower level flat, three bedrooms, one bath, a very tiny yard — mostly cement, probably a 10-by-10 patch of cement to play in, very small garden – under, I’d say, very lower middle class means.

My dad owned two taverns, he owned two hot-dog and hamburger luncheonette places. My mom was a stay-at-home housewife — she raised three of us — I was the oldest, so I have a younger sister who’s a physician and I have a brother who’s in the finance industry.

I was born Greek Orthodox, but I was educated pretty much Catholic and Jesuit from the seventh grade through graduate school.

Curt Nickisch: Why did you go to Catholic school?

HM: Well, they didn’t have any Greek schools in the small town of Eerie, there was only 130,000 people. Most of the population was Catholic, and so I gravitated toward the private-school system. I was in the public schools from K through sixth grade, and then in seventh grade my family moved me to the Catholic schools and I stayed there ever since.

CN: Did it appeal to you?

I liked it, it was a lot of discipline. It’s funny, I’d get disciplined at school. I would break the rules, I’d get disciplined. They’d either hit me with a ruler on my knuckles. Sometimes they would take a ring and hit me on top of the head, or a thick history book or something.

And of course you could never go home and tell your parents that because then it’d be another beating administered. So I limited myself to one beating a day, I guess you could say. Every time that I was punished in the Catholic school system, I certainly deserved it.

CN: What did you do?

I did so many things to get in trouble in the Catholic school system. Where do I begin? Some of them were just mere pranks.

I know that in 10th grade, we had fruit flies that we were breeding in biology class. I snuck a vial home, bred them through two cycles and had tens of thousands of these in a five-gallon stock jar. I told my mother it was for a special science project and I had to go in early.

So school started at about 8 a.m.; I got there at 6:30 a.m., she dropped me off. I snuck in near the cafeteria and released them all. Within three day the entire school was infested and that following weekend they had to fumigate. And I never got caught, thank goodness. If I had, I would certainly have been expelled.

CN: So your mom was an accomplice in this?

HM: Oh yeah, she used to think that I had special honors projects on the weekends, and that was actually Saturday morning detentions where I was cleaning the schools. And for four years she thought I was a special honors student, and I sort of was, but it was in a different sense of the term.

CN: Do you think you picked up on the natural law, education and the ethics and the morals and those sorts of things? Or did it come more from the family?

I’d say it came from both, both from family and certainly the education that I received, it was mainly Jesuit. Even though they taught ethics in the classroom, I can’t recall a single class in ethics. I think it was more the role models – the teachers and professors that I had – and that’s how you learned the ethics.

I think the most important lesson that stuck with me was when I was an undergraduate at Loyola College in Maryland. It was just the school motto: Strong truths. Well-lived. And that stuck with me more than anything. And the Boston College motto: Ever to excel. And it’s the little things like that, the interaction with your professors, that stay with you. Where the ethics classes, they teach them because they have to, I’m not sure what good they do.

On His Time In The Military

HM: I did military service, I was an army ROTC graduate. And I was very, very involved in the military, and it prevented me from going to graduate school because the deployment schedules. I was an army special operations officer, and I had teams deployed 24/7, 365 days a year.

I never saw the unit that I commanded all in one place at one time, ever. And so I knew that I couldn’t do both a graduate program and stay in the army so when I got out of the army in 1995, I was able to go to graduate school and I started up at Boston College in 1995, went there for two years and got my masters in science and finance.

CN: We talked to some of your commanders. They loved you, mostly because you worked a lot.

If you’re gonna do something, give it your all, do your best. If you can’t do your best, quit. And that’s why I got out in ’95 — I could no longer afford to do my best, and so I got out. But, while I was there, I went above and beyond. I did the extra work to make sure that my units were the sharpest in the army.

I usually was assigned to turn-around situations where units were struggling or failing, and I was sent in to turn them around. And I would. You know, I’d replace leadership, bring in and recruit new leaders and I would groom the existing people that I had and promote them to positions of higher responsibility rather quickly. And I tended to get the most out of the people that I worked with.

CN: You also did a lot of quartermaster supply management. Looking at systems and trying to figure out how to make them work.

Yes, what I found from the Army was, it was a dysfunctional bureaucracy, and so I looked at the systems that they had in place and I would always replace them with streamlined systems, and get my units to adopt those. So I’d typically write the standard-operating procedures that were quite a bit different from the Army’s.

I used to tell my troops that if you follow the army’s systems and you follow the army’s rules and procedures, you’re no good to me. You have to go way above that. And I always had a higher standard than what the army had, and that’s why my units were successful.

I think generals are used to being lied to, a lot, because there such high-ranking officers. And I never would snow them, you know I’d tell them the god’s honest truth and what ever the situation was I’d tell them. I’d say, “We’re doing badly in these three areas, we’re doing pretty good in these other areas,” and let him judge.

And let him talk to my troops, I had nothing to be embarrassed about. Other officers would try to blow smoke, sing and dance, and I was pretty straight forward. I was never intimidated by the generals.

CN: Why not?

HM: I figure, they’re human like me. They put their pants on one leg at a time. They’re just older than me. They had progressed through the ranks. I figured if I wanted to stay, maybe I’d be a general someday – of course I never did stay – but I figured I’d just treat everybody as a human being, and you learn a lot that way.

CN: Where did you get this sort of approach from? You just thought of your professional on their level?

HM: No, I knew I wasn’t, I knew I didn’t have the years of training and experience to get to the general officer ranks, but I felt that I was competent at the level that I was operating on, I had nothing to be ashamed of and I could be very straightforward, there’s nothing to hide.

A lot of officers in the military, it’s a zero-defects policy and they’re afraid to admit mistakes.

I had a very good general. The best general I think in the Army that I’ve ever seen. His name is Boyd Cook. He’s a major general. And I served under him when he was a colonel, brigadier general and major general. And he would bring us in – different units – and sit us down, and he would say, “What was your biggest failure this year?”

And if you didn’t have a big enough failure, he fired you. Because he felt you weren’t trying hard enough. He only wanted people that were gonna try to achieve more than was realistically possible. And those were the officers he would keep. And so he’d always challenge you and he would look, “What’s your biggest failure?” And I always kept that in mind.

And failure never bothered me — in fact I thrive on it. And, as we have seen, the Madoff case unfortunately was probably the biggest failure in history, and I was a part of that.

CN: What did you love about the Army?

HM: I like commanding troops. I like seeing them progress through the ranks. I like promoting them. I liked giving them medals. I like living with them. I like being part of their lives, I like being a role model to them. And I had so many role models and mentors in the Army, I couldn’t name them all.

CN: Why finance?

HM: I found I was very good at math and formulas and data, and looking at formulas to fit the data. And something just clicked so I stayed with it.

There was a logic, there was a truth, but if you just look at the math part, that can deceive you. You have to match it with the human element. And I think with the Army, that had trained me in the human element. Human intelligence gathering. And you saw that in Wall Street, where the mathematical models became so elegant, and yet they became so wrong and now we’re on the brink of national insolvency because they’re so wrong.

They never looked at the underlying human element. And so the Army trained me to do the human intelligence gathering and I thought I was able to develop better models that way and I think that proved to be the case with the Madoff affair.

CN: Being someone to approach it differently than a quant, basically.

HM: The quants had looked at this and they didn’t see what there was to see. Unless you did the human intelligence based fact gathering, you would not be able to see beneath the smoke and the mirrors, behind the curtains of secrecy.

I wanted to leave the industry and be on the other side of the industry. And I knew that there were certainly illegal acts occurring within the industry and I felt I was very capable of attacking those frauds and bringing the perpetrators to justice.

On How He First Came To Examine Madoff

HM: I would say that in ’98 and ’99, people at Rampart started becoming aware of Bernard Madoff and his hedge-fund operation. It was highly secretive, it was hard to find out about it, but our people did, our marketing people did. They were very attuned to what was happening out in the derivatives world. And Frank Casey, a senior marketing professional at Rampart, came back to me, and I wasn’t tasked probably ’til late ’99 or early 2000, to come out with a competing product that was Madoff-like.

Because they were going to New York in ’98 and ’99 and they were hearing about this Bernard Madoff and the phenomenal returns that he was achieving and the billions of dollars that he was managing in that product. He was actually the largest hedge fund in the world, but he was such a secret hedge fund that very few people even knew he was running the money. But our people did — they identified it in the late ‘90s.

And probably late ’99, 2000, early 2000, I was tasked to reverse engineer his returns stream, figure out what he was doing based on the marketing documents and his return numbers, and nothing made sense, and I quickly knew it was a fraud.

In five minutes, after reading the opening paragraph on his marketing literature – on the option split strikes and conversion – I knew that didn’t make a lot of sense. I knew what that strategy was capable of, but the way he had designed it had so many glaring errors in it, I didn’t see how it was functional, I didn’t see how it could be zero. And then I looked at the next paragraph beneath that and all I saw was a chart that went up at a 45-degree angle, and that was his return stream. And I knew that that didn’t exist in finance. It’s just impossible.

So that was the tip-off. And then I looked at the return stream and I saw 4 percent of the months were losing months and 96 percent of the months were even – I mean were all positive, had a steady state return. And I knew – right then and there, in five minutes – that it was a fraud. But then to prove it, I had to do about four hours of mathematical modeling, and when I did that and took his return stream and compared it to the index he reported to manage against, I knew for sure that it was a fraud.

I took the strategy — and the strategy as purported in his marketing literature – has anywhere between 32 to 37 moving parts. When you have that many moving parts, it takes a high level of mathematical understanding and you have to learn how to simplify, ’cause it’s very hard to think of 37 different securities moving at different rates of change, and so I had to make some simplifying assumptions, which I did in my modeling techniques.

I modeled everything as best I could. And the correlation coefficients that I was expecting to see between his strategy and the index, they weren’t adding up. I was expecting a correlation coefficient of between 30 to 60 percent similarity to the underlying index, and he was coming in at a 6 percent correlation. It was way off the charts, it was too low of a number, and I was puzzled by that. It was a clear indication of fraud, and I was so startled that this man could be the biggest hedge fund operator in the world – the most secretive hedge fund operator in the world, where very few people even knew he was running money – and I didn’t trust my math.

I said, “Maybe I’m wrong. This is a respected individual. He has a very powerful brokerage firm. He’s one of the most distinguished individuals on Wall Street. How could it be a fraud?” And so, I looked up the best financial mathematician that I knew of in Boston – Dan diBartolomeo at Northfield Information Systems – and I went over to him with it. And I had him look at my math and my modeling techniques, and after several hours he came back and said, “Harry, it’s a fraud.”

And we knew that whatever Madoff was saying he was doing, he wasn’t doing and that certainly was enough to land him in prison — little did I know it would be for the rest of his life.

I never anticipated it would take so long. I thought that my May 2000 submission to the SEC was clear proof, there was enough red flags there to have stopped Madoff. I don’t know why he was allowed to proceed for another eight and a half years. It shouldn’t have happened, but it did.

I’m sure it was a comedy of errors. I, like the rest of the world, am waiting for the SEC inspector general’s report, which is due out sometime this summer, probably the latter part of the summer, and it’ll all be detailed in there.

CN: What did you say to your boss?

HM: Actually, a very funny situation developed. And I have a very unique sense of humor. So, I knew it was a fraud. And I knew they had to be doing either one of two things. It was either illegal front running of the brokerage flow, because he had a respected broker dealer with lots of trading relationships, and it’s possible to earn those type of returns if you’re illegally front running.

My other fraud theory was that it was a Ponzi scheme. But I had no information on which it was, in early 2000. I went to my bosses and to the managing partners and I said, “You want a Madoff-like product, I think I have it.”

And they said, “Really? What?” And I said, “Well, we can do one of two things. We can engage in illegal front-running, or we can just start up a Ponzi scheme and type in the returns every month.” And they said, “No! We don’t want to do that.” And then everybody broke out laughing of course.

I felt that it was such a large fraud that it was gonna be very damaging to the investment industry, and I decided I needed to do something about that. And I had done some committee work with Boston Security Analysts Society, and one of the people on one of my committees, on the ethics committee in fact – subcommittee — was Ed Manion from the SEC.

And I became very friendly with him over the course of the years. It was someone I certainly looked up to and respected – this is a man that had 25 years of industry experience, at that time he had had several years in with the SEC, and I would talk to him about ethics, ethical issues in the financial industry.

And I saw him as a resource for me when I encountered this fraud and I went to him and said, “I think I’ve discovered the largest Ponzi scheme in history, and I think it’s also the largest hedge fund in the world, although no one will know that, it’s run so secretly,” and he thought that was a rather serious fraud and he wanted it brought to his office’s attention and we made arrangements to do that in May of 2000.

CN: How ticked off were you to know that this guy was doing this?

HM: It made me extremely angry and here’s the reason: If you’re a legitimate asset manager, and you have to compete against a Ponzi scheme, you have no chance. They’ll beat you every time, they are gonna get your customers. You’ll have existing customers of yours leave to go to the Ponzi scheme. Or you won’t get new customers.

It’s impossible to beat somebody who’s that perfect because they’re just typing in the returns every month, and you have to earn yours legitimately in the marketplace. And you’re gonna have variation of returns. You’re gonna have down months, you’re gonna have flat months, and you’re gonna have up months. You can only take what the market gives you, and Madoff was just typing in his returns, they were totally phantom. They didn’t exist except on paper. It’s hard to compete against someone like that.

In fact, just recently I talked to a money manager at a big Boston hedge fund, manages many, many billions of dollars, and he complained to me; he said, “I’m very livid about Madoff. I lost so many customers with that man, because from 2000 to 2003, that killer bear market, I was down just like the market, and Madoff was up. And so people fired me. Long-standing clients of a decade or more with me, fired me and went to Madoff with the money.’

And he said, “I had one call from a woman, when the news broke on Dec. 11. On the morning of Dec. 12, I had a call from this woman, and she calls me and she’s in a panic and I’ve known her for a long time, and she said, ‘How much money do I have in my account with you?’” And he said “‘I told her,’ and she said, ‘Oh thank god. I’m glad I left something with you because all the other money I took from you I invested with Madoff and it’s all gone.”’ And she was in tears. And so of course my friend was right to be angry at Mr. Madoff. Anyone who was a legitimate manager would be angry at Madoff for what he did.

A lot of people suspected. Madoff was not transparent; he would never let you behind the magic curtain, where the black box was. He would just tell you he had a black box, he couldn’t let you look inside the black box, because what was taking place inside the box was so secret that once you saw it and understood it you’d be able to duplicate it.

And that was his cover story. And a lot of people never wanted to open that box because they wanted those returns, they wanted to believe that those returns existed, but of course they did not. And they cast aside all suspicions and all doubt and all fear, and they let greed overrule all else, and that’s why it ended in disaster, unfortunately.

I’d like to also say that being suspicious does not mean being certain. Being suspicious means, if you’re prudent, you just walk away. He’s not opening his black box, I’m gonna walk away. I suspect it’s not real, I have no proof, but there’s no incentive for me to really investigate any further. So, they didn’t go forward with it.

The ones that we’re losing clients to Madoff had an incentive, and I think there his position in the industry, sitting on some of the most powerful industry association boards, being chairman of the NASD, sitting on SEC advisory committees, knowing the SEC chairman personally, gave him a patina of respectability and I think he was just a master conman, he used that patina of respectability as a smoke screen to lure people into his scheme, and people fell for it, unfortunately.

You don’t take on one of the most powerful men on Wall Street without damning proof and hard evidence and they had neither. And just investigating someone of that stature takes a lot of courage, and most people don’t have that kind of courage.

I’m not so rich that I had a lot to lose, except my life, as it turned out. I think I probably risked too much on this case. I didn’t know it at the time when I started my investigation. I thought the government would take it in 2000 and shut him down quickly. I never thought that this would carry on for so many years.

And once I had children in 2003 I certainly should have stopped pursuing the case, I just wasn’t smart enough to stop at that time. I just felt so invested in the case, and he had gotten so much larger. I felt he was such a clear and present danger to our nation’s capital market system and the reputation of the nation, I had to keep going, so I kept my team in the field.

On Madoff’s Scheme In Europe

HM: I knew that Madoff was so big in Europe. And that’s mainly where we tracked him — we tracked him throughout North America and Europe. And I always felt personally that he was much, much bigger in Europe than he is here in the U.S.

I think the world will come to discover how big he was in Europe. But it may come across that information slowly. And the reason is that the Europeans were investing mainly through off-shore feeder funds. And when you’re in an off-shore feeder fund, you’re only going offshore for illicit purposes.

Mainly because you want to avoid your host nation tax man. So those people won’t be filing claims here in the U.S. Because if they do, they will alert their host nation tax authorities that they had illegal money that they never paid tax on. And they’d face their host nation tax man, and no one wants to tangle with the revenue authorities. And so those people won’t come forward.

And I also felt that whenever you’re dealing with offshore funds, that attracts a high percentage of organized crime money and I knew that that had to be in there. Especially from those jurisdictions. And so I knew that Madoff was playing a very dangerous game of unimaginable complexity. And that if he had gotten caught by organized criminal elements that he was not long for this world, and I knew he would do anything to protect his secrets and so I feared for my life.

Madoff had his life on the line and I felt that — to protect his secret — if he knew that he had a team in the field tracking him, as he did, that he would take steps to eliminate that threat, and I was the main focus of that threat and I didn’t think I would be long for this world if he discovered what I was doing.

I knew how to develop information networks and use those networks to identify key pieces of intelligence to go after, and I knew how to recruit people to a team to go after that information, and I would recruit by functional specialty. And if you look at the team that I assembled, they were highly capable, highly trained, highly compensated finance professionals. Two were on the marketing side and two of us were on the derivatives side so we had a combination of derivatives math background and institutional marketing backgrounds and we were well equipped to track him and we did a pretty good job.

I don’t know how good of a job we did because we still don’t know the full scope of the Madoff fraud and we’re eager to find out how close we were. We know we weren’t perfect, we know we missed plenty of things, we know we nailed certain things spot on, and we just want to find out what our final report card looks like and it looks like that’s a few years off, but we’ll find out how well we did in the next few years.

CN: So tell me about your trip to Europe where you discovered it was a Ponzi scheme and not a front-running for sure.

In June 2002, I had developed a product, a statistical options arbitrage product, and it could make money like Madoff, make a little bit more than Madoff, a little bit higher return and it had a higher risk certainly, you could lose up to 50 percent any given month, less your option premium received that month.

So it was a much higher return, higher-risk product on the surface than Madoff, but of course I knew my returns were legitimate and I knew.

And when I went to Europe, I didn’t know if Madoff was a Ponzi scheme or if he was just front running. But, through that European trip, I met a few dozen European fund-to-funds and feeder funds and private-client banks, mainly in England, France, Switzerland.

And what I discovered there was that many of those funds had Madoff. And they bragged about it.

I was in Europe with someone that unfortunately committed suicide over the Madoff affair – Thierry Villehuchet – of Access International. And he was leading the marketing effort for my firm, in a joint venture on this new product. And he would– He was a big Madoff investor. He had about 45 percent of his fund-to-funds’ assets with Mr. Madoff – I think in the end he lost about a billion and half. And he had all of his personal assets with Mr. Madoff.

And he would introduce me as – at the beginning of each meeting, which infuriated me – as Madoff-like. I was just like Bernie Madoff, only I was higher-return, higher-risk. And it was a way for these managers to diversify away from Bernie, in another options-based strategy with different, slightly different characteristics.

And the managers would brag about their exposure to Bernie, and they would all tell me the same thing, they would say, “We have a special relationship with Mr. Madoff. He’s closed to new investors and he takes money only from us. And we’re so proud of that relationship. And it’s so meaningful to us.”

And when you hear it the first time, you take it at face value. When you hear it the second time, you get suspicious. And after you’ve heard it 14 times in two weeks, you know it’s a Ponzi scheme at that point.

I knew that they were gonna get wiped out, for the most part. Because they were so deep into Madoff, and they were doing it offshore. And I, I felt that I really couldn’t warn them because if I did I had too much risk.

You know, at that time I was married, I was planning on having children, I had children a year later and, you know, it was just too much risk for me to come forward at that point in time. I did warn Mr. de Villehuchet, and he did not heed my warning. I know that Frank Casey warned Mr. de Villehuchet, and he did not heed that warning.

CN: How did you go about that? I mean, you were obviously very familiar with him…

HM: It depended on the level of trust and the level of finance skills – what the person on the other side of the conversation had – on how I approached it. And I had to be very careful for my personal safety. So, I knew that Mr. de Villehuchet had several hundred million invested with Mr. Madoff, and so my warning couldn’t be as forceful as it would be to someone I work with here in Boston that had a quant finance background that could understand the derivatives math.

So for him it would be more low key, something like, “You know that Madoff’s a fraud don’t you? That those returns can’t exist.” And then I’d wait for his initial reaction. And when you get an initial reaction from anybody I warned that was, “What? Are you crazy? Madoff, he’s one of the most respected finance professionals in the world. How can you say that he’s a fraud?”

If you get that kind of response, you don’t proceed any further. If you get a response, ”Really? Tell me,” then you can go a little bit deeper. But I wasn’t going to reveal that I had turned him into the government, twice already to the SEC. I was never going to say that because that was like signing my own death warrant.

CN: Right. That must have killed you though, not to be able to…

HM: No. It would have killed me if I had come forward and been to open about it. That would have killed me.

Actually, in my October 2001 submission, I offered to go undercover for the SEC because I was really doubting their competence, even at that early of a stage. And I was offering to be one of the team, get business cards that said I was a SEC examiner, and lead that team in and lead them to a successful result very, very quickly.

Because I knew that if you go into a Ponzi scheme, it’s very easy to crack these open like an egg rather quickly. What you do is: Since there’s no underlying product or service with a Ponzi scheme, there’s not gonna be trade tickets, and if there are, they’re gonna be falsified. And if you have falsified trade tickets, all you have to do is find who the trading party was on the other side of the trade, because of course there won’t be any, because in a Ponzi scheme there are no trades.

I know that, if you’re a securities lawyer, and someone hands you a bunch of derivatives math proofs – I submitted them to the SEC in that submission – they’re going to have plenty of questions because they’re not trained in that kind of math. And I received no questions. So I panicked. I feared for my life. I went to my local police department and I worked up security protocols with them, and they’ll tell you how frightened I was. It was a terrifying experience.

I like catching big companies, with the top officials committing fraud, and turning them in to the government. That gives me a tremendous amount of satisfaction. It’s like solving the pieces of a puzzle. It’s very challenging. It’s hard work. It takes months and months of investigation with multiple witnesses.

But, at the end, I can’t think of any career that’s more satisfying. It’s…some one has to do it, and I seem to have just developed a talent for doing it, and I would never go back to finance, given what I’m doing now. I just find it immensely satisfying.

Madoff was my first case. Being in Boston, of course it’s a very Irish town, and you have this thing called Murphy’s Law: What can go wrong will go wrong. And that certainly was the Madoff case for me. You’re not supposed to make a multi-billion dollar Ponzi scheme your first case, that’s just not in the rule book. And I guess I don’t follow the rule book very well, and never have.

So that was sort of surprising, that that would be my first case and that would get me hooked on fraud investigation. But I so enjoyed figuring this thing out. It was so complex, I liked bringing this to a successful result – and of course I was not able to do that, but it was so challenging and I put so much work into it, and so did my team, that I just said, “You know, this is a lot more fun than managing billions of dollars trading equity derivatives. I’d rather be doing frauds – big frauds — than trading for large customers.”

Because I felt that there’s probably, I don’t know, several dozen to several hundred people that could trade derivatives at least as well as I could in the world. But I felt that this was a calling for me. I felt that I was really gifted at this and I wanted to pursue it. And I made it a career, full time since September of 2004.

Since the news broke on Dec. 11, I have not been able to get a full night’s sleep. I wake up and contemplate it in the early hours of the morning. And I always think of the terrible tragedy – the human face, all the people that are not receiving medical care, charitable services, scholarships, people that have no retirement – and it’s just a hard thing for me to live with. And I know that some day I’ll be able to get through this, but for right now it’s been very difficult.

I have a very private office with heavy security. And I don’t really bring my work home with me. This case — after the news broke on Dec. 11 — I did tell her that I was involved and I told her that the families, you know, it was gonna change our lives. I was very, very worried that the SEC was gonna come in and seize my computers and my documents because they knew what I had turned into them and perhaps they wouldn’t want that made public.

And so, I told my family I was worried for their safety, I was gonna work with the press to get the documents published, and that would guarantee our family’s safety, ’cause I didn’t want my home invaded by federal agents taking the documents out and destroying the evidence. And so we had a few days of risk. We were scanning documents and sending them to different law firms in Washington, New York, Boston.

I knew that once the documents were in the hands of the press and of my law firms, that we were pretty safe. And once the Wall Street Journal went to press and printed the front-page cover story on Dec. 18, I knew I was free and clear – that the government, all the documents, the main ones, were online, and that I was pretty safe, that I wasn’t going to face any government retaliation after that.

CN: What was it like getting that phone call that December morning?

HM: Actually I got it in the evening around 5:15. I had two voice mails. I was at karate with my children – my twin sons, they’re identical twins, five years old – and I step outside to take the call into the foyer, and I get two voicemail messages from friends of mine that had helped me on the case, tangentially, and they called to inform me that Madoff had turned himself in and admitted to a $50 billion Ponzi scheme.

I returned those two calls as quickly as I could, and when the news was official I felt a tremendous burst of energy and then I almost fainted. And I fell against a guard rail to prop myself up, because I was happy that he was caught, and then I was fearful because that was just one of my opponents that was felled – and he was the big bad dangerous one – but I had one opponent left and that was the SEC, and I needed to rush home as soon as that karate lesson ended and preserve my documents.

I needed to collect and organize my documents and fax them to the Wall Street Journal as quickly as I could, because that was the only way to protect myself from the SEC, I felt that they may want to engage in a cover up, and I just needed to get the documents out of my house and safeguard them and I managed to do that.

I always looked at them (the SEC) as aiding and abetting because they were either incompetent– I always felt that they were pretty incompetent. I never really felt that they were corrupt, I just felt that they were just incapable of finding fraud when you pointed them right to it.

So I just felt that they were just another opponent – a roadblock, if you will – in my way to stopping Madoff.

CN: You talked about waking up in the middle of the night now. Did you ever back then? It seems to it would just be extremely frustrating to know something like this, and trying to figure it out and just frustrated that you did everything you could do.

HM: I slept pretty well I’d say during the entire period prior to Dec. 11. It was post-Dec. 11 that I’m having the problems sleeping. And I think it’s because now we’re seeing the human face on the tragedy – all the life stories, the tragedy that has befallen so many of the victims.

There’s so many people affected; I just think what it did in Boston to all the charitable foundations here. You know, think about the services that are not being provided in our community. And magnify that to what’s happening around the globe, and you realize what a monster this man was and how evil he was and how the government’s supposed to stop him, but they didn’t. And that’s disheartening.

To be close to the Madoff case is to be so close to evil, and it does something to you and you’re not prepared for it. And I don’t think any of them were prepared for it anymore than I was. And it’s just gonna take time. But eventually, I think people will get back to their lives.

The people I probably feel the most saddened for are the ones that were relying upon this for medical care and who may not be receiving that care, or they might be receiving a lower quality of care. That affects me the most. And the retirees that are too old to start over and have no money for living expenses, and they’re gonna have to go back on Social Security.

And it’s just a terrible tragedy — nothing prepares you for that. All the years of training and education that I have, nothing prepared me for this.

CN: So out of all this money, he was living off of one percent?

HM: Oh, much less than one percent. And the way that I look at is: It’s possible for someone to spend $1 billion. You could do that: You could have multiple homes, you could have a couple jet airplanes, you could have a couple big boats, you could have fancy jewelry. And that would still be hard to spend $1 billion. So even if you spend the first billion, you’d never be able to spend the second billion.

So, how much is enough? And those are questions that are unanswered at this point. It may take years to answer those questions, we may never get all the answers to those questions.

We knew then that the scheme was getting close to unraveling. We thought that maybe he was gonna collapse then, and he didn’t, he kept going, like the Energizer Bunny. It was like a bad nightmare, you just couldn’t stop this scheme.

He also had some great luck. He had an unbelievable streak of luck. A lot of things had to go wrong on the SEC-side, and a lot of things had to go right for Madoff to continue after I first turned him in, in May of 2000. And we won’t really know what those things were that had to happen until the inspector general’s report comes out later this summer.

That’s what happened. They said, ‘He’s the steady-Eddie manager, he’s always up, he’s my best, I can always get back in. I’m taking the money out and I’m not gonna realize my losses with the other managers.’ And so his supposed great reputation for always providing positive returns in the end did him in. It’s sort of ironic, isn’t it?

I never met Mr. Madoff, so I’m not in a position to comment. We always saw him as a predator. The only member of my team that had ever met him was Michael Ocrant. Frank Casey, Neil Chelo and I had never met him, so I really can’t comment to his inner workings. I just have no idea. I saw him as a predator, I saw him as pure evil, and that’s how I always came to view him. As you know, I considered him a domestic enemy and I don’t have any nice things to say so I prefer not to comment.

It’s nice that people are taking white-collar fraud more seriously, and I think that’s important for the nation because armed robbers only cause a little bit of damage, it’s the white collar felons that cause tremendous damage to the nation.

These are the people that have the best resumes, live in the best neighborhoods, have the best houses, never got any problems with law enforcement whatsoever – and these are the people that bankrupt companies and put tens of thousands of people out on the streets unemployed.

These are the people that cause foreigners to distrust our nation and our way of thinking, and so those people are much more dangerous and I just think we need to devote more resources to the Department of Justice to bring those people to justice. And right now we’re spending more on counter-terrorism, and as harmful as 9/11 was, I think white-collar criminals have caused far, far more harm to our nation.

CN: Are you afraid this case is going to define you?

HM: Yes, I am very afraid that this case would define me and no one wants to be defined by failure. I do not think that this is my best work, I think I have better cases in with the government right now that will be successful. This one was not successful, and that’s why I don’t want to dwell on it. I want to move forward. I want to put this in my past.

I found out from a friend of mine, Chuck Hill, that Mr. Spitzer was going to be appearing at the JFK Library, I think there’s a profile on courage lecture series, and it was in the wintertime and I couldn’t even tell you what year it was now – probably after 2003, but I couldn’t get you any closer than that – and so I took my case submission, made sure I didn’t have any fingerprints on it, put it in two envelopes, handled it with gloves, the outer envelope had an envelope inside it just in case I screwed up and had my fingerprints on the outer envelope, I was gonna open it at the JFK Library, which I did and pull out the 9×12, I think I had it inside a 10×13.

And I went there, listened to him speak, and handed the envelope – the inner envelope – with the case submission to a staffer at the JFK Library and said, ”Please make sure Mr. Spitzer gets this,“ and I left as soon as I did that, because I didn’t want her pointing me out, I didn’t want any description of me with Mr. Spitzer.

And that probably harmed the case submission actually, because when you submit something anonymously, it’s harder for the government to take it as seriously as if you put your name behind it and they can question you.

So I might have made a tactical error there, but I was very, very worried for my personal safety and that of my family and so I thought it was prudent to take those precautions because I had heard through the grapevine that Mr. Spitzer was a big hedge-fund investor and likely was a Madoff investor, or could have been, ‘cause he was in New York and Madoff would be particularly alluring to anybody who was a hedge-fund investor in New York.

And so I felt there was too much risk to reveal my identity to him and it probably did not help the case submission at all. It probably harmed it and maybe I did the wrong thing, maybe if I had come to him in person it could have had a different result, I just don’t know.

That was the one thing I could have done better, was handling it with Mr. Spitzer – maybe if I had approached him and had a conversation. ’Cause I think I could have convinced him, even if he had invested with Mr. Madoff I think I could have convinced him that it was a fraud.

On Being A Big Nerd

HM: The people that come from quantitative finance backgrounds march to the beat of a different drummer. They’re very offbeat. All my friends are like this. And so I think to the general population at large, you’d be considered mildly eccentric. Some of my friends are more than mildly eccentric, they’re truly weird, and I love ‘em dearly.

It’s just a persona: It’s cool to be geek, I guess, and I’m not ashamed of it, I’m a little geeky. But I have a hard edge. You know, I have that military background, I’m not a soft target, I’ve been around the world, I’ve done some interesting and exciting things, perhaps too exciting at times.

CN: And now you still are.

HM: I will say that fraud investigation against large corporations committing fraud against the government is about as exciting as it gets. It’s a lot more exciting than trading derivatives, it’s a lot more exciting than managing money for others. Psychically it’s a lot more rewarding going after high-level felons that are CEOs and CFOs committing massive fraud.

On Testifying Before Congress

HM: It was definitely strange. I wouldn’t recommend the experience to anyone. But, I would say that I had an edge when I went before Congress in February. And I knew that the SEC was not speaking, the only thing they were going to answer to is their names during their testimony, and I was right.

And I knew that they weren’t going to apologize to the victims, because I knew they had too many lawyers there, and lawyers don’t want to take any risk. So, someone had to tell the American people – especially to the victims – what really happened. And I knew it was up to me, because I knew the government wasn’t going to come clean.

So, I had to tell the truth, and I wasn’t gonna pull any punches ‘cause I was damn angry, I knew the investors were angry, and someone had to speak on their behalf and I knew that there was no one more qualified than me, and if I didn’t tell the truth, than the truth wasn’t gonna come out. So I went in there with both barrels loaded and a lot of ammunition and I kept firing every bullet I had. And I knew that they were only going to give me a couple hours to speak, and I wanted to fire every bullet I could in that amount of time.

And I wasn’t gonna pull any punches because I thought the SEC had done a horrible thing, letting investors down by not regulating for a period of decades. This did not just happen over an eight-and-a-half-year period, it was multi-decades. Through many presidencies of both parties in power and I just wanted them to be held accountable. ‘Cause I wanted to see them get better, and I think that we’re gonna see a good result come from this.

We were not perfect in our investigation. And we missed some things. And one of the things we missed – and it was pretty obvious, in retrospect of course – that a Ponzi was gonna be an affiliation scheme, and we saw that in Europe and we saw how royals were marketing to royals in Europe, and high-borns were getting disadvantaged in Europe.

So we tracked the affinity scam in Europe to a tee, we tracked the feeder funds in New York’s Greenwich Quarter very, very well, and we totally missed what Mr. Madoff was doing to his own community – the Jewish community – and it’s so obvious that he would be victimizing them and we never saw that because we were victims of our training and background.

My team and the way I put it together, it was all people with institutional investor backgrounds, it was all people with business finance type training in the institutional level, it was people that knew derivatives, and we were tracking him institutionally, thinking we were getting it all, and in fact we missed the separately managed accounts he was getting from the Jewish charities, the Jewish foundations and the Jewish high-net worth individuals here in the U.S.

And it’s so obvious: If you look in Boston, in the financial district, there’s no victims from the firms. You’re not gonna see any consulting firms, you’re not gonna see any money management firms victimized by Mr. Madoff in Boston, because those people knew us, and we warned them. We had no idea that if you went to the suburbs, and you went to the temples, that Madoff was raiding the temples. And destroying the Jewish community here at home.

And so we did miss that because we were institutional in our focus and in our training and in our background, and we totally ignored what was right in front of us. And, I wish we had seen it. I don’t know what else we could have done to stop it, but I wish we’d seen it, I wish we’d included it in our investigation, I don’t know that it would have led to a better result however.

I don’t know that it was a major miss on our part, it certainly was a big one. But I don’t know that it would have led to a successful case at all. I somehow doubt it.

I tend to keep my teams at four or five or less, I tend not to go larger size than that, that’s just more of my special operations background, that you tend to do more focused, better work with a smaller team. Just for the reasons you cited: You have security concerns, it’s harder to manage, and if you put the right team together at the outset you’re gonna have a better result.

And I thought I had a good enough team, and you can see that the papers we put together – the submissions – are pretty accurate as far as they go. They’re pretty detailed, it certainly was enough for the government to act on and stop this fraud, and I’m eager to find out what really happened from the government’s side and I’m sure we will when the inspector general’s report comes out later this summer.

It’s all coming out, post Dec. 11, after he turned himself in. So we’re finding out as the world finds out through the media, but we had no idea pre-Dec. 11 what this man was really like. We knew he was bad, we knew he was a monster, we had no idea how big a monster he truly was. And we’re finding that out right now, just like you are and just like the rest of the nation and the rest of the world, in fact. We’re in shock at how purely evil this man was.

I can’t answer for Mr. Madoff. That’s why I hope he will take the challenge and write the book and show us he has a shred of decency and tell us what was going through that mind of his. Does he have feeling for other humans? ‘Cause it certainly doesn’t look like it from the outside from where I sit, but I would like to know and I think people want to know what type of society produces a person like this.

We’re a nation of 300 million. We have some bad apples. He’s certainly one of the worst apples we’ve ever produced, but what happened? I’d like to know and I think all of us would like to know and I hope he will write a book.

It’s gonna take time to heal, and I hope to heal. I look to the future, I look to the cases I currently have and I want them to do well and have a better result. I strive to get better — this was my first case, it was a disaster, I hope my future cases are much more successful than this. I learned a lot along the way. I became close to three other men that really stood behind me the entire eight and a half years.

I feel he killed my friend. And my friend died the most horrible way imaginable – and if you want me to talk about that, I will, because he was a man of honor – that I could say without breaking up. I mean I could say that he wanted to send a message to his family, his friends and his investors of how sorry he was, and that’s why he killed himself in the most gruesome way imaginable.

And he watched himself die, he bled out into a trash can. He didn’t want to make a mess on the floor, so he bled into a trash can ’cause he didn’t want to leave a mess for anybody to clean up. That’s how noble this man was. He had a code of honor, he lived up to it. Many others are lying and trying to distance themselves from investing in Madoff. You see the Noel family saying, ‘We didn’t know, we didn’t know.’ Well they should have known.

Thierry took personal responsibility and too many others are running away from that responsibility. And Thierry acknowledged it and he gave up his life for his beliefs, and that’s very commendable and tragic.

And I wish he had not, but it shows you the type of honor that he had, and he showed his sorrow and others have shirked their duty and have not come forward and are hiding behind a shield of lawyers, trying to fight these cases to a standstill and I hope they don’t succeed.

I think that they need to be brought to justice too, the people that were complicit, who assisted Mr. Madoff, who didn’t ask questions, who certainly didn’t ask tough questions. Who ignored obvious warning signs. And just ignored that because they were getting paid so darn well. They were getting so many hundreds of millions of dollars in fees every year that they were willfully blind and looked the other way.

I’d like to see them brought to justice. They deserve to be penniless. If the victims are penniless, the people that lured them into Madoff deserve to be penniless too. That’s only fair.

I’m willing to stand up here and tell you that I failed. And it’s $65 billion worth of failure. There are some things to be proud of and there are some things that I wish had gone a lot different. And I’m telling the American people where I failed, I’m not ashamed of that because I had a really good general in the army.

The best general ever, Maj. Gen. Boyd M. Cook, who passed away last February. And he told me that if you’re not failing, you’re not trying, and you can’t be a great success without great failures. And so I’ve lived that. He was my role model. I don’t mind failing big. I hope to succeed big later on in life. So far I may not have, but I’m gonna keep trying until I do.

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