Point by point Ocrant confirmed Frank’s claims about Madoff. And just as had happened to us, the more he learned the more intrigued he became. Madoff’s name began slipping into most of his conversations. He was on the phone one afternoon with Hunt Taylor, the former chairman of the Cotton Exchange who was then managing the family office for the Stern family, owners of Hartz Mountain. Whatever the original purpose of the call, eventually Ocrant found himself asking the now-familiar question: “Have you ever heard about Bernie Madoff managing money?”
“God,” Taylor responded. “It’s funny you should mention that, because I just came back from a conference, and me and a bunch of guys were sitting around the table talking about that. One of them told me he knew someone who had three hundred million dollars with Madoff. Somebody else said he knew someone who had more than that. Before we knew it we were up to six or seven billion dollars.”
Ocrant was careful to hide his surprise. If this group could account for at least six billion, how much money was Madoff managing? More and more it seemed like Casey was right, that this was potentially the largest fraud in history.
While Mike Ocrant was working on the story, we continued to compile as much evidence as possible. This investigation wasn’t our primary objective, because we all had paying day jobs to do, but whenever possible we asked the right questions and collected the documents. In March 2001, one member of the team (truthfully, I have no record of the source—it could have been Frank or my brother or someone we’d spoken with) faxed me the “Use of Proceeds and Investment Program Offered by Fairfield Sentry,” and managed by Bernie Madoff. Obviously, I don’t know where the source got it, but it was easily available. From that time forward we continually tracked this fund. Why not? Fairfield had an amazing product to sell. The document included Fairfield’s pitch to potential investors as well as charts of the fund’s return stream. It was typical Bernie. Everybody is a winner!
Inside the SEC Boston district office (or BDO, as it was referred to officially back then), Ed Manion was growing increasingly frustrated. As we later discovered, my report had not been forwarded to the SEC’s Northeast Regional Office (NERO) in New York. Grant Ward hadn’t understood it and just dropped it. Almost a year had passed since our meeting, and Manion urged me to resubmit my report. I added some of the new information we had gathered from the feeder funds and prepared an analysis comparing Madoff’s returns to the market. During the period for which I had returns, the market had 26 down months, whereas Bernie had three. In his worst month he was down 0.55 percent, whereas in its worst month the market was down 14.58 percent. As I wrote, “His numbers really are too good to be true.”
Included in this March 2001 submission was an offer. If the SEC couldn’t prove Madoff was a fraud, I would do it for them. “I can provide you with detailed questions for your audit team,” I wrote. “In fact, I would be willing to accompany a team undercover under certain conditions (new identity, disguise, proper compensation) ... and serve under the command & control of the SEC. In return, I would take a leave of absence from my firm....”
It was a no-cost offer with 100 percent upside and no downside. I was confident I could walk into Madoff’s office and within a few minutes prove he was a complete fraud. I didn’t think it would take me more than five or six of the right questions and one hour of my time. If SEC investigators weren’t capable of figuring out this operation, than I would do it for them. Now, I don’t know if I ever seriously believed they might actually take me up on this offer, but I did walk myself through my plan if I ever did get inside. I was going to ask Madoff’s people to take me directly to his derivatives trading desk. That was all I needed to do. Chances were they would have looked at me as if I was the crazy one. Madoff wasn’t making any trades, so there was no reason for him to maintain an equity derivatives trading desk. But assuming he had prepared for this investigation and had set up a Potemkin trading desk, meaning a phony front, I would have asked for copies of trading tickets. These fake tickets were the center of gravity. They were the hard evidence that would prove his operation was nothing more than a house of cards. Once I had those, he would be toast.
I knew the trading tickets existed, because he supplied copies of them to his clients. Somebody somewhere was sitting in a back room making them up and printing them out. Once I had them, I would go to a Bloomberg terminal or some other data vendor and get copies of the Option Price Reporting Authority (OPRA) tape. The OPRA tapes are the permanent record of every trade. Madoff’s trading tickets would not match up with the OPRA tapes. Once I proved to the SEC that he had falsified those trading tickets, it would be game over, case closed, sayonara.
This was in early 2001, when we estimated he was running less than $20 billion. When he surrendered in 2008, it was estimated he was running roughly $65 billion. You do the sad math.
About three years later Neil confirmed this to be a viable scenario. By that time he was working at Benchmark Plus in Tacoma, Washington. His employer was friendly with an extraordinarily successful investor named Edward Thorp, who had conducted due diligence on behalf of another institution many years earlier. As
