Page 1 of 1 FW:Resubmitted Madoff SEC Meeting,doc 11/4/200512:08:00PM From: Cheung, To: Suh, Srmon Personal Privacy Attachments: ResubmittedMadoff SEC MeeUng.doc -~-~~-`~-`~-~~~I~ ·-·--------- From:Harry Markopolos [mailt Personal etl Privacy Sent: Friday, November 04, 200 To: Cheung, Meaghan S, Subject: ResubmittedMadoff SEC Meeting,doc Meaghan, 1. Per a conversation with Mike Garrityofthe Boston SEC this morning, attached ismy 21-page report on why i believethat MadoffInvestment Securities, LLC is theworld's largest Ponti Scheme. I madea presentationto yM~onOctober 251h. 2005 and he thought awould bemore efficient ifthis case were sent directly toNew Personal Privacy 2. My contact information is: work Personal Privacy Markopolos, CFA. You can contact either8927 nd Ema Myfull name is Harry branchchief for references on pastwork I haveDavidsubmitted Bergers, Esto the SEC's Boston office. rcment, orMike Garrity, 3. You and the team leader on the case are alwayswelcome to contact me. Ifyou'd like to meetat youroffices in New York, I can arrange other business and make a trip to NYCwith about a week's notice. I lookforward to speakingwith you at your convenience, Regards, Harry Markopolos, CFA Personal Privacy MADOFF EXHIBITS-04308 The World's Largest Hedge Fund is a Fraud October 25, 2005· Presentation to the SEC (modified and resubmitted November 4, 2005) Madoff Investment Securities, LLC www.madoff.com Opening Remarks: I am the original source for the information presented herein. There was no whistleblower or insiderinvolved in compilingthis report. I usedthe MosaicTheory to assemblemy set of observations.My observationswere collectedfirst-hand by listeningto fund offund investors talk abouttheir investments in a hedgefund run by MadoffInvestmentSecurities, LLC, a SEC registeredfirm. I havealso spokento theheads of variousWall Street equity derivative trading desks and every single one of the senior managers I spoke with told me that Bemie Madoffwas a fraud. Of course,no one wants to take unduecareer risk by stickingtheir head up and saying the emperor isn't wearing any clothes.... I am a derivativesexpert and have traded-or assisted in the tradingof severalbillion $US in optionsstrategies for hedgefunds and institutionalclients. I haveexperience managing split- strikeconversion products both using index options and using individual stock options, both with andwithout index puts. Veryfew people in the worldhave the mathematicalbackground needed to manage these types of products but I am one ofthem. I have outlined a detailed set of Red Flagsthat makeme verysuspicious that Bemie Madoff s returnsaren't real and,if theyare real, then they are certainly generated by front-running. Due to the sensitive nature of the case I detail below, its dissemination within the SEC must be limitedto thosewith a needto know. Thefirm involved is locatedin theNew York Region. As a result of this case, severalcareers on Wall Street and in Europewill be ruined. Therefore,I havenot signednor put my nameon thisreport. I requestthat my name not be releasedto anyoneoutside this SECregion without my expresswritten permission. The fewer people who know who wrote this report the better. I am worriedabout the personalsafety of myself and my family. Under no circumstancesis this report or its contentsto be sharedwith any other regulatory body without my express permission. This report has been written solely for the SEC's internal use. As far as I know,none of thehedge fund, fund of funds(FOF's) mentioned in my reportare engagedin a conspiracyto commitfraud. I believethey are ndivemen and womenwith a notablelack of derivativesexpertise and little or no quantitativefinance ability. There are 2 possible scenarios that involve fraud by Madoff Securities: i. Scenario# 1 (Unlikely):I am submittingthis caseunder Section 21A(e) of the 1934Act in the eventthat the broker-dealerand ECN depicted is actuallyproviding the stated returnsto investorsbut is earningthose returns by front-runningcustomer order flow. Front-runningqualifies as insider-tradingsince it relies upon material,non-public informationthat is actedupon for the benefitof oneparty to the detrimentof another MADOFF EXHIBITS-04309 party. Section21A(e) allows the SECto payup to 10%of the totalfmes levied for insider-trading. 2. Scenario# 2 (Highlylikely) Madoff Securities isthe world's largest Ponzi Scheme. In thiscase there isno SEC reward payment duethe whistle-blower sobasically I'mturning thiscase in because it's the right thing to do. Far better that the SEC is proactive in shuttingdown a Ponzi Schemeof this size ratherthan reactive. Who:The politically powerful Maddff family owns and operates a New York City based broker- dealer, ECN, and what is effectivelythe world'slargest hedge fund. Bemard"Bernie" Madoff, the family patriarch started the firm. Accordingto the ~ website,"Bernard L. Mado~ ~yas one oflhefive broker-dealersmost closely involved·in developing theNASDAB Stock Market. He has been chairmanoSthe board o~directors oflhe NASDA& Stock Marker as well as a memberofthe board of governors of the NASD andamember of numerous NASD committees. BernardMadoff wasalso afounding member of the International Securities Clearing Corporation in London. Hisbrother, Peter B. Madoff has served as vicechairman ofthe NASD, a member of its board ofgoverndrs, and chairman of itsNew York region. He also has beenactively involved in theNASDAL! Stock Market as a membero~i~s board oSgovernors and its executive committee andas chairmanof its trading committee. He also has been a memberof the board o~directors of the SecurityTraders Association ofhrew York. He is a memberolthe boardof directorsof the Depository Trust Corporation. What: i. Thefamily runs what is effectivelythe world's largest hedge fund with estimated assets undermanagement of at least$20 billion to ~erha~s$50 billion, but no one knows exactlyhow much money BM is managing. That we have what is effectivelythe world'slargest hedge fund- operating underground isplainly put shocking. But then again,we don't even know the size of the hedge fund industry so noneof this should be surprising.Asuper-sized fraud of this magnitude was bound to happen given the lack of regulationofthese off-shore entities. My best guess is thatapproximately $30billion is involved. 2. Howeverthehedge fund isn't organized asa hedge fund by Bemard Madoff(BM) yetit acts and trades exactly like one. BM allows third party's to private label hedge funds that providehis firm, Madoff Securities, with equity tranch funding. In return for equity tranchfunding, BM runs a tradingstrategy whose returns flow to the third party hedge fundsand their investors who put up equity capital to fund BM's broker-dealer andECN operations.BM tells investors itearns itsfees by charging commissions onall of the trades done in their accdunts. Red Flag # 1: Whywould a US broker-dealer organizeandSund irselj~insuch an unusual manner?Doesn't this seem to be an unseemly way oiro~t~erating underthe regulator S radarscreens? Why aren't the commissions chargedfully disclosed toinvestors? Can a SECRegistered Investment Advisor both charge commissions aildchauge aprinciple ~e MADOFF EXHIBITS-04310 15 ) I: for trades MOSTIMPORTANTLI:whywouldBMsettlefor charging only undisclosed commissions when he couldearn standard hedge fundf~es oSr ~ managementfee ·t 20% c~StheproJits? Doingsame simple math on BM's 12% average annual return stream to investors, thehedgefund, beJorefees, would have To be earning averageannual returns ofld%. Subtractout the I% managementSeeand investors are down to 150~ 20% of the proJits wouldamount to /20n 15%= 3%pro~fitparticipation) 3~ soinvestors would be left with the ;rtated IZ% annual returns listed in Attachment 1 (Fairfie2dSent~y Ltd. Performance Data). Totalfees tothe rhirdparty FOF's would amountto 4%annually. Now why would BM leave 4% in average annual fee revenue on thetable unless he were a PonziScheme?Or,is he charging a whole lot more than 4% in undisclosed commissions? 3. Thethird parties organize the hedgefunds·and obtain investors but 100%ofthe money raised is actuallymanaged by MadoffInvestmentSecurities, LLCin a purportedhedge fund strategy. Theinvestors that pony up the money don't know that BM is managing their money. ThatMadoffis managing the money is purposelykept secret from the investors.Some prominent US based hedge fund, fund offUnds, that "invest" in BMin this manner include: A. Fairf~eldSentry Limited (Arden Asset Management) which had $5.2 billion investedin BM as ofh/iay 2005; 11" Floor, 919 Third Avenue;New York,NY 10022;Telephone 212.319.606; TheFairfield Greenwich Group isa global family of companies with offices in New York, Londonand Bermuda,and representative offices in the U.S., Europe and Latin America. Local operatingentities are authorizedor regulatedby a varietyof governmentagencies. including Fairfield Greenwich Advisors LLC, a U.S.SEC registered investment adviser. FairfieldHeathclift Capital LLC, a U.S.NASD member broker-dealer, and :ha~~enl~:e~'r~~tnng~;;~i~:(UK)Limited,authorized andregulated bythe Financial Services Authority in B. AccessInternational Advisors; www.aianroup.com; a SEC registered investment advisor, telephone # 212.223.7167;Suite 2206; 509 Madison Avenue, New York, NY 10022 which had over $450million invested with BM as ofmid-2002.The majority ofthis FOF's investors are European, even though the firm is US registered. C. BroyhillAll-Weather Fund, L.P. had $350 million invested with BM as of March 2000. D. TremontCapital Management,