Authors: James B. Stewart
Tags: #History, #United States, #General, #Law, #Ethics & Professional Responsibility
Tangled Webs (70 page)
After speaking to Lamore, Suh felt it was clear that he and Ostrow had not focused on whether Madoff was running a Ponzi scheme. Cheung, on the other hand, came away with the impression that the examiners had looked into all the issues Markopolos raised and found nothing, and conveyed that message to her superiors.
O
n October 1, the enforcement division’s office of Internet enforcement received an e-mail from a “concerned investor”:
n October 1, the enforcement division’s office of Internet enforcement received an e-mail from a “concerned investor”:
Dear SEC:I was a former client of one of Madoff Financial’s “hedge funds.” . . . I am deeply concerned that Madoff is running a very sophisticated fraudulent pyramid scheme. I came to this conclusion shortly after I joined Madoff as a client in 1999. When I tried to get a better understanding of their operation and get some financial data, they refused. Their response to me was, “If you don’t like your returns, then get out.” After a short period of time, I decided to withdraw all my money (over $5 million). . . .I know that Madoff also has a broker dealer which they [use] to run all their trades. Although I cannot point to anything concrete, their return of 12% to 18% annually over the last 20 years or so tells me something is wrong there. Believe it or not, I don’t think they had a losing year. I also know firsthand that they “guarantee” a certain percentage annual return for some clients who put in more than $100 million. I know at least 3 people in Palm Beach who have actually borrowed money–great sums of money–to put into Madoff because of this “guarantee.”I know that the Madoff Company is very secretive about their operations and they refuse to disclose anything. If my suspicions are true, then they are running a highly sophisticated scheme on a massive scale. And they have been doing it for a long time. I suspect that their scheme has not collapsed because they control the amount of redemptions. I only hope I am wrong but given the recent blowups around the country, more and more I think of Madoff’s operation, more and more it seems fishy.I know I have not provided too many concrete facts but I only wish I had them. If you can look into their operation, perhaps it will reveal a greater truth.
An enforcement attorney searched the SEC’s database for “Madoff ” and found nothing. No one in the enforcement division had entered the Markopolos complaint into the SEC’s computer system. The e-mail made it through several layers of authority before it languished, forgotten, among the Internet division’s archived records.
D
espite the initial skepticism over Markopolos’s report, Cheung, Suh, and Lamore followed up on Lamore’s suggestion to contact a feeder fund, and made an appointment to interview Amit Vijayvergiya, known as Vijay, a managing director and head of risk management at Fairfield Sentry, Fairfield’s largest feeder fund.
espite the initial skepticism over Markopolos’s report, Cheung, Suh, and Lamore followed up on Lamore’s suggestion to contact a feeder fund, and made an appointment to interview Amit Vijayvergiya, known as Vijay, a managing director and head of risk management at Fairfield Sentry, Fairfield’s largest feeder fund.
Fairfield’s general counsel, Mark McKeefry, asked Suh if it was okay for them to talk to Madoff first, and surprisingly Suh didn’t object. Vijayvergiya and McKeefry had a conference call with Madoff on December 19.
“Obviously, of course, this conversation never took place. Okay?” Madoff said when he got on the phone (although it turned out that the entire conversation was recorded, in part because Madoff typically spoke so fast that they had trouble taking notes).
Madoff was clearly at pains to make sure that Vijayvergiya told the SEC that Madoff Securities was not an investment adviser nor was it required to register as one with the SEC. Throughout the call, he essentially dictated to Vijayvergiya what he should say, and Vijayvergiya repeatedly responded “Right,” “Okay,” and “Good.”
“We never want to be looked at as the investment manager or that we are out, you know, soliciting or doing any marketing for the fund,” Madoff emphasized. “We are the executing broker for these transactions and you use a proprietary trading model . . . that has certain parameters built in that have been approved by you.”
Still, Madoff had a problem. Fairfield Sentry’s Madoff trading records were filled with options trades, and Madoff had just told Ostrow and Lamore that he no longer traded options. Fairfield even had a document from Madoff indicating that options were part of the proprietary model, which Madoff said was actually a few years out-of-date. “Options are no longer part of the model,” he said. “The options are separate and there are standing instructions for the model . . . so if you ever get into any conversations about the model, it’s for the equities. That’s important, okay?”
“Okay, good,” Vijayvergiya responded.
“Any time you say you have something in writing they ask for it. . . . So the best thing to do is just say it’s a phone call. That’s what we said it is. . . . No one pays attention to these types of things or who calls or who doesn’t or who remembers who calls,” Madoff continued. Meanwhile, he assumed the focus of the call would again be front running. “You guys are not part of the execution piece of this. The concern they have with any strategy is, does anybody know it ahead of time? Because then . . . there’s the possibility for someone to front run an order.”
Madoff’s phone rang, and he put Vijayvergiya on hold. After a few moments he came back on the line.
“I’m sorry, if I get any more solicitations for charity I’m going to kill myself. As I was saying . . . that’s the major concern that these people have and probably why they want to know who is it that’s implementing the strategy . . . and probably the most important issue is Madoff is the one who’s implementing the strategy.”
“And how many people are on the team now?” Vijayvergiya asked.
“I’m the only one that can make the decision. . . . I’m the only one that pulls the trigger. Or if I’m not there someone else, but I’m always there. But this kind of information is not information that you have any reason to have,” Madoff stressed, and hence, should not be volunteering to the SEC. Vijayvergiya shouldn’t get into any details about Madoff’s trading strategy. “The less you know about how we execute, the better you are . . . you could, you know, if they ask, do you know if Madoff has Chinese walls, you could say, yes, . . . Madoff has been in business for forty-five years, he executes a huge percentage of the industry’s orders, he’s a well-known broker. We make the assumption that he’s doing everything properly.”
At this juncture Madoff looked over a written list of points he’d prepared.
“Okay, so we don’t market. You don’t know the exact amounts we trade for others. We’re the executing broker. We don’t do any other business with you. There are terms and conditions on the options just like the equity. Yup, and the options are not part of the model anymore.”
Next he read over Fairfield’s marketing materials, which vaguely described Madoff’s investing approach and promised consistent monthly returns. “Don’t say consistent monthly returns,” he lectured. They were a little too consistent.
“Okay, you can delete that,” Vijayvergiya said.
But then Madoff seemed unable to resist boasting about them and his unique strategy. “And the purpose of the strategy is to take advantage of an upward move in the market, all right?” he said. “You’re buying the securities that are basically going to move with the S&P. That basket of securities can be hedged using broad index options, you know, to put a collar to limit the risk of the strategy. . . . We’ll hedge it with a broad base index with certain parameters below the market, they have to be out of the money, you know, on both sides and so forth. But again, that is not something, so you understand, that they . . . You’re not the one that’s implementing the strategy and you’re not even the one that determined if this is a great strategy or not. I mean this fund has been using this strategy for fifteen years.”
“Right,” Vijayvergiya responded.
“This strategy was put on long before you even showed on the scene,” Madoff continued, evidently warming to his subject. “The skill of Madoff is to know when to get into the market and get out of the market,” he said, speaking of himself magisterially in the third person.
“I wouldn’t anticipate that will be something the SEC is interested in . . .” Vijayvergiya said.
Madoff warned they might ask about anything. “These guys come in to do a books and records examination and they, you know, they ask you a zillion different questions, and we look at them sometimes and we laugh, and we say, are you guys writing a book? We’re good market timers. . . . If they ask, you know, do you know how Madoff decides when he’s going to go in the market and out of the market, which is a question people always ask me, I’d say, ‘I’m not going to share that information with you.’ There’s all sorts of, obviously, black-box technology, momentum models, and all sorts of things that tell us when to get in and out of the market.”
“I know the options are all OTC at this stage,” Vijayvergiya mentioned.
“Yeah, those are done with derivative dealers.”
“Dealers, okay . . .”
“Basically European bank and derivative banks, dealer banks,” Madoff added. “You don’t want them to think you’re concerned about anything. With them you should be, you know, casual. . . . What else, what else, what else,” Madoff continued, as if thinking aloud. That seemed to be it. “Okay . . . great, Amit. Take care.”
Madoff’s first words–“this conversation never took place”–should have been a red flag. (A spokesman for Vijayvergiya responds that Madoff was always so secretive that he didn’t find Madoff’s initial comment jarring and took it as an “off the cuff” remark.)
Madoff also tried to get Vijayvergiya to accept the proposition that options trading was no longer part of his proprietary model, although they always had been. He also didn’t want Vijayvergiya saying that anything was in writing (such as the document indicating options trading was part of the model). And Madoff’s explanation for his vaunted ability to time the market, filled with vague references to “black box models” and “momentum,” lacked any credible detail. In any event, Vijayvergiya wasn’t supposed to know anything about that.
Vijayvergiya dutifully followed through with his SEC interview on the afternoon of December 21, so much so that Cheung, Suh, and Lamore were all suspicious that he’d worked out his statements with Madoff in advance–in Suh’s words, that he was “prepped.” According to Fairfield’s notes of the interview, Vijayvergiya explained the split-strike strategy and said, “The equities piece of the strategy is done by a proprietary model and ‘black box’ technology . . . whereas the options piece is more broad based and not proprietary. Therefore there are separate documents for each. . . . The price and timing decision is made by Madoff employing a sophisticated model and technology. We do not have any input to the price or timing decision. . . .” To his credit, Vijayvergiya defied Madoff and acknowledged, when asked, that he had spoken to Madoff before the interview, although he gave a truncated version of the conversation: “The substance was, do you know what the conversation with the SEC might concern? We talked about our relationship. . . . The whole thing was more of a courtesy call.” (Nor did Vijayvergiya disclose there was a tape of their call.)
Vijayvergiya also testified correctly that options trading was an essential part of the Madoff strategy, whether or not they were part of the model. Yet Madoff had told Lamore and Ostrow that he’d stopped trading options entirely–not that he’d removed options from his model–and that the clients executed their own options trades. This didn’t escape Lamore, who noted the next day in an e-mail that “I’ll be writing up my notes from the Madoff/Fairfield Greenwich Group (FGG) conference call that I participated in yesterday. Also, I’m going to provide the attorneys with a list of differences (lies) from what we were told and provided during the Madoff exam vs. what we learned about Madoff’s operation from various documents provided by FGG and during the conference call yesterday.” And Bachenheimer, the enforcement staff’s assistant director, wrote, “The Madoff investigation took an interesting turn. Contrary to what Madoff told our exam team, he is trading options for at least one hedge fund.” Now the enforcement division itself recognized that Madoff had lied–yet evidently didn’t consider referring the matter to the Justice Department.
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