Free No One Would Listen: A True Financial Thriller by Harry Markopolos

clients. Generally in those meetings the portfolio managers would outline their investment strategy and Frank would probe, looking for an opportunity. Among the managers he met with during this period was the Broyhill All-Weather Fund, a hedge fund of funds. In 1980 the Broyhill family had sold its South Carolina furniture manufacturing business and established an investment fund. As the manager of that fund, Paul H. Broyhill, pointed out, “It’s a whole lot easier to make money when you’re not losing it.” Frank met several times with Broyhill representatives in the lobby of a New York hotel. They showed Frank their product, which they explained was steadily producing 1 percent a month, and asked Frank if he could find a bank to guarantee it. As it turned out, the fund depended basically on two managers the Broyhill representatives would identify only as Manager A and Manager B. They handed Frank a promotional pamphlet and a single page showing Manager B’s returns.
     
    Frank took one look at it and knew it was Madoff. Either this was an amazing coincidence and Frank had chanced upon two of the few funds investing in Madoff or he was much larger than we had imagined. We began to wonder how far into the industry his tentacles extended.
     
    This material was the first solid evidence we had found. As soon as Frank handed it to me, I began breaking it down. “The manager’s investment objective is long term growth on a consistent basis with low volatility,” Broyhill’s fund description began. It explained that the fund utilized “a strategy often referred to as a ‘split-strike conversion,”’ which meant purchasing a basket of stocks with a high degree of correlation to the general market. Madoff’s subtle—but unspoken—message was that he had access to trade flow information because clients were buying and selling through his brokerage, so he knew what stocks were going up. Well, I had already proven that was false. But then it continued, “To provide the desired hedge the manager then sells out of the money OEX index call options and buys out of the money OEX index put options. The amount of calls that are sold and puts that are bought represent a dollar amount equal to the basket of shares purchased.”
     
    Well, that was interesting. Like many people, Neil and I had been actively trading OEX options, but we had stopped and substituted S&P 500 options in the mid-1990s when these options, called the SPX, came to dominate the market and the S&P 100 OEX index options fell by the wayside. We were trading large numbers of option contracts, as much as 30,000 options at one pop. When you do trades like that, it shows up in the market. Bloomberg reports how many contracts are traded and at what price, where the market was when the trade hit the floor, and where it was after the fact. All the details are there. And the market responds. You can’t do trades of that size and not be noticed.
     
    If Madoff actually was purchasing these options, we would have seen the footprints of his trades. At the volume he had to be trading to produce the results he claimed, his trades should have been reflected in the market activity. But there was no sign of his presence in the market. He supposedly got in and got out, bought and sold, without leaving a trace. But then I began doing the math. I knew that there was in existence a total of $9 billion of OEX index put options on the Chicago Board Options Exchange (CBOE). Madoff claimed to be hedging his investment with short-term (meaning 30 days or less) options. You can realistically purchase only $1 billion of these, and at various times Madoff needed $3 billion to $65 billion of these options to protect his investments—far more than existed. This was a breathtaking discovery. There simply were not enough options in the entire universe for him to be doing what he claimed he was doing. If that wasn’t sufficient proof, then assuming that those options actually existed, the