Frank shook his head. Almost a quarter century earlier he’d been working with a young math whiz from MIT named Chuck Werner who was creating new option strategies in his living room. Options were a brand-new business, and Werner was using a PDP 11, a computer about the size of a four-drawer filing cabinet, to figure out what could be done with them. One of those strategies turned out to be the split-strike conversion. Although he’d been in that living room, Frank didn’t consider himself an expert on that strategy; but he claimed he knew enough about options to be dangerous. And in all the years since then he’d never heard of anybody consistently producing such substantial returns from a split-strike strategy. The 12 percent annual return was possible in some years; it was the consistent 1 percent a month return—month after month almost without exception, no matter how the market moved—that concerned him. A split-strike strategy certainly wasn’t without risk. There were bound to be times when it lost money, much more than was implied by the results he had seen. How could Madoff possibly still be making a profit whether the market went up or down? But Thierry seemed to have an answer for every question. To prove to Frank that Madoff’s returns were real, Thierry handed him several sheets of paper listing sales confirmations, explaining, “I get reports every day of which positions are bought, which are sold, and which options are purchased and which are sold.” It was all the usual data: On this date he’d bought this many shares of this stock at this price. On that date he’d sold that many shares of that stock at that price. Frank had seen thousands of these confirmations in his career, enough to know that they contained very little real information. It was like opening the hood of a car and looking at the engine. All that confirmed was that there was an engine, but there was no evidence that it ran, or what horsepower it generated, or even if it was powered by seawater. The only thing these papers confirmed was that Madoff was producing paperwork. Frank wondered what Access did with these reports when it received them.
Thierry brought him into another room, where two clerks were busy typing these statements into a computer. “I want to make sure when I get the monthly statement that all of these trades actually show up on that statement,” he said. “I’m also trying to reverse engineer what he’s doing. I want to see where his edge is.”
Frank was incredulous. Access wasn’t receiving any electronic confirmation on execution from Madoff. It was simply getting sheets of paper with numbers on them, typing them into a computer, and logging them on a spreadsheet. “Thierry, basically you told me you give this guy your money. I don’t know him from a hole in the wall, but I know he’s got full discretion and he’s the primary market maker. He writes his own trade tickets. It’s not like you have an account at Charles Schwab or Fidelity; this guy is executing his own trades. He produces the trade tickets and the statements. I mean, there aren’t even commissions on any of these things, right?”
Thierry agreed that everything was done in-house. Unfortunately, it was Bernie Madoff’s house.
Frank may have been the first person to ask Thierry this question about Bernie Madoff: “Let me ask you this, Thierry. What if he’s phonying up records? What if he’s just printing these tickets?”
“No, no, no,” Thierry responded quickly. “It’s not possible. Listen, we know this guy. We’ve been doing business with him for a while and everything has always balanced out. It’s got to be real, because I check to see that all the trades match against the monthly statement.”
Frank suggested to Thierry that rather than having two men spend their time processing data that Madoff had generated, he should hire one person who should sit down on Friday night and confirm that every stock had actually sold for a price within the day’s highs and lows. “If the ticket reports that a stock sold outside the day’s highs and lows, you know he isn’t doing what he says he’s doing. But I don’t see the value in what you’re doing.”
Several months later, we discovered another method Access used to conduct due diligence. When we started to work on another project, Thierry asked Frank and another man to submit handwriting samples, which were then sent to a handwriting analyst in France. This analyst supposedly could determine from an individual’s handwriting whether he or she were honest. This pseudo science is called graphology, and in the United States it definitely is not admissible as evidence in the courtroom. In fact, voodoo magic probably has more credibility as a crime-fighting tool than graphology. We were never able to confirm that Madoff had submitted a handwriting sample; but as Access was very serious about it, we assumed that he did. Incredibly, that was the level of Access’s due diligence, that and the fact that a check arrived every month, every single month. And money always makes a strong statement.
Frank came away from that meeting believing there was a real opportunity to do business with de la Villehuchet and Access. Madoff was too risky, and Frank didn’t want Rampart to get involved with him; but Thierry was different. Although he didn’t know precisely how much Access had placed with Madoff—we estimated it at about $300 million but eventually learned it was considerably more, roughly 45
