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The man who saw through Madoff

Book Review: True financial thriller: The frustrating story of Harry Markopolos and the SEC

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  • Written by  Kim Fowler
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No One Would Listen: A True Financial Thriller, by Harry Markopolos, Wiley, 376 pp., 2010 No One Would Listen: A True Financial Thriller, by Harry Markopolos, Wiley, 376 pp., 2010

No One Would Listen is the firsthand account of Harry Markopolos, the whistleblower who brought down the fraudulent empire built by Bernie Madoff.

Markopolos narrates a tale so full of intrigue, mystery, and nail-biting suspense, it’s hard to believe it actually happened. But all the reader has to do is remember the initial media accounts of the scandal; the incredible amounts of money reported as stolen; the pictures and stories of those trusting souls who gave Bernie Madoff everything they owned to invest in “a sure thing”; the suicides of those who could not bear the losses they sustained; and the criminal trial which sent Madoff  to prison for 150 years (140 years if he’s on his best behavior). Even the recent auction of Madoff’s personal belongings, including shoes, ascots, and his designer boxers reminds us this was a real and devastating fraud with global implications.

But this account is not just about how the crime of the century came to light—that seems to have been the easy part.

Struggling with the SEC

Instead, No One Would Listen is a candid and uncompromising exposé of the financial regulatory bodies, particularly the Securities and Exchange Commission. Throughout the book, Markopolos details the numerous attempts he made to convince someone—anyone—at the SEC to listen to his story. Instead, he and his team were rebuffed, ignored, and discouraged time and again.

Consequently, nearly nine years passed between Markopolos’ first report to the SEC and when the house of cards finally imploded. Over time, the fraud grew exponentially from as much as $7 billion in May 2000 to $50 billion in December 2008.

In the end, the author, whom the SEC saw as an eccentric chasing reward money, became the star witness against the agency charged with protecting the American investor from predators such as Madoff. In a blistering attack, he revealed the flaws, ineptitudes, and outright blundering that existed in the mammoth bureaucracy, laying special blame at the feet of the SEC.

He could do no wrong

In the chapter entitled “The Slot Machine that Kept Coming Up Cherries,” Markopolos, a self-confessed numbers geek, was asked by his employer to develop a financial product to compete with the successful formula Madoff had engineered. Madoff had somehow managed to devise a technique that returned steady income year after year. In fact, when Markopolos examined Madoff’s financial reports, he discovered that Madoff only reported three down months during a seven-year period. There was no model Markopolos could come up with that would provide returns remotely close to those of Madoff’s.

It didn’t take Markopolos long to conclude that whatever Madoff’s process was, it was not legitimate.

Once he verbalized the idea that perhaps Madoff was running a Ponzi scheme, he was quickly criticized by his boss and co-workers alike.

How could he even think Madoff would do such a thing? Madoff was the epitome of everything good and upstanding in the financial, Jewish, and social worlds. He was a generous benefactor and even helped co-found NASDAQ.

No, Markopolos’ conclusions had to be wrong. He was obviously suffering from sour grapes at not being able to replicate a financial product that could compete with Madoff’s.

Now Markopolos’ pride was at stake and he couldn’t let it drop.

Numbers failed to add up

As he began investigating, Markopolos assembled a loose-knit team of sleuths, all equally intrigued and puzzled by Madoff’s success. Over the course of time, they realized that if Madoff’s numbers were accurate, his company was by all accounts the largest hedge fund in the world.

Then again, so much of what they found made absolutely no sense. For instance, there was the never- ending, always present 45-degree rate of return. Next, Madoff’s trading left absolutely no footprints in the market.

If he was buying, someone had to be selling, right?  In fact, there weren’t enough existing options in the entire marketplace to cover the volume of Madoff’s purported trades.

Then there was the “pact” all of his clients seemed to buy into. Each one was sworn to secrecy, believing Madoff was doing a special favor by only trading for them and no one else. (Can you say, “Pass the Kool-Aid?”)

For those who did try to do some due diligence, Madoff simply refused to do business with them.

Surprising view of Madoff in Europe

Only after making an overseas trip did Markopolos discover that Madoff was bigger in Europe than he was in the States. However, the overseas foreign investors, most acknowledging that Madoff was a crook, all thought they were taking advantage of him.

If Bernie did go down, they thought, the legal arm of the U.S. could not reach them and their offshore investments. It was at this point Markopolos realized how potentially dangerous being a whistleblower could become. If he managed to bring down Madoff, would the Russian Mafia soon be waiting for him in an alley?

But, what good is being a whistleblower when the one whose attention you are trying to get is deaf, dumb, mute, and apparently pathetically incompetent, to boot? In the fall of 2008, as many hedge funds were beginning to collapse, Madoff, remarkably, still turned a profit. But he could not continue to “feed the monster” and he was leveraging everything he had to keep all the spinning plates in the air.

The pyramid begins to crumble

After nine years and five attempts at submitting a complete investigation to SEC, Markopolos and his team began to see cracks in the veneer. All they could do was to stand by and watch as everything came crashing down on Dec. 12, 2008. On that day, Madoff admitted to the FBI he had indeed been running a Ponzi scheme.

Eventually, Congressional hearings (headed by House Financial Services Committee Chairman Barney Frank) and a specially appointed investigator detailed just how inept and ill-equipped the federal agencies were. The SEC, at first behaving as though it had never heard of Harry Markopolos, did nothing to help its case. The Special Commission was livid and for all intents and purposes eviscerated the SEC, publicly accusing them of being worthless.

Some victories for Markopolos

Over the last two years, the SEC has made some notable changes. That includes sending its examiners to Certified Fraud Examiner training, and becoming more proactive in trying to identify risky markets and firms.

In fact, many of the reforms Markopolos and his team proposed are being instituted.

And it’s not too hard to connect the dots to see that the Madoff scandal has had an unmistakable impact on the recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act. The act includes provisions to compensate whistleblowers on successful actions relating to SEC violations. While certain conditions must be met in order to receive a reward, it is thought the resulting payments could be substantial. The bill also includes provisions to protect a whistleblower from retaliation, allowing them to submit their information through an attorney on an anonymous basis.

Interestingly enough, the identity of the whistleblower will be disclosed once the reward is turned over. I just wonder how many whistleblowers might feel threatened by that bit of news.

A witty read that sometimes goes a bit far

I love using metaphors as much as anyone and the author weaves them in throughout the text—sometimes going a bit overboard. In fact, you’d be hard pressed to find a page in the book that does not have a metaphor of some sort.

Nevertheless, I often found myself laughing out loud or reading an excerpt to whomever might be in the room with me at the time. Aside from the humor, the author’s vivid style brought to life the maddening frustrations he felt and the absolute fear he experienced once he knew he had crossed over the line to becoming a whistleblower.

Anyone with a deep-seated sense of justice will feel their own blood boil as they read about the blatant disregard and willful blindness exhibited by SEC.

Lastly, I must mention that one of my favorite parts of the book was at the very beginning: the list of “Who’s Who.”

I can’t tell you how many times I’ve wished for just such a list. I’m sure I’m not the only one who has read a book and found themselves jotting down characters’ names and traits. The list helped me to keep up with the good guys, the bad guys, and, of course, the bozos.

The mere idea of reading a fact-based account about a hedge fund fraud might turn some away, but don’t be fooled. This is a fascinating book with lots of excitement. Numbers-geek or not, Harry Markopolos crafted this incredible event into a captivating page-turner.

As Markopolos continues on his endeavors to uncover fraud in the world of the whistleblower, I can only hope that he will find time to write again. But let’s all hope someone will listen a bit sooner.
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