EARLY in 2001 I became managing editor of Marhedge, a New York-based hedge-fund publication that owned about the only serious database on the then fledgling industry. I had been a financial reporter around Wall Street for 14 years and was happy to get involved in what I thought was going to be the most dynamic part of the asset-management business.

Soon after I joined, I was stunned to receive a tip from a highly regarded and knowledgeable source, who told me Bernie Madoff, founder and principal of Bernard L Madoff Investment Securities, was, in essence, a fraud. The basis for his charge was simple – Madoff’s claimed investment strategy was incapable of delivering the returns he was getting. It was simply not possible.

This shocked me. Madoff was a legend on Wall Street. He had built his own firm from scratch and it remained an independent market-maker when all others had been acquired by much larger entities. He was a recognised leader in trading technology and had been deeply involved with big Wall Street matters for more than 40 years. He was admired by his peers and seemed to personify the ideals of a former era in which one’s word was one’s bond.

There was no conceivable reason for Madoff to be involved in any improper activity. He had made a fortune and his market-making business remained viable. He lived, as far as could be seen, well within his means.

My source, however, could not be ignored. He was an experienced investment professional who had traded options and developed options-trading strategies for decades, and his views couldn’t be shaken: Madoff was either front-running – trading ahead of his customers based on the market order information he had access to – or he was operating a giant Ponzi scheme.

Soon I was in contact with other sources, many with similar backgrounds. Some of them represented funds of funds that invested in hedge funds that had reviewed the Madoff operation before deciding not to invest. Over the course of three months I would speak with more than a dozen people with long experience in options trading. When I was done, the consensus was clear: the Madoff fund was a fraud.

There were other reasons why all these sources were so certain of their views. They noted that the options contracts Madoff would have to trade would eventually show up at one of the options exchanges. They didn’t. What if much of the trading was being done over-the-counter – outside of the exchanges – I asked? A good number of those trades would still have to be offset in the listed market, according to these experts, and there was no evidence that they ever were.

The consistency of the returns was another signal that something was amiss. At the time, I was provided with data that showed 72 straight months of positive returnsfor the Madoff fund with almost no volatility. No asset manager, not even one who was a computer programming genius given access to all the supercomputers in the world, could create a system that would produce such steady returns, my sources insisted.

But if they were correct, how could so many investors be duped? Among my acquaintances was a rich investor who had placed money with Madoff. I considered my friend to be financially sophisticated. He had come from an ordinary background and made a fortune of about $25m, so I thought him to be cautious and conservative when it came to investing to preserve the wealth he had worked so hard to obtain. After telling him what I had learnt, his response was: “I know all I need to know.”

“What’s that?” I asked. “One percent. I get 1% a month,” he said. “I’ve been with him for three or four years and my returns have been about 1% a month without fail.”

When I noted that as a market-maker Madoff could create legitimate looking statements that might even fool auditors, this investor shrugged off the suggestion by noting that, over the years, he had occasionally asked to redeem some of his profits and had promptly been issued a cheque. “The cheques have never bounced,” he said.

It was time to confront Bernie Madoff himself.

I called his office in early April 2001. His assistant took the message and a short time later Bernie called me back. I explained the story I was working on and the questions about his fund.

“Sure, I understand. Why don’t you come down to my office to talk about it,” he responded without the least hesitation.

“Do you want to give me some days and times when you’ll be available?” I replied.

“No, I mean why don’t you come down now. I’ll wait for you.” Needless to say, I was surprised by his response.

It was perhaps 4pm when I arrived at his office at the Lipstick building in midtown Manhattan. I don’t recall if I met him on the 17th floor where it has been reported he ran the bogus fund-management operations, but I remember being in a large, glass-enclosed office that looked out on a trading floor that was by then fairly empty. He sat me down facing him and asked if he could get me a coffee or a glass of water; his assistant had left by then.

It would be clichéd to say he was cool, calm and collected – but he was.

What about the smooth results he had managed to produce for such a long time? He wasn’t about to reveal proprietary information that could help competitors, he said. In any event, the lack of volatility in the performance of the fund, he explained, was illusory, for there was a great deal of intraday volatility that was not apparent when looking at monthly or annual results.

During the course of our two-hour interview one of Madoff’s sons who, like much of his immediate and extended family, worked for the firm, passed by the window of his office. Madoff waved him in and introduced him to me. Later he gave me a tour of the trading floor and introduced me to a few of the employees.

While I was with him he was courteous, composed, attentive and responsive to my questions. His answers were quick and direct. The exception was his refusal to provide any details about the trading strategy that achieved such results.

That success, he insisted, was related to the firm’s market knowledge and experience, its systems, infrastructure and a number of real but hard-to-define strengths. Most importantly, perhaps, it was due to a “proprietary” automated trading system that used market data to provide signals telling the fund’s managers when to increase or decrease exposure to certain positions.

In retrospect it was an amazing performance, much like the act he apparently gave regularly to potential investors, disarming them with seemingly straight and serious answers, a nonchalant attitude and demeanor, and a certain degree of detachment that was still engaging for the level of professionalism it suggested.

None of my sources was buying it. When I spoke to all of them again, they remained unified in their contention that it just wasn’t possible. It now has come to pass that they were right beyond comprehension. My story, under the headline “Madoff tops charts; sceptics ask how” appeared in May 2001. Bernie continued to pull in investors for the next seven years.

Michael Ocrant is a former financial journalist and now works at Institutional Investor

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