No One Would Listen: A True Financial Thriller
No One Would Listen: A True Financial Thriller
Bernie Madoff was a king of the financial world and a beloved philanthropist. But very few people knew that he was quietly running the largest hedge fund in the world, a fund that eventually spread to over forty nations and handled tens of billions of dollars.
Harry Markopolos was a little-known number cruncher at a Boston equity derivatives firm analyzing investment products. A marketer for that firm, Frank Casey, handed Harry a prospectus outlining Madoff’s strategy and asked him to create a similar product. Harry sat down and looked at the numbers. The numbers didn’t add up. For the next ten years, the investigative team Markopolos recruited warned the government, the industry, and the financial press that the largest and most successful hedge fund in the industry was a total fraud and that the respected and admired Bernie Madoff was a crook. But no one would listen.
This is the thrilling, complete story of the pursuit of the greatest financial criminal in history. The incredible investigation takes listeners inside the financial industry, revealing the never-before-told stories behind the headlines. No One Would Listen is the frighteningly true story of massive fraud, governmental incompetence, and criminal collusion that has changed thousands of lives forever—as well as the world’s financial system.Harry Markopolos and his team of financial sleuths discuss first-hand how they cracked the Madoff Ponzi scheme
No One Would Listen is the exclusive story of the Harry Markopolos-lead investigation into Bernie Madoff and his $65 billion Ponzi scheme. While a lot has been written about Madoff’s scam, few actually know how Markopolos and his team-affectionately called “The Fox Hounds” by Markopolos himself, uncovered what Madoff was doing years before this financial disaster reached its pinnacle. Unfortunately, no one listened, until the damage of the world’s largest financial fraud ever was irreversible.
Since that time, Markopolos openly has testified and questioned the enforcement and fraud investigation capabilities of the Securities and Exchange Commission (SEC), shared a sliver of this page-turning story with 60 Minutes, and become perhaps the world’s most visible and insightful whistleblower on fraud and conflicts of interest in financial markets.
Throughout the book, Markopolos and his Fox Hounds tell their first-hand story of investigating Madoff-with the help of bestselling author David Fisher. They explain how they discovered the fraud, and then how they provided credible and detailed evidence to major newspapers and the Securities and Exchange Commission (SEC) many times between 2000 and 2008, only to have his warnings ignored repeatedly by the SEC.
- Provides a firsthand account of how Markopolos uncovered Madoff’s scam years before it actually fell apart
- Discusses how the SEC missed the red flags raised by Markopolos
- Describes how Madoff was enabled by investors and fiduciaries alike
- The only book to tell the story of Madoff’s scam and the SEC’s failings by those who saw both first hand
Despite repeated written and verbal warnings to the SEC by Harry Markopolos, Bernie Madoff was allowed to continue his operations. No One Would Listen paints a vivid portrait of Markopolos and his determined team of financial sleuths, and what impact they will have on financial markets and financial regulation for decades to come.
A Timeline of a Take-Down
Amazon-exclusive content from author Harry Markopolos
How long did it take to uncover and expose a $40 billion crook? Ten years.
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1998-1999
• 1998: My Firm “discovers” Bernie Madoff
• Late 1999: I am asked to reverse engineer Madoff’s returns
2000
• I knew he was a fraudster in 5 minutes
• May: Submission to SEC Boston Regional Office’s Director of Enforcement with 12 Red Flags
2001
• January: Team Member Frank Casey recruits MAR Hedge investigative journalist Michael Ocrant onto the team during a chance meeting in Barcelona, Spain
• March: My 2nd SEC Submission on how I think Madoff is running the scheme and his investment process
• I offer to go undercover to assist the SEC
• Apr: Michael Ocrant interviews Madoff
• May: MAR Hedge publishes Madoff expose, “Madoff Tops Charts; skeptics ask how”; Barron’s publishes, “Don’t Ask, Don’t Tell: Bernie Madoff is so secretive, he even asks investors to keep mum”
2002
• Jun: Key trip to UK, France & Switzerland; met with 20 Fund of Funds & Private Client Banks: 14 have Madoff and report “special access to Madoff”; two have admitted Madoff losses – Dexia Asset Management and Fix Family Office; 12 have not admitted Madoff losses and all 12 were turned into SEC Chairwoman on Feb. 5, 2009; off-Shore funds attract three types of investors who won’t report losses or file SIPC claims with the US government
2003-2004
• E-mail records of investigation lost; attempting to recover data from non-functioning hard drives
2005
• Jun: Frank Casey discovers Madoff attempting to borrow money from European banks (first sign that Madoff scheme is in trouble)
• Oct: Boston SEC’s Ed Manion arranges for 3rd SEC Submission
• Oct: Meeting with Boston SEC Branch Chief Mike Garrity, who quickly investigates, finds irregularities, and forwards my submission to SEC’s New York Office
• Nov: Boston Whistleblower calls NYC Branch Chief Meaghen Cheung and reveals his identity
• Nov: 29 Red Flags submitted
• Dec: I doubt NYC SEC’s ability, fear for my life, and contact Wall Street Journal and go to local law enforcement for protection
2006
• Jan: Integral Partners’ $40 million derivatives Ponzi Scheme goes to trial five years and five months after discovery, causing us to further doubt SEC competence
• Sep: Chicago Board Options Exchange VP tells me that several OEX option traders also think Madoff is a fraudster; if SEC had called the CBOE’s marketing office, they would have cooperated
2007
• Feb 28: Neil Chelo obtains a Madoff portfolio which shows zero ability to earn a return
• Jun: Casey obtains Wickford Fund LP prospectus showing Madoff is short of cash and offering a 3:1 leverage via bank loans, another clear warning sign that Madoff is running short of cash
• Jul: Chelo obtains Fairfield Greenwich Sentry LP financial statements for 2004 – 2006 and discovers three year-end audits with three different auditors in three different countries!
• Aug: Chelo conducts a 45 minute telephone interview with Fairfield Greenwich’s head of risk management; hedge funds all lose money except for Madoff!
2008
• Apr 2: Undelivered e-mail to Sokobin, SEC’s Director of Risk Assessment, entitled, “$30 Billion Equity Derivatives Hedge Fund Fraud in New York”
• Dec 11: Madoff runs out of money, turns himself in
• Dec 12: SEC insider calls me and warns “watch your back, Operation Cover-up has begun.”
2009
• Feb 4: My U.S. House testimony followed by SEC’s senior staff and FINRA acting CEO
• Sep 4: 477-page SEC IG Report on the Madoff Fiasco released
• Sep 10: I testify before US Senate Banking Committee with SEC IG
User Ratings and Reviews
2 Stars Extremely boring
shortest review I have ever written: Boring /way too technical/ a good story badly told / and arrogant
5 Stars No one would listen
Harry Markopolos’s book NO ONE WOULD LISTEN gave me a detailed blue print into the twisted reality of human behavior when it comes to money. A must read for every business student on the planet. Of course I would suggest that every government worker involved with regulating the financial institutions of this country should read this book, but, it seems to me they lack this skill.
5 Stars The financial crisis takes down Madoff. Markopolos takes down the SEC
This is a sensational story about the largest Ponzi scheme ever facilitated by the most incompetent financial regulator: the SEC. Congress is currently undertaking financial reform. But, Markopolos warns regulations are only as good as the regulators.
The best way to read this book is to start with Appendix B where Markopolos makes his case to the SEC and explains clearly why Bernie Madoff (BM) is running a Ponzi scheme. Next, move on to Attachment 1: that shows the unreal 15 year investment track record of Fairfield Sentry, a large feeder fund that invested all its assets with BM. Thus, Fairfield Sentry’s disclosure is a perfectly transparent window on BM’s claimed performance. Next, move on to Appendix A to read the excellent article by Michael Ocrant written in 2001. It is one of the first public article that raises worrisome questions about BM. Ocrant will become a member of Markopolos four-man investigative team. After reading this material at the end of the book, you will have an insider understanding of this Ponzi scheme.
Markopolos uncovering this Ponzi scheme boils down to two basic concepts. BM virtually never experienced any material losses. To do that he had to buy Puts very close to being in the money. Those would be financed by selling Calls also close to being in the money. As a result, Markopolos knew he could only earn T-Bills like returns instead of the15% per year before fees. The second impossibility is that BM funds required option positions that were at all times a lot greater than the entire volume outstanding S&P 100 index options he claimed he used. That is just not possible.
Markopolos investigation has a clear motivation. The manager of the Rampart hedge fund where he worked puts relentless pressure on Markopolos to come up with a competing product to BM. No matter how often Markopolos tells his boss, you can’t compete against fake numbers the latter orders Markopolos to come up with a competing product anyway. Tired of this situation, Markopolos decides to uncover Madoff.
No one would listen to Markopolos. Besides the SEC, he shared his findings with The Wall Street Journal, Forbes, and Eliot Spitzer, the former NY Attorney General. They all did not listen to his stuff. In the case of Spitzer, Markopolos suspected it may be because Spitzer invested in the BM funds. Yet, all the U.S. investment banks did not touch BM because they all understood he was running a Ponzi scheme. If among the outsiders no one would listen… among the insiders no one would speak up. Markopolos was determined to change that. He quits his job at Rampart and becomes a full time fraud investigator in 2004.
The SEC just won’t listen to Markopolos. Markopolos fully informed the SEC about Madoff’s Ponzi scheme in 1999, 2000, 2001, 2005, and 2007. The SEC would have to just obtain records of Madoff trades and confirm those were fictitious to arrest him. But, the SEC did only one meaningless investigation in 2006 where they just requested Madoff to register as an investment advisor. Only the financial crisis brought Madoff down. In December 2008, Madoff investors requested $8 billion in redemption that he could not meet. He confessed to his family the whole thing was a Ponzi scheme. And, his sons turned him in to authorities. The FBI arrested Bernie Madoff. The SEC made no difference.
Markopolos states the SEC has the wrong set of skills. SEC staffers are lawyers instead of financial experts. Thus, in our complex world the SEC is not equipped to protect investors. Markopolos makes 13 recommendations on how to restructure the SEC and its governing the securities industries. Some of those include replacing lawyers with financial experts, increase pay scale to attract top talent, overhaul the SEC examination process, relocate the SEC headquarter from Washington DC to New York where the expertise is, and develop a whistle blower program similar to the ones of the IRS and DOJ. It all makes good sense.
Markopolos takes down the SEC hierarchy. After Bernie Madoff was caught, Markopolos makes a Congressional testimonial that is devastating to the SEC. He demonstrates the SEC incompetence and illicit cooperation with the industry it is deemed to regulate. Within days of his Congressional hearing many of the senior SEC executives resign. Within less than five months they are all gone. And, their replacements conduct an honest internal investigation of why they did not listen to Markopolos. They interview Markopolos at length.
Why did Bernie Madoff’s Ponzi scheme succeeded for so long? It is because he offered everyone a deal to good to pass up.
For investors, he offered irresistible returns. Over the period 1990 to 2005 described in Attachment 1, BM funds earned 10.93% per year net of fees and beat the S&P 500. More importantly, BM funds bore only 24% of the risk of the S&P 500 with a standard deviation of only 4.24% vs 17.88% for the S&P 500. Gateway fund that used a strategy most similar to the BM funds earned only 4.54% per year over the same period hardly beating T-Bills at 4.15%. And, Gateway’s risk was still a bit higher than BM funds at 5.13%. The Efficient Market Hypothesis dictates that higher returns are associated with higher risk. But, BM funds combination of high returns with impossibly low risk were so far above the Efficient Frontier as to be unreal. But, his investors decided to believe in BM’s superior market timing, black box model, and even his front-running instead of deducing the obvious: this could only be a Ponzi scheme.
For investment managers, he offered an irresistible deal. The standard hedge fund charges 1% of assets and 20% of yearly returns. The feeder funds that diversify over several hedge funds usually tag on very small fees on top of the hedge funds very high fees. But, Bernie Madoff gave away the entire 1%/20% fee to the feeder funds. Thus, feeder funds were making as much with BM as if they were the original hedge fund! The feeder funds fees represented a fat 4% of assets. This indicated that BM returns before fees had to be a staggering 15% over the long term. Indeed, 15% times (1 - 20%) - 1% = 11% or BM return net of fees.
Investors losses were massive. Since 1991, David Sheehan, chief counsel of the trusteeship that resolved the BM affairs, gathered that investors invested about $36 billion. The $36 billion invested at different times rose to $65 billion in funny money by December 2008. Of the original $36 billion, investors got back $18 billion (or half). Remember in a Ponzi scheme not all funds are wiped out. The later investors repay the earlier investors in the fund.
So how much did the SEC failure cost investors? If the SEC had acted upon Markopolos first investigation in 1999, at that point BM had about $5 billion under management. Assuming investors would have received back close to half that amount in redemption as they did later, the loss to investors would have been $2.5 billion or only 1/7th the loss they incurred a decade later.
Markopolos finds out fraud is prevalent. As a fraud investigators he uncovers 20 market-timing frauds. That’s when an investment fund buys international stocks after the U.S. market has ran up and closed but before the international market has opened and captured the upcoming rise in price. He reports those 20 cases to the SEC. They don’t act on any of them. Markopolos also indicates front-running is rampant. That’s where a broker/dealer places his own order just before the ones of his clients to benefit from the upcoming pick up in prices. Markopolos has also investigated pharmaceutical and other medical frauds exploiting the Medicare fund. He says Big Pharma makes Wall Street look good. Hopefully, the health care and financial reforms will curb those abuses.
5 Stars Well Written and Captivating from the Beginning
The Madoff fraud was the biggest con in the history of the world, and Harry Markopolos and his team of Frank Casey, Neil Chelo and Mike Ocrant are true heroes for trying to ring the bell and get the SEC to do its job.
That goes without saying.
What needs to be said, however, is that this book is a genuinely fun read. This is more than a good tale; it is a tale well told.
Markopolos can write and he is both funny, insightful and appropriately outraged at “the big wink” given to lying, stealing and cheating on Wall Street.
Buy this book; it is as well written as anything produced by John Grisham, but has the advantage of being TRUE.
5 Stars worthwhile read
interesting insight into Madoff and the SEC.
I have been involved with SEC work or their impact on by business for a long time.
they really were horrible in this case and acted like what a lot of people think is wrong with government, protect who you are supposed to be checking. (the current oil spill is an example of a similar government agency) I hope the new changes make it more effective.
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