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De la Villehuchet McMullan.com/Sipa
Markopolos testifying Getty Images
Madoff going to court Mario Tama/Getty Images
Martin Schoeller
"I'm a quant," writes Harry Markopolos. "I look at numbers the way other people read books." That ability allowed him to smell a rat in 1999 when he encountered the remarkable returns claimed for a secretive hedge fund run by Bernard Madoff, a renowned Wall Street broker-dealer. Markopolos and two colleagues at asset manager Rampart Investment began looking into Madoff's operation. They soon concluded he couldn't produce those results legally.
The following excerpt describes Markopolos' 2002 trip to Europe with Thierry de la Villehuchet, a French aristocrat who ran Access International, a New York firm that funneled money to Madoff. Markopolos already suspected Madoff was running a giant Ponzi scheme. As he and de la Villehuchet try to market an options-based trading product, Markopolos begins to understand the true dimension of Madoff's crime. On Dec. 23, 2008, less than two weeks after Madoff confessed to FBI agents, de la Villehuchet committed suicide.
We had 20 meetings in three countries in 10 days. It was a whirlwind tour of Europe. We met with various hedge funds and funds of funds. The meetings eventually ran together in my memory, but it seemed like each office or conference room was more luxurious than the previous one. The floors were covered with plush Persian carpets; the walls were done in rich walnut and cherry woods, and hung on many of them were oil paintings; we were served only with sterling silver, and the fixtures were gold. These rooms had been decorated to impress clients, to show them that money didn't matter—which they apparently believed was an effective means of convincing clients to give them their money.
We met with many of the leading investment banks and private banks of Europe. The system there is quite different than here, as wealthy investors use private banks to conduct their business. I went to a meeting with members of the L'Oréal family. At JPMorgan (JPM) I met with a member of the Givenchy family, who spent considerable time complaining about the Hermès family, who apparently were suing his family over an investment that had soured. At lunch one day with Prince Michel of Yugoslavia we sat at a table near Marc Rich, the disgraced financier whom Bill Clinton had so controversially pardoned. All these people knew each other. In Geneva, we were supposed to meet with Philippe Junot, the playboy who had been married to Princess Caroline of Monaco, but he canceled, I was told, because he thought my strategy was too risky, and he preferred to stay with Madoff.
Thierry began every one of our 20 meetings the same way: "Harry is just like Madoff. It's an option-based derivative strategy, only he offers a higher risk and a higher return. But it's different enough from Madoff that you should have him in your portfolio. If you have Madoff and you want some diversification, this will do it."
And every time he said it I got furious. What I wanted to shout out loud was that I was offering higher returns than Madoff because my returns were real and his were not. And I was a lot lower risk, because at most I was going to lose only 50% of their money while with Bernie they were going down a full load.
But I didn't. Instead I smiled and explained how this strategy worked. After that we would drill down to the details. I'd go through my pitch book. Then they would ask the usual range of questions: What are your risk controls? What are your trading rules? What is the frequency of the bad events that can hurt you?
It was the potential risk that scared them. I told them that way less than 1 percent of events could hurt the product, although admittedly should it happen it could be catastrophic. I was honest: "You could lose half your money very quickly."
The only fund that asked what I thought were the right questions about my due diligence was Société Générale. The people I met with there knew their derivative math. They told me, "We like your risk controls.
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