Home

Harry Markopolos believes that if the Securities and Exchange Commission would have taken him seriously, $50 billion of the $65 billion investors lost in Bernie Madoff's massive Ponzi scheme would have been saved.

In "No One Would Listen," Markopolos, who as a securities industry executive at Boston-based Rampart Investment Management Co. first reported Madoff to the SEC in 2000, focuses heavily on the watchdog agency's costly ignorance of damning evidence.

When the global recession set in and Madoff's investors rushed to withdraw their money, the Ponzi scheme collapsed and Markopolos was finally credited with being the whistleblower -- while the SEC got a large chunk of the public blame for failing to catch Madoff -- following a story on Markopolos in the Wall Street Journal, an interview he did for "60 Minutes," and his testimony before Congress.

But all of that publicity came much too late for the 339 hedge funds of funds (hedge funds that invest in other investment funds rather than directly in stock and bonds) and 59 asset management companies who invested with Madoff in the largest fraud ever committed. Markopolos details how various parties refused to believe Madoff was a fraud: fund managers because Madoff's return on their investments was so consistent, journalists because he was too prestigious of a figure to take on, and the SEC because the agency's lawyer-heavy staff either didn't understand finance or didn't want to investigate too hard because they aspired to later work in the private sector.

Markopolos and his investigative team of Neil Chelo, Frank Casey, and journalist Michael Ocrant discovered that "there were more red flags in Madoff's claims than in the former Soviet Union," one of a number of colorful metaphors Markopolos uses to illustrate his points. Among the red flags were that Madoff returned investors about a 1 percent gain each month whether the market went up or down; that there was only a 6 percent correlation between Madoff's numbers and the S&P 100 even though Madoff claimed his basket of 35 stocks at any given time corresponded with that index; that the numbers had a 45-degree return line without volatility, which doesn't exist in finance; that Madoff threatened to return investors' money if they spoke about him; that he didn't allow outside accounting audits of his operation; and that major investment firms like Merrill Lynch, Citigroup, Morgan Stanley, and Goldman Sachs didn't invest with him.

Particularly disturbing was the fact that in a month when the market was down 14.58 percent, Madoff's numbers were only down .55 percent. That's why Markopolos calls Madoff's system "the slot machine that kept coming up cherries." Madoff's "split-strike conversion" strategy -- involving buying a basket of stocks and protecting them with put and call options -- limited potential profit if the market rose sharply, protected investors against devastating losses if the market dropped, but in either case needed absolutely perfect market time to succeed like it did in Madoff's statements, Markopolos writes.

Markopolos's dilemma was that Rampart saw Madoff's numbers and requested that he create a financial product to compete with Madoff. As far as Markopolos was concerned, Madoff was either front-running -- using buy and sell information from his brokerage clients at Madoff Securities to illegally buy and sell securities based on trades he knew he was going to make -- or running a Ponzi scheme, meaning he made up his numbers and paid initial investors with funds he received from later investors.

On a whirlwind tour of Europe to pitch Rampart's Madoff alternative, Markopolos -- who initially thought Madoff managed between $3 and $7 billion -- found that he managed far more and that he was also constantly searching for new cash, convincing Markopolos that Madoff was operating a Ponzi scheme rather than front-running.

Since Markopolos had no way of competing with a man who made up his numbers, he decided even before the Europe tour to take his case to the SEC. Despite a multitude of attempts to reveal an obvious case of fraud to the agency, the SEC rejected or ignored Markopolos each time, citing that his submission came from selfish motives because he worked for a Madoff competitor and wanted to expose Madoff to get a cash reward as part of the SEC's bounty program for whistleblowers. However, the bounty program was limited to civil cases of insider trading and therefore doesn't cover Ponzi schemes, refuting the SEC's point, Markopolos writes.

Markopolos concluded that the SEC was "a government agency that had been captured by the private industry it was created to regulate." When he left Rampart to start his own business as a Certified Fraud Examiner, Markopolos continued to investigate Madoff with his team as more of a hobby because he knew the SEC wouldn't catch him, maintaining contact with about 20 hedge funds of funds that invested with Madoff.

Many of the fund managers Markopolos spoke with were suspicious of Madoff's tactics -- some were almost certain Madoff was a fraud -- but still looked the other way because the returns on their investments were too good to be true.

"He was the Wizard of Oz, and he made everybody so happy that they didn't want to look behind the curtain," Markopolos writes of Madoff.

While Ocrant wrote a lengthy piece on Madoff for the MarHedge financial newsletter that Markopolos thought would certainly expose Madoff, nothing came of it and other journalists were reluctant to pursue the story, a trend Markopolos details in a chapter titled "Does Anyone Want a Pulitzer?" Markopolos was convinced veteran Wall Street Journal reporter John Wilke would turn in the groundbreaking Madoff story when presented with the proper materials, but not even Wilke came through and the story sat with the Journal for three years before the Ponzi scheme was revealed.

After Jonathan Sokobin, director of the SEC's Office of Risk Assessment, ignored Markopolos's submission in April 2008, Markopolos officially gave up his pursuit of the Madoff case with the SEC. But when Madoff admitted his scheme later that year, it set the stage for Markopolos's day of glory before Congress in February 2009, when he emphatically stated his views on the SEC's incompetence.

Markopolos's flashy figures of speech, such as "In a nutshell, the SEC staff was not capable of finding ice cream in a Dairy Queen" and "Most of the attorneys at the SEC -- I don't think they could find steak in an Outback" prompted Senate Banking Committee Chairman Chuck Schumer to ask: "Markopolos, do you have any more metaphors for us?" The testimony couldn't have gone better for Markopolos, as it ignited the wrath of those like U.S. Rep. Gary Ackerman (D-N.Y.), who told the SEC: "You couldn't find your backside with two hands if the lights were on ... You have single-handedly defused the American people of any sense of confidence in our financial markets if you are the watchdogs. You have totally and thoroughly failed in your mission."

While Markopolos's investigation managed to bring down a number of senior staff members at the SEC, he admits that his team couldn't foresee the colossal damage Madoff's scheme inflicted on the Jewish community.

"We were focused on the institutional accounts, so we didn't have the slightest concept that Madoff was using separately managed accounts to ransack synagogues for every cent he could pull out of them," Markopolos writes.

Noting that Madoff was referred to as "the Jewish T-bill," Markopolos describes the Jewish aspect of his fraud as an "affinity scheme," meaning that a perpetrator is likely to target people with similar affiliations to his own -- which for Madoff meant wealthy Jews in New York and Florida.

"Historically, almost by definition Ponzi schemes start within a well-defined community, often an ethnic or religious community," Markopolos writes.

"The reason for that is trust; nobody thinks one of their own is going to cheat them, not when they can cheat so many others," he writes. "No One Would Listen" is available on Amazon.com.