Markopolos eyes a fortune from BNY whistleblowing

By Felix Salmon
October 12, 2011
just got a lot more cloak-and-dagger: apparently all of them can be traced back, in one way or another, to a secret plan hatched by none other than Harry Markopolos.

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The suits and investigations into BNY Mellon’s dodgy FX trading just got a lot more cloak-and-dagger: apparently all of them can be traced back, in one way or another, to a secret plan hatched by none other than Harry Markopolos.

Mr. Wilson’s decision to become a whistleblower started with Mr. Markopolos, the fraud investigator, who had the 2006 hunch about currency-transaction costs. Over the past four years, he and his legal team contacted Mr. Wilson and two former State Street employees, Peter Cera and Ryan Gagne, to secretly help build cases against the two banks…

Working with the legal team, Mr. Markopolos arranged clandestine meetings with the whistleblowers at a shopping center and hotel restaurants…

Mr. Markopolos’s hunch came from a book by Yale University’s chief investment officer, in which a description of currency transactions stuck out: “Foreign exchange translations may influence returns in a substantial, unpredictable manner.” Mr. Markopolos also noticed that pension funds using outside money managers reported slightly lower returns than the money managers themselves.

He asked a friend who had worked at State Street, who told him that custody banks typically charge pension funds unfavorable foreign-exchange, or FX, prices. The friend told Mr. Markopolos, “No one ever checks FX.”

He strategized about how to find bank insiders who could help him look into his suspicions. A key tactic: Looking for traders who might be sympathetic, then cold-calling them and saying, “I have a better job for you.”

The source for this account is clearly Markopolos himself; I do wonder why Markopolos has chosen this time to out his co-conspirators and to boast about his perspicacity and his whistleblower-recruitment technique.

Markopolos can be a little bit crazy — he said recently, for instance, that law enforcement agencies should treat the board of BNY Mellon “like Seal Team 6 treated Osama Bin Laden”. And the story about reading a book by David Swensen just doesn’t ring true to me. If you look at the passage in question (try searching on “unpredictable”, it’s on page 103), Swensen is talking about the optimal number of asset classes to have, and is saying that foreign bonds don’t constitute a particularly sensible asset class. Here’s a bit more of the passage:

Investors cannot know how foreign bonds might respond to a domestic financial crisis, since conditions overseas may differ from the environment at home. Moreover, foreign exchange translations may influence returns in a substantial, unpredictable manner. As a separate asset class, high-quality foreign bonds hold little interest. The combination of low, bondlike expected returns and foreign exchange exposure negate any positive attributes associated with nondomestic fixed income.

In this context, it’s clear that Swensen is talking about the way that fluctuations in foreign-exchange rates affect returns; he’s not talking about the difficulty of getting good FX execution. Or maybe Markopolos is a bit like Matt Zames: someone who, when reading public documents, can see ideas which are invisible to most people’s eyes.

More likely, there’s quite a lot that Markopolos is not telling Carrick Mollenkamp about the genesis of this operation. Enormous sums are at stake here — Markopolos and his team stand to get up to 25% of the amount recovered by the states, and the suits in total are asking for more than $2 billion.

Essentially, Markpolos and his whistleblowers are trying as hard as they can to extract hundreds of millions of dollars from State Street and BNY Mellon, and trouser it for themselves. You can see how Markpolos’s “better job” might have been attractive to someone like Grant Wilson — especially when it involved him staying in his existing job. And it’s certainly a pitch unavailable to journalists looking for this kind of story.

If this tactic ends up paying huge dividends for Markopolos, Wilson, and their team, I also wonder whether the whistleblower space might not start getting a bit more crowded: it’s easy to imagine that in cases like this one, whistleblowing profits could end up being much bigger, and involve much less up-front investment, than short-selling profits. Should short-sellers start thinking about recruiting whistleblowers instead? And also, has anybody asked Markopolos whether he’s short BNY Mellon? He’s on the record saying that it’s “going to go down”. Is there some kind of rule which says that whistleblowers can’t or shouldn’t short the company they’re shopping to the government?

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