Mathematical analysis in 1999 showed Madoff's returns were unreal.
Here is his 2005 report to the SEC:
Boston - His repeated warnings that Wall Street money manager Bernard Madoff was running a giant Ponzi scheme have cast Harry Markopolos as an unheeded prophet.
But people who know or worked with Markopolos say it wasn't prescience that helped him foresee the collapse of Madoff's alleged $50 billion fraud. Instead, they say diligence and a strong moral sense drove his quixotic, nine-year quest to alert regulators about Madoff.
"He followed through on everything he ever did. He never let up," said his mother, Georgia Markopolos, in an interview Thursday. "Some kids just let it go if it's too hard, but he wouldn't do that."
"He feels very sorry for these people that got taken," she added. "It wouldn't have happened if they would have listened to him long ago."
Markopolos waged a remarkable battle to uncover fraud at Madoff's operation, sounding the alarm back in 1999 and continuing with his warnings all through this decade. The government never acted, Madoff continued his ways, and people lost billions.
Markopolos reached his conclusion with the help of mathematicians like Dan diBartolomeo, whose analysis of the Madoff's methods in 1999 helped fuel Markopolos' suspicions.
"People should have seen the writing on the wall," diBartolomeo said.
Researching Madoff's numbers, using data the firm distributed to prospective investors, diBartolomeo concluded within hours that it was impossible for Madoff to get the returns he reported while using the strategy he said he used.
"As the market goes up and down, this strategy should have done a little better or a little worse, just like everybody else," he said. "Instead, it appeared to be indifferent as to whether the market went up or down. They made money all the time."
Markopolos complained to the SEC's Boston office in May 1999, saying it was impossible for the kind of profit Madoff was reporting to have been gained legally.
But Madoff continued to thrive, even as Markopolos continued to pursue the case.
In 2005, he submitted a report to the SEC saying it was "highly likely" that "Madoff Securities is the world's largest Ponzi scheme." In the report, he says he knew his research could ruin people's careers and asked the SEC be discreet about circulating the report and his name.
"I am worried about the personal safety of myself and my family," he wrote.
The report highlights 29 "red flags" about Madoff's business, among them the returns of a third-party hedge fund managed by Madoff's firm which had negative returns in just seven on the 174 months Markopolos analyzed.
"No major league baseball hitter bats .960, no NFL team has ever gone 96 wins and only 4 losses over a 100 game span, and you can bet everything you own that no money manager is up 96% of the months either," he said.
His warnings were heard too late, and he's become a symbol of a botched oversight of Madoff by the SEC. His mother says the father of three boys under 5 has been bombarded by media requests. Now, a man who tried to be heard for years is going to lay low for a bit, she said.
"Right now, he's out relaxing some place," he said. "I can't even get in touch with him."
See also this interview with James Hedges, who knew absolutely that something was wrong with Madoff’s company.
James Hedges suspected there was something wrong a decade ago.
James Hedges, President and founder of LJH Global Investments in Naples, Fla., has invested billions in hedge funds and private equity since 1990 through relationships with numerous hedge funds.
Barron's chatted recently with Hedges about why he was able to dodge a bullet when he walked out of Madoff's offices eleven years ago without a deal.
Barron's: You once took a pass on investing in Bernie Madoff's fund. What troubled you?
Jim Hedges: I went in 1997 to meet Madoff, and spent two hours with him in his offices. His manner with me was wildly outside the traditional rapport I have had with managers and the kinds of access I have had to managers. I was told it was unusual for him to meet with anyone for that length of time, and that he was perturbed with the process. His whole tone during the meeting was curt, truncated, and he volunteered nothing. It was an extraction process to get him to answer anything. He was distracted the whole time, looking at people out on the trading floor through the glass wall of his office. Mind you, I was coming in to potentially invest billions of dollars for prominent families and institutions, representing extraordinarily well-known clientele. I couldn't be more the type of person for whom you would open up the kimono. And what it told me was that it was a fraud, full-stop. It was wildly impressionable on me. I have said over the years to many people: Do not touch Madoff with a barge pole.
Q: What didn't you like in that initial interview?
Is the U.S. government going to continue to bail out rich people and banksters and hucksters for behaving so stupidly? Doesn't Darwinian "survival of the fittest" also apply to them?