Table of Contents
Title Page
Copyright Page
Dedication
Foreword
Who’s Who
Investigation Team and Advisers
Madoff and Advisers
Wall Street Feeder Funds
Financial Wizards and Wall Street Brains
Journalists
Government Officials
Introduction
Chapter 1 - A Red Wagon in a Field of Snow
Chapter 2 - The Slot Machine That Kept Coming Up Cherries
Chapter 3 - Falling Down the Rabbit Hole
Chapter 4 - Finding More Peters (to Pay Paul)
Chapter 5 - The Goddess of Justice Wears a Blindfold
Chapter 6 - Didn’t Anyone Want a Pulitzer?
Chapter 7 - More Red Flags Than the Soviet Union
Chapter 8 - Closing the Biggest Barn Door in Wall Street History
Chapter 9 - Soaring Like an Eagle Surrounded by Turkeys
Epilogue
Appendix A - Madoff Tops Charts; Skeptics Ask How
Appendix B - The World’s Largest Hedge Fund Is a Fraud
Appendix C - Online Resource Guide for the Classroom and Beyond
A Note on Sources
About the Author
Acknowledgements
Index
Photo Insert
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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
&nbs
p; 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
George Devoe, CFA, Chief Investment Officer, Rampart Investment Management Company
Elaine Drosos and family, owners of the Venus Cafe in Whitman, Massachusetts
Dave Fraley, managing partner, Rampart Investment Management Company
Scott Franzblau, Principal, Benchmark Plus
Bud Haslett, CFA, Chief Option Strategist, Miller Tabak Securities
Dave Henry, CFA, Chief Investment Officer, DKH Investments in Boston, Massachusetts
Chuck Hill, CFA, succeeded Markopolos as president of the Boston Security Analysts Society
Daniel E. Holland III, Managing Director, Goldman Sachs in Boston
Debbi Hootman, Darien Capital Management
Greg Hryb, CFA, Darien Capital Management
Louie Markopolos, Harry’s younger brother
Matt Moran, Vice President of Marketing, Chicago Board Options Exchange
Peter Scannell, Putnam Investments’ Quincy employee who filed a claim with the Securities and Exchange Commission
Rudi Schadt, PhD, Director of Risk Management, Oppenheimer Funds
Diane Schulman, False Claims Act fraud investigator
Jeb White, President, Taxpayers Against Fraud
Burt Winnick, Managing Partner, McCarter & English in Boston
Bill Zucker, attorney, McCarter & English
Journalists
Erin Arvedlund, Barron’s magazine reporter
Reuben Heyman-Kantor, 60 Minutes
Andy Court, 60 Minutes
John “Front Page” Wilke, Wall Street Journal reporter
Greg Zuckerman, Wall Street Journal reporter
Government Officials
Securities and Exchange Commission (SEC)
David Becker, General Counsel
Steve Cohen, attorney
Christopher Cox, former Chairman
David Fielder, Assistant Inspector General
Noelle Frangipane, Deputy Inspector General
Robert Khuzami, current Director of Enforcement
David Kotz, Inspector General
Lori Richards, former Director, Office of Compliance, Inspections and Examinations
Mary Schapiro, current Chairman
Jonathan Sokobin, Deputy Chief Economist, Office of Economic Analysis, and Director of Risk Management
Heidi Steiber, Senior Counsel
Linda Thomsen, former Director of Enforcement
Andrew Vollmer, former Acting General Counsel
John Walsh, Chief Counsel, Office of Compliance, Inspections and Examinations
Chris Wilson, Senior Counsel
David Witherspoon, Senior Counsel
Boston Regional Office
Jim Adelman, former senior enforcement attorney
David Bergers, former New England Regional Director of Enforcement, who replaced Grant Ward, current Regional Administrator
Michael Garrity, Assistant Regional Director
Edward Manion, Senior Staff Accountant
Juan Marcelino, former Regional Administrator
Joseph Mick, Assistant Regional Director
Walter Ricciardi, former Regional Administrator
Grant Ward, former New England Regional Director of Enforcement
Northeast Regional Office in New York
Doria Bachenheimer, Assistant Director of Enforcement
Meaghan Cheung, Branch Chief
Peter Lamoure
Simona Suh, enforcement attorney
Senate
Jeff Merkley (D-OR)
Chuck Schumer (D-NY)
House of Representatives
Gary Ackerman (D-NY)
Shelly Capito (R-WV)
Joe Donnelly (D-IN)
Barney Frank (D-MA), Chairman of the House Financial Services Committee
Scott Garrett (R-NJ), Ranking Member, House Capital Markets Subcommittee
Al Green (D-TX)
Paul Kanjorski (D-PA), Chairman of the House Capital Markets Subcommittee
Carolyn Maloney (D-NY)
James Segel, Special Counsel to the House Financial Services Committee
Brad Sherman (D-CA)
Other
Andrew Cuomo, current New York State Attorney General
William Galvin, Massachusetts Secretary of the Commonwealth
Eliot Spitzer, former New York State Attorney General
Kathleen Teahan (D, Plymouth), Markopolos’s former local Massachusetts state representative
Introduction
On the rainy afternoon of June 17, 2009, David Kotz sat patiently in a small room with a single barred window at the Metropolitan Correction Center, a prison in lower Manhattan, waiting to interview Bernard Madoff, the mastermind behind the greatest financial crime in history. Kotz, the Securities and Exchange Commission (SEC) inspector general, was investigating the total failure of his agency to expose Madoff’s $65 billion Ponzi scheme—even after I’d warned the SEC about it in five separate submissions over a nine-year period.
Kotz and his deputy, Noelle Frangipane, sat across from an empty chair, and on either side of it sat Madoff’s two attorneys, Ira Lee Sorkin and Nicole DeBello. Eventually Madoff was escorted into the room by a guard, who carefully unlocked and removed his handcuffs. Bernie Madoff had been a king of the financial industry, the widely respected cofounder and former chairman of NASDAQ, the owner of one of Wall Street’s most successful broker-dealers, and a prominent New York philanthropist. Now, wearing a bright orange prison jumpsuit that glared against the drab gray walls of the room, he sat down between his impeccably dressed lawyers.
Madoff had agreed to this interview with the single stipulation that it not be taped or transcribed. Kotz began by explaining to Madoff that he had a legal obligation to tell the truth. The fact that he was to be sentenced a week later may have influenced his decision to talk openly to Kotz. Or it may simply have been his ego making a last grasp for attention. When it comes to assigning motives to Madoff’s actions, who can really say? His motives make him an enigma, even to this day.
As Kotz later recalled, Madoff was overly polite and seemed forthcoming. “I guess we were concerned that all the answers to our questions would be one or two words or he wouldn’t provide much information or his lawyer would cut him off every time he tried to say something, but there was none of that. He answered all of our questions expansive
ly. It seemed like he didn’t hold anything back.”
No One Would Listen: A True Financial Thriller Page 1