The man who hunted Madoff

By James Bandler


NEW YORK (Fortune) -- James Bandler caught up with Harry Markopolos in Boston recently to discuss his upcoming book, No One Would Listen: A True Financial Thriller, and how he's doing with his life as an agent for whistleblowers. Edited excerpts from the extended interview:

What should your readers take away from your book?

The SEC was nonfunctional and still is nonfunctional. They'd have to improve several-hundred-fold to become functional. It is run by lawyers without any industry experience. They've never sat at a trading desk, never managed money. What chance do they have against Wall Street sharks?

How would you assess SEC Chairman Mary Schapiro's performance thus far?

She has done a lot (to educate her staff). Chartered Financial Analyst training, Certified Fraud Examiner training. I give her A+'s there. I'd say she's done a good job reorganizing the enforcement unit by specialty, making them subject-matter experts. She's done a good job of eliminating silos. They're putting economics and finance people in with the lawyers, because lawyers left to their own devices will never be capable of doing cases, because they just don't have the finance background to understand. She has some good people from Wall Street. She got Richard Bookstaber who's probably one of the best, if not the best, risk manager on Wall Street.

How would you reform the SEC?

They need to test the existing staff. Anybody who doesn't have a working knowledge of finance, they need to eliminate. There are plenty of qualified people that were laid off of Wall Street that would take those jobs. You give them a base of $150,000 to $200,000, and you turn it into an eat-when-you-kill type of compensation scheme like Wall Street has. You bring in a $100 million case. They give (you) a $10 or $15 million bonus.

Where should the SEC focus its investigative resources?

I'd say the entire over-the-counter derivatives market. That's where the cockroaches go to play on Wall Street -- to structured products (financially engineered security/derivatives). It's the 99% of the structured products that are bad that give the good 1% a bad name.

You mentioned that you would hold the heads of federal regulatory agencies criminally responsible for their misconduct. That sounds pretty harsh. Do you really think Federal Reserve Chairman Ben Bernanke, former Fed chairman Alan Greenspan, and former SEC chairman Christopher Cox should go to jail?

Yes. They were regulators who failed to regulate. They made sure that their agencies were toothless and blind and mute. Of course, you can't prosecute them after-the-fact, but going forward, I think they need to change the laws and they need to make the agency heads responsible for enforcing the nation's laws and having competent staffs.

How is your fraud-fighting business going? You must have had some lean years pre-Madoff.

I went in with the expectation that I'd be cash-flow positive in a year and I was an overnight success three and a half years later. Fortunately for me, I had a Wall Street job. I was well compensated. My wife had a Wall Street job and was well compensated. I live well below my means.

What kinds of fraud are you investigating now?

No one was hunting the large fraudster. The big game's not worried. They've never been hunted before. So I started hunting large corporations. I only do cases where someone's cheating the public. I'll do cases where the pension accounts of our firemen, our teachers, public officials, government-elected officials, are being defrauded. I'll do cases where Medicare or Medicaid is being defrauded and I'll also do cases where the Department of Defense has been defrauded.

How do you do it?

I don't want to go into the methodologies, except to say that a lot of people focus on the footnotes, and I tend to focus on the CEO's shareholders' letter. I look at the balance sheet and the income statement and I can piece it together. I'm really good at connecting the dots. My math ability has certainly helped.

Walk me through a case.

Numbers 2 and 3 in an industry have settled civil and criminal complaints with the Department of Justice for cheating Medicare. The Number 1 company with market share had to be doing it, but somehow they escaped the dragnet and weren't brought to justice, so I simply questioned their employees. Sure enough, it turns out they were involved in a fraud too.

How do you find the employees?

I go where their employees are. It could be a professional industries conference. It could be a bar near corporate headquarters. It could be other locations. I like the fieldwork the best.

You like it even more than the numbers?

Yes, I would say that. Human intelligence is way underrated, human intelligence and gathering techniques. Everybody likes to do the computer stuff, and I feel that if something's in a corporate database or any kind of database that you can buy, that it's successful to the masses and you're not going to get real intelligence there. You have to go out and hunt for it, so I am the antithesis of artificial or computer intelligence.

Since Madoff, I would imagine every whistleblower in America would want to talk to you.

I've gotten a lot of interesting evidence mailed to me and some of it has been borderline lunacy, like, who killed Kennedy type of thing. Others have been grounded probably in a good set of facts, but they're not my cases. The negatives are that my undercover days are over. I can't be anonymous. I don't want to be recognized with whistleblowers because it would be harmful to their careers. I have to wear disguises more.

What do you have, wigs?

I don't want to go into it because that would be stupid. That's operational security.

You were a whistleblower and you work with them now. What is the profile of the whistleblower's personality?

If you don't have a strong belief system, you're not going to be a whistleblower. You have to be crazy-brave. The risks are all weighted to the downside.

Crazy-brave?

Yes. You cannot have self-doubt. You just have to go forward and say I believe in this country. I believe in these core values. I know if I get outed and get caught, I've committed economic suicide for myself and my family. I'm going to be on the industry blacklist.

You write that you were afraid that Madoff or shady gangster clients would try to kill you if they fingered you as the whistleblower. You took to checking under your car for bombs and you carried a gun everywhere with you.

I didn't know if I was going to live through it.

You were so afraid of being identified by Madoff that you wore gloves (in 2002) when you handed a packet of information to an aide of Eliot Spitzer so that your fingerprints would not be on the documents. Were you being overly paranoid?

I had twin boys that were going to be born three months later, and I wanted to make sure that they would have a father. I knew that Spitzer came from a very wealthy family and that it was possible that he was a Madoff investor. (In fact, Spitzer's family real estate company did lose money in the scandal.)

What would've you done differently?

I can think of two things that would've influenced the action and hopefully brought this to a successful resolution. One is approach Spitzer in the open. Take the risk. Shake his hand, look him in the eye, say, 'I'm Harry Markopolos, I'm president of the 4,000-member Boston Security Analysts Society. I'm a derivatives expert and this is what I know about Bernie Madoff. He's a fraud.'

I wish I had confronted Mr. Spitzer to his face. Or I should have gone to (Massachusetts Secretary of the Commonwealth) Bill Galvin. He'd taken on Wall Street titans like Spitzer had. He was a hometown boy like me.

In your book, you write that when Madoff was interviewed by the SEC inspector general and asked about you, he dismissed you as a "joke in the industry." What would you tell Madoff if you met him?

I wouldn't want to meet him. I think he's a pathological liar and a predator. I think he's mentally twisted and I know a lot more about him than he knows about me. He hunted at funerals and weddings. He's the lowest form of scum. I don't want to meet him or his family. I don't want anything to do with him. I don't want to be that close to evil.

Are you long or short on the United States over the next ten years?

Short. I don't think you can recover until you've hit rock bottom. And to think that we've chastised the Japanese banks for the past two decades for not owning up to the zombie banks and forcing them to admit to their losses and closing them.

And what are we doing? We're allowing the money-center banks to extend and pretend on their balance sheets, keep stuff off balance sheet, not mark-to-market. We're not forcing the banks to own up because, for some reason, we want to bail out the shareholders and the bondholders of those institutions instead of making them feel the pain. To top of page