BOOK REVIEW Mad about Bernie Madoff No One Would Listen by Harry Markopolos
Reviewed by Muhammad Cohen
My father says he invented the clock radio. Serving in the Signal Corps during
World War II, he and his roommates attached a mercury switch to an alarm clock
to turn on their radio in the morning so they could wake up to music. But the
invention didn't make my father and his pals rich because they failed to tell
the world about their breakthrough.
Even more surely than my father's clock radio claim, Harry Markopolos uncovered
Bernard Madoff's multi-billion dollar fraud. No One Would Listen is
Markopolos' story of how he and three colleagues uncovered the world's biggest
financial crime, how they blew the whistle on Madoff, and how no one listened.
Trained as a quantitative analyst and army reserve officer, Markopolos was a
fund manager at Rampart Investment
Management in Boston. Like everyone in finance in the 1990s, Markopolos knew
Bernie Madoff's name. Madoff Investment Securities was a principal market maker
for NASDAQ securities. Madoff claimed to be a founder of NASDAQ, the dominant
over-the-counter market, and once served as its chairman. Now he's serving 150
years for fraud in federal prison.
Too good to be true
Even though Madoff was a well-known and respected Wall Street figure,
Markopolos was surprised when salesman Frank Casey returned from a call at
Access International Advisors in New York reporting that Access was using
Madoff as an investment manager. Even more surprising, Madoff was delivering
returns of 1-2% per month. From the start, Markopolos smelled a rat.
Throughout his finance career, Markopolos had seen rules broken and came to
question Wall Street's morality. That ingrained suspicion spiked when he saw
Madoff's unwavering returns. Whether Wall Street went up or down, Madoff's
clients had lost money in only three months in seven years. That track record
offended Markopolos the quantitative analyst; steady returns in all markets
simply didn't happen in the real world.
For Markopolos the fund manager, Madoff wasn't just an abstract academic
problem. Frank Casey and Rampart management wanted a product like Madoff's to
offer clients and pushed Markopolos to produce one. So he began digging deeper
to find evidence that Madoff's fund was crooked. It didn't take long to uncover
Paging Mr Ponzi
Markopolos duplicated Madoff's split-strike options strategy, but couldnít
match the returns. Fund managers that invested with Madoff had a variety of
explanations for his success, but none made sense. A Ponzi scheme - an outright
fraud, using new investors' money to pay off old ones - did.
Charles Ponzi was an American con man who collected $15 million in 1919 by
promising to double investments in three months. He offered a compelling
investment proposition, based on international postal reply coupons that could
be bought at the selling country's postal rates and traded for stamps in a
country where postal rates were higher. But an investigation revealed the
number of postal reply coupons available globally was more than 5,000 times
below the total needed for Ponzi's alleged system to work. Similarly,
Markopolos calculated there were not enough of the derivatives Madoff claimed
to be using being traded, so the fund had to be an outright fraud.
In early 2000, Markopolos submitted his first analysis of Madoff to the
Securities and Exchange Commission (SEC), the US agency that oversees Wall
Street. The analysis included several telltale red flags about Madoff's
operation. According to Markopolos, less than an hour in Madoff's office would
have confirmed fraud. But the SEC couldn't even find Madoff's fund management
office, cleverly placed a floor below his trading operation.
At the time of his first submission, Markopolos believed Madoff was handling
about $5 billion, far more money than any registered hedge fund. By the time
Madoff turned himself in, in December 2008, the total was $65 billion.
Markopolos contends the SEC's bungling cost $60 billion to investors from minor
European royalty to major Jewish philanthropies. In a tested Ponzi ploy, Madoff
reached out to his affinity group and became known as "the Jewish T-bill",
named for the steady, reliable US Treasury bill.
After Markopolos' most detailed submission in 2005, the SEC finally launched an
investigation of Madoff. The government discovered he was running an
unregistered hedge fund - the equivalent of concluding a speeding motorist was
driving - and accepted his fund's registration as a settlement, even though
Madoff told the SEC numerous lies that he thought would sink him.
Markopolos spends much of his book vilifying the SEC for failing to listen to
him and crack the Madoff case he handed it on a silver platter. He proves
convincingly that the SEC is woefully incompetent. But there's plenty of blame
to go around. Many fund managers that heard about Madoff concluded there was
something fishy but, unlike Markopolos, did nothing. Investors happily accepted
returns they knew were too good to be true. The media missed the story for
seven years while it was hidden in plain sight.
In May 2001, "Madoff Tops Charts; Skeptics Ask How" appeared in hedge fund
industry magazine MARHedge. The reporter was Michael Ocrant, who broke
the story of Hillary Clinton's miraculous commodity trading success. Ocrant
interviewed Madoff face-to-face, and the article laid out Markopolos' case with
Madoff's bemused but largely unconvincing replies. Within a week, Barron's
ran a similar article. "The two magazine stories together made as much impact
as a single snowflake," Markopolos wrote. "We had shot our biggest guns, and
our target hadn't even been wounded."
Incredibly, particularly since Ocrant became part of the team tracking Madoff,
Markopolos didn't consider reloading the media gun until 2005. In those four
years, Markopolos' original half-dozen red flags for the SEC had grown to 30.
Each new development and every discovery of billions more under Madoff's secret
control - several times larger than any known hedge fund - gave the team a
reason to pitch the story to news media. But Markopolos and company didn't call
a New York Times or Wall Street Journal reporter until 2005.
Similarly, Markopolos didn't call other law-enforcement agencies or his elected
officials while the SEC floundered. Instead, he got out of finance, became a
professional whistleblower, and grew increasingly bitter and suspicious.
Markopolos seems to have written Nobody Would Listen himself; a decent
ghost writer would have made him much more likable and sympathetic. After
submitting his first report to the SEC, Markopolos regularly calls his biggest
supporter there to declare, "Your agency sucks." The SEC inspector general
found that "personal dislike" for Markopolos led at least one official to
dismiss his submission, and readers won't doubt it. He comes across as a
thoroughly unpleasant figure - self-righteous, quirky, paranoid, prideful,
vengeful and now a sore winner, unsatisfied to have been proven right about
Nobody Would Listen adds a somber coda to the Madoff scandal. After
reading the book, it's hard to remember who the real villain is. It's too bad
that Markopolos didn't broadcast his feelings with the same whistle he blew on
No One Would Listen: A True Financial Thriller by Harry Markoplos.
Hoboken, New Jersey, John Wiley & Sons, 2010. ISBN: 978-0-470-55373-2.
Price US$27.95; 354 pages.
Former broadcast news producer Muhammad Cohen told Americaís story to the
world as a US diplomat and is author of
Hong Kong On Air,
a novel set during the 1997 handover about television news, love, betrayal,
financial crisis, and cheap lingerie. Follow
Muhammad Cohenís blog for more on the media and Asia, his adopted home.