No One Would Listen: A True Financial Thriller

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Library of Congress Cataloging-in-Publication Data:

Markopolos, Harry.

No one would listen : a true financial thriller / Harry Markopolos.

p. cm.

Includes index.

eISBN : 978-0-470-62575-0

1. Madoff, Bernard L. 2. Ponzi schemes—United States. 3. Investment advisors—Corrupt practices—United States. 4. Hedge funds—United States. 5. Securities fraud—United States—Prevention. 6. United States. Securities and Exchange Commission—Rules and practice. I. Title.

HV6697.M37 2010

364.16’3092—dc22

2009049433

To all the victims—you above all others deserve to know the truth.

Foreword

Harry Markopolos is a hero.

But not for anything he meant to do. He did not stop Bernie Madoff from creating the largest Ponzi scheme of all time; nor did he save Madoff’s investors any money.

What he did do was create a clearly documented record of his warnings so that
when
Madoff’s scheme eventually toppled under its own weight, the Securities and Exchange Commission (SEC), which
was
charged with stopping fraud and protecting investors, could not assume an ostrich defense.

Ponzi schemes exist in stable disequilibrium. This means that while they can’t ultimately succeed, they can persist indefinitely—until they don’t. Just the fact that something has gone on for a very long time doesn’t mean it’s legitimate. Madoff’s story shows that investors are attracted to too-good-to-be-true situations despite the red flags. How statistically different was Bernie Madoff’s track record from General Electric’s 100-quarter record of continual earnings growth or Cisco’s 13-quarter record of beating analysts’ quarterly estimates by exactly one penny per share between 1998 and 2001? Madoff’s record was clearly implausible and, therefore, raised the question of what was wrong. The question is: Do we draw the line at Ponzi schemes or do we do something about less clear-cut manipulations as well?

One time I pointed out to a Wall Street analyst that a certain company was cooking the books. The analyst responded that it made him more confident in his bullish recommendation because such a company would never disappoint Wall Street.

For years, I observed and experienced the SEC protecting large perpetrators of abuse at the expense of the investors whom the SEC is supposed to protect. The SEC has been very tough, and usually appropriately so, on small-time cons, promoters, insider traders, and, yes, hedge funds. But when it comes to large corporations and institutionalized Wall Street, the SEC uses kid gloves, imposes meaningless nondeterring fines, and emphasizes relatively unimportant things like record keeping rather than the substance of important things—like investors being swindled.

Bernie Madoff epitomized the problem. When he was legit, Madoff was a large broker-dealer and the former chairman of NASDAQ. He was not famous as a money manager, let alone as a hedge fund manager, because he wasn’t one. After his scheme collapsed and he became known as a crook, he was rechristened as a hedge fund operator—even though, to this day, his was the only so-called hedge fund I’ve heard of that didn’t charge a management fee or an incentive fee. I doubt he would have fooled the SEC had he been known as a hedge fund manager, as the SEC would’ve been predisposed to catch him if they had known him with that title.

Warren Buffett said, “You only find out who is swimming naked when the tide goes out.” The financial crisis of 2008 revealed many, including Madoff, to be inappropriately attired. Effective regulation must mean that the skinny-dippers are stopped while the tide is still in.

As you will see, the SEC has taken some steps toward reform, and Harry Markopolos is optimistic that the agency will do better. I’d hold off judgment until the SEC brings cases that matter against large corporations that haven’t gone bankrupt (taking action before the money is lost) and against institutionalized Wall Street.

The silver lining in the Madoff collapse, if there could be such a thing, is that for at least one moment in time, the SEC has been exposed. And for his role in making that happen, Harry Markopolos deserves all of our thanks.

DAVID EINHORN
December 2009

Who’s Who

Investigation Team and Advisers

Frank Casey

Neil Chelo CFA, CAIA, FRM

Gaytri Kachroo, personal attorney

Harry Markopolos CFA, CFE

Phil Michael,
qui tam
(whistleblower) attorney

Michael Ocrant

Madoff and Advisers

Nicole DeBello, Madoff’s attorney

Bernard Madoff, founder, Madoff Investment Securities LLC Ira Lee Sorkin, Madoff’s attorney

Wall Street Feeder Funds

Access International Advisors and Marketers

Francois de Flaghac, marketing

Patrick Littaye, Founder

Prince Michel of Yugoslavia, marketing

Tim Ng, junior partner (and husband of Debbi Hootman)

Rene-Thierry Magon de la Villehuchet, Chief Executive Officer

Fairfield Greenwich Group

Douglas Reid, Managing Director

Amit Vijayvergiya, Chief Risk Officer

Financial Wizards and Wall Street Brains

Dan DiBartolomeo, Founder, Northfield Information Services

Jeff Fritz, Oxford Trading Associates

Leon Gross, Head of Equity Derivatives Research, CitiGroup

Andre Mehta, CFA, super-quant and Managing Director of Alternative Investments at Cambridge Associates

Chuck Werner, math wizard from MIT

Markopolos’s Friends and Colleagues

Harry Bates, sergeant, Whitman, Massachusetts, Police Department

Pat Burns, Director of Communications, Taxpayers Against Fraud (whistleblower organization)

Boyd Cook, major general in the National Guard, Maryland dairy farmer

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