No One Would Listen: A True Financial Thriller

goal was to level the playing field, to ensure that anyone who wanted to buy or sell securities had access to the same information as everyone else, that they had all the information they needed to make intelligent decisions. As the SEC explains on its web site, its current mission is to “protect investors, [and] maintain fair, orderly, and efficient markets.” The efficient markets hypothesis, which Neil even now continues to believe in, theorizes—very basically—that as long as all market information is simultaneously and freely available to everyone, no one can have an edge. And that is completely dependent on the ability of the SEC to do its job. Through the years, though, the SEC had gained a completely undeserved reputation as the agency that effectively policed the financial markets, allowing people to believe that their interests were being protected. That SEC seal of approval was misleading and actually very dangerous.

Actually, the SEC has a lot less power than most people assume. While it can take civil action against corporations or individuals in district courts for crimes such as insider trading, accounting fraud, and the failure to divulge information, it has extremely limited investigative authority. The most SEC investigators can do is refer suspected criminal activities to state or federal prosecutors. What most people outside Wall Street don’t know is that the SEC doesn’t even regulate the over-the-counter markets. The biggest opponent of protecting those OTC markets was Alan Greenspan, who served as chairman of the Federal Reserve for almost two decades and foolishly believed that the markets were self-regulating.

But because the SEC also had the power to revoke licenses and prevent companies or individuals from participating in the market, I figured the least it would be able to do would be to prove publicly that I was right—that Madoff was a fraud—and shut down his hedge fund, eliminating the pressure on me to create a product that mirrored his returns. While I thought he probably deserved to go to jail, I didn’t spend much time considering the consequences to him or, in fact, to his investors.

I had very little confidence in the ability of the SEC to investigate Madoff on its own. My experience had proved to me that it was generally a nonfunctional agency, but I figured if I handed him to the SEC with all the evidence it needed carefully laid out, even that organization would be able to take action against him. I didn’t think it would be able to resist. It would be an easy case for the agency and would result in a lot of good publicity. The SEC would also be doing precisely what it was originally created to do—protecting investors.

There also was that remote possibility that we could earn a very large reward. Section 21A(e) of the 1934 Act had instituted a bounty program to help the government catch people who violated the insider trading laws. People who provided information that led to the successful civil prosecution of insider trading could theoretically receive as much as 30 percent of the amount actually recovered by the government from a civil penalty. This bounty program was limited to civil cases of insider trading; it didn’t cover criminal acts of any kind or any other type of financial crime. If Madoff was a Ponzi scheme, for example, it would not be covered by this program. And even if he was front-running, it would be the decision of the SEC whether that fit under the insider trading regulations. The SEC had the sole legal discretion to determine who would get paid and the amount, and there was no legal recourse. By 2000, when I first went to the SEC, the program had paid just one whistleblower the sum of $3,500. So clearly the chances of us actually receiving a reward for turning in Madoff were only slightly better than me pitching the first game of the World Series for the Red Sox.

I told Neil and Frank what I was going to do, and I explained I would keep their names out of my report. If there were repercussions I would take the hit for the team. If, for example, Rampart’s management found out what we were doing, they would not be thrilled. I didn’t think they would fire me, but they certainly would put me on notice that the investigation had to end.

Neil was totally supportive, Frank less so. Our relationship at that time was office-friendly but somewhat tense. We still had very different objectives. He wondered if it might not be somewhat premature. “I’ve got nothing to bring to the SEC. What are you going to tell them?” he asked. “Everything’s sort of hypothetical at this point, isn’t it?”

Not to me. The numbers were real.

I had established good relationships with two men I respected in the SEC’s Boston office, Ed Manion and Joe Mick. Because the SEC considers anything derivatives related to be high-risk and because Rampart managed equity derivatives portfolios, our firm was examined by the SEC every three years—like clockwork. An SEC audit is mostly a paper chase, more to make sure records are up-to-date than any kind of real investigation. In fact, the teams that came in never had any derivatives expertise, so they depended on me to teach them what they should be looking for while they were auditing our books. Because the SEC had no derivatives experts on their staff, on occasion Ed Manion would call on me to answer derivatives questions pertaining to issues the SEC examination teams were encountering in the field. I never knew who the SEC was examining, but I know the Boston SEC office appreciated the fact that I was always willing to help out.

I’d met Joe Mick during our first audit. Joe is a lawyer and pretty senior in that office. I’d kept in touch with him on a professional basis; I trusted him completely, so when people e-mailed me illegal inside information or stock tips I would forward those e-mails directly to him.

Ed