As soon as he got back to his office he called Frank. “Are you guys really sure about this?” he asked. “Because I gotta tell you, Frank, this guy was as cool as can be. I mean, I didn’t see the slightest indication that anything was wrong. In fact, rather than worrying about the story I was writing, he acted like he was inviting me over for Sunday tea.
“He doesn’t act like he’s got something to hide. He spent more than two hours with me. He showed me around the whole operation. He even offered to answer any other questions. Guilty people usually don’t act this way.”
The numbers don’t lie, Frank emphasized.
Ocrant wasn’t so sure of that. “Is it possible we’re missing something?” he wondered aloud. While writing his story, Ocrant reviewed the facts countless times. Madoff had been firm in his explanations: “Listen, we’ve got great market intelligence,” he’d pointed out. “We’ve got an incredible infrastructure. We’re well known as being on the leading edge of technology, and we’ve got 40 years of experience in the market.”
It made sense. All of it made sense. All of it except those numbers.
In addition to his face-to-face interview with Madoff, while working on the story Ocrant had spoken with him several times on the telephone to clarify certain points. Madoff was always friendly and forthcoming, and if he was nervous about this forthcoming article, Ocrant never heard a hint of it in his voice.
Mike Ocrant’s story was published in MARHedge on May 1, 2001. It was a very low-key story, extremely well written, simply laying out the facts and offering Madoff’s explanations. He wrote that Madoff’s $6 billion to $7 billion in assets “would put it in the number one or two spot in the Zurich (formerly MAR) database of more than 1,100 hedge funds, and would place it at or near the top of any well-known database in existence defined by assets.
“More important, perhaps, most of those who are aware of Madoff’s status in the hedge fund world are baffled by the way the firm has obtained such consistent, non-volatile returns month after month and year after year.”
Point by point Ocrant laid out the arguments we’d made. “Skeptics who express a mixture of amazement, fascination, and curiosity about the program wonder, first, about the relative complete lack of volatility in the reported monthly returns.
“But among other things, they also marvel at the seemingly astonishing ability to time the market and move to cash in the underlying securities before market conditions turn negative; and the related ability to buy and sell the underlying stocks without noticeably affecting the market.
“In addition, experts ask why no one has been able to duplicate similar returns using the strategy and why other firms on Wall Street haven’t become aware of the fund and its strategy and traded against it, as has happened so often in other cases; why Madoff Securities is willing to earn commissions on the trades but not set up a separate asset management division to offer hedge funds directly to investors and keep all the incentive fees for itself, or conversely, why it doesn’t borrow money from creditors ... and manage the funds on a proprietary basis.”
And then he presented Madoff’s responses, describing him as appearing “genuinely amused by the interest and attention aimed at an asset management strategy designed to generate conservative, low-risk returns that he notes are nowhere near the top results of well-known fund managers on an absolute return basis.
“The apparent lack of volatility in the performance of the fund, Madoff says, is an illusion based on a review of monthly and annual returns. On an intraday, intraweek, and intramonth basis, he says, ‘the volatility is all over the place, with the fund down by as much as 1 percent.”
An illusion? Only magicians do illusions. Maybe that was right—magic was as good an explanation for his returns as anything he said. As Ocrant wrote, “Market timing and stock pricing are both important for the strategy to work, and to those who express astonishment at the firm’s ability in those areas, Madoff points to long experience, excellent technology that provides superb and low-cost execution capabilities, good proprietary stock and options pricing models, well-established infrastructure, market making ability, and market intelligence derived from the massive amount of order flow it handles each day.”
And how does he make his massive stock and options moving invisible so that no one ever sees it? “Avoiding market impact by trading the underlying securities, he says, is one of the strategy’s primary goals. This is done by creating a variety of stock baskets, sometimes as many as a dozen, with different weightings that allow positions to be taken or unwound slowly over a two-week period.
“Madoff says the baskets comprise the most highly capitalized liquid securities in the market, making entry and exit strategies easier to manage.”
And why doesn’t he simply open a hedge fund, which would enable him to make even bigger profits? He even had an answer for that one: “Setting up a division to offer funds directly, says Madoff, is not an attractive proposition simply because he and the firm have no desire to get involved with the administration and marketing required for the effort, nor to deal with investors.”
“Many parts of the firms’ operations could
