Madoff was extremely gracious about it. No problem, don’t worry about it, everybody’s just doing their job, and thanks for the call.
We had shot our biggest guns, and our target hadn’t even been wounded. In the movies good always triumphs over evil, and sometimes there’s a tendency to believe that’s also true in real life. As we were being taught, that isn’t true. Not only didn’t we slay the monster, but it was growing. And it would soon become more dangerous than ever.
Chapter 4
Finding More Peters (to Pay Paul)
At the height of my frustration I sent this e-mail to Neil, outlining my new plan to expose Madoff: “You know, maybe we should launch a fund just like Bernie’s only we’ll offer slightly higher returns with a 4 percent annual volatility. We raise $2 billion in maybe a year or 18 months, divide it equally and flee to a country without extradition. We then sell our story to Larry King and point out that we only did it to alert investors to the much larger Bernie Madoff Ponzi scheme and that Bernie is our hero for teaching us how to run a really good Ponzi. Bernie then goes down, we look like heroes, and we live happily ever after in Switzerland.”
Ah, that Neil. He thought I was kidding.
But I didn’t know what else to do. Nobody was listening. Even at Rampart the only thing management cared about was finding a product that could compete with Madoff. When I explained once again that it was impossible, they agreed with me, and then asked when I was going to have it ready.
After it became clear to them that I didn’t want to do it, they began looking outside. Finally, through a web site Frank found an options trader on the Pacific Exchange who appeared to have created a very interesting product. It looked like he had found that elusive inefficiency in the market structure. Basically, until the turn of the century the major options exchanges in Chicago, New York, Philadelphia, and San Francisco really didn’t compete with each other. They would each trade options on specific stocks and the other exchanges would honor that exclusivity. But as the big institutions began to move into the options market that tacit arrangement broke down. When the volume increased, the competition got a lot tougher—and so did the risks traders were forced to take. To protect themselves they had to lay off some of their risk. The whole business was changing, and this trader Frank found believed there was the opportunity to make a lot of money by taking some of that risk in exchange for a piece of the profits—but he needed a lot of seed capital to build his business.
It was an interesting concept. This trader came into the office to explain it to Neil and me. We weren’t impressed. But when Neil and I offered to examine this strategy and determine if it was any good, management blocked us. For a reason we’ve never discovered, they did not want us digging into it. It was very strange. We spent all day, every day, researching and trading options; they found someone with an options product and they never even asked our opinion about it. Neil kept pushing them to let us rip it apart to see if it made sense, but they wouldn’t allow us to do it. One afternoon we sat down with the three founders of the firm and asked them, “Explain a trade to me. Just one.” They would explain loosely how they believed the strategy worked. But no one could actually answer any of our questions about it. The fact that they couldn’t didn’t seem to bother anyone; they had dollar signs in their eyes.
Frank thought it could work and brought Thierry de la Villehuchet of Access into the deal. He’d found an options trader, he explained. “He’s got a theory that sounds like it might have some traction. I’m going to need capital to fund him. We want to bring him in-house and form a fifty-fifty joint venture with Access.”
Thierry also needed a new product. He had all his nest eggs in the Madoff basket and wanted to spread them out. Rampart Managing Director Dave Fraley, Frank, and Thierry heavily recruited this trader, eventually convincing him to give up his seat on the exchange and move to Boston. The Rampart office was too small for these big plans, so they rented an office for him—and gave him the $75,000 he demanded up front. Frank had done some background research. He had spoken with people this guy worked with on the floor, and they’d said that this trader showed up every day, did his trades, and appeared to be making money. Frank wanted to do a little more investigating before the deal was finalized, but the trader gave Rampart a deadline to make a decision.
Frank, however, couldn’t get rid of his uneasy feeling that something was wrong. The guy just grated against him. Once Frank had connected him to the traders the guy turned around and tried to push Frank out of the deal. So when it was done, Frank took him aside and said firmly, “If you’re screwing us, I promise you, we’re gonna go after you like a pack of wild dogs.” That’s not typically the way Frank talks.
While these negotiations were in progress, Frank spent considerable time with Thierry. They bonded over their love of ocean sailing. At some point Frank sat down at dinner with him and told him flatly that Madoff was a fraud. Thierry just couldn’t accept that. “He can’t be,” Thierry insisted.
Frank was trying to save him. “But listen, what if
