ffirs.indd iiffirs.indd ii 1/9/10 10:04:33 AM1/9/10 10:04:33 AM

NO ONE WOULD L I S T E N

ffirs.indd iffirs.indd i 1/9/10 10:04:32 AM1/9/10 10:04:32 AM

ffirs.indd iiffirs.indd ii 1/9/10 10:04:33 AM1/9/10 10:04:33 AM

N O O N E WO U L D

L I S T E NA True Financial Thriller

HARRY MARKOPOLOS

with

Frank Casey, Neil Chelo,

Gaytri Kachroo, and Michael Ocrant

John Wiley & Sons, Inc.

ffirs.indd iiiffirs.indd iii 1/9/10 10:04:33 AM1/9/10 10:04:33 AM

Copyright © 2010 by Fox Hounds, LLC. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, ortransmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923,(978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department,John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011,fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifi cally disclaim any implied warranties of merchantability or fi tness for a particular purpose.No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profi t or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:Markopolos, Harry. No one would listen : a true fi nancial thriller / Harry Markopolos. p. cm. Includes index. ISBN 978-0-470-55373-2 (cloth) 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

Printed in the United States of America10 9 8 7 6 5 4 3 2 1

ffirs.indd ivffirs.indd iv 1/9/10 10:04:33 AM1/9/10 10:04:33 AM

To all the victims—you above all others deserve to know the truth.

ffirs.indd vffirs.indd v 1/9/10 10:04:33 AM1/9/10 10:04:33 AM

ffirs.indd viffirs.indd vi 1/9/10 10:04:33 AM1/9/10 10:04:33 AM

Contents

Foreword ix

Who’s Who xi

Introduction 1

Chapter 1 A Red Wagon in a Field of Snow 5

Chapter 2 The Slot Machine That Kept Coming Up Cherries 33

Chapter 3 Falling Down the Rabbit Hole 61

Chapter 4 Finding More Peters (to Pay Paul) 89

Chapter 5 The Goddess of Justice Wears a Blindfold 117

Chapter 6 Didn’t Anyone Want a Pulitzer? 147

Chapter 7 More Red Flags Than the Soviet Union 175

Chapter 8 Closing the Biggest Barn Door inWall Street History 203

Chapter 9 Soaring Like an Eagle Surrounded by Turkeys 237

Epilogue Mr. Pinkslip Goes to Washington 267

vii

ftoc.indd viiftoc.indd vii 1/11/10 4:06:35 PM1/11/10 4:06:35 PM

C O N T E N T Sviii

Appendix A Madoff Tops Charts; Skeptics Ask How 287

Appendix B The World’s Largest Hedge Fund Is a Fraud 297

Appendix C Online Resource Guide for the Classroom and Beyond 333

A Note on Sources 335

About the Author 337

Acknowledgments 339

Index 345

ftoc.indd viiiftoc.indd viii 1/11/10 4:06:35 PM1/11/10 4:06:35 PM

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 indefi nitely—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 fl ags. 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 com-pany was cooking the books. The analyst responded that it made him more confi dent in his bullish recommendation because such a com-pany would never disappoint Wall Street.

ix

flast.indd ixflast.indd ix 10/7/11 2:55:59 PM10/7/11 2:55:59 PM

x

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 insti-tutionalized Wall Street, the SEC uses kid gloves, imposes meaningless nondeterring fi nes, 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 man-ager, 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 fi nd out who is swimming naked when the tide goes out.” The fi nancial 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 cor-porations 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

F O R E W O R D

flast.indd xflast.indd x 10/7/11 2:55:59 PM10/7/11 2:55:59 PM

Who’s Who

Investigation Team and Advisers

Frank CaseyNeil Chelo CFA, CAIA, FRMGaytri Kachroo, personal attorneyHarry Markopolos CFA, CFEPhil Michael, qui tam (whistleblower) attorneyMichael Ocrant

Madoff and Advisers

Nicole DeBello, Madoff ’s attorneyBernard Madoff, founder, Madoff Investment Securities LLCIra Lee Sorkin, Madoff ’s attorney

Wall Street Feeder Funds

Access International Advisors and MarketersFrancois de Flaghac, marketingPatrick Littaye, Founder Prince Michel of Yugoslavia, marketingTim Ng, junior partner (and husband of Debbi Hootman)Rene-Thierry Magon de la Villehuchet, Chief Executive Offi cer

Fairfi eld Greenwich GroupDouglas Reid, Managing DirectorAmit Vijayvergiya, Chief Risk Offi cer

xi

flast.indd xiflast.indd xi 10/7/11 2:55:59 PM10/7/11 2:55:59 PM

W H O ’ S W H Oxii

Financial Wizards and Wall Street Brains

Dan DiBartolomeo, Founder, Northfi eld Information ServicesJeff Fritz, Oxford Trading AssociatesLeon Gross, Head of Equity Derivatives Research, CitiGroupAndre Mehta, CFA, super-quant and Managing Director of

Alternative Investments at Cambridge AssociatesChuck Werner, math wizard from MIT

Markopolos’s Friends and Colleagues

Harry Bates, sergeant, Whitman, Massachusetts, Police DepartmentPat Burns, Director of Communications, Taxpayers Against Fraud

(whistleblower organization)Boyd Cook, major general in the National Guard, Maryland dairy farmerGeorge Devoe, CFA, Chief Investment Offi cer, Rampart Investment

Management CompanyElaine Drosos and family, owners of the Venus Cafe in Whitman,

MassachusettsDave Fraley, managing partner, Rampart Investment Management

Company Scott Franzblau, Principal, Benchmark PlusBud Haslett, CFA, Chief Option Strategist, Miller Tabak SecuritiesDave Henry, CFA, Chief Investment Offi cer, DKH Investments in

Boston, MassachusettsChuck Hill, CFA, succeeded Markopolos as president of the Boston

Security Analysts SocietyDaniel E. Holland III, Managing Director, Goldman Sachs in BostonDebbi Hootman, Darien Capital ManagementGreg Hryb, CFA, Darien Capital ManagementLouie Markopolos, Harry’s younger brotherMatt Moran, Vice President of Marketing, Chicago Board Options

Exchange Peter Scannell, Putnam Investments’ Quincy employee who fi led a

claim with the Securities and Exchange CommissionRudi Schadt, PhD, Director of Risk Management, Oppenheimer FundsDiane Schulman, False Claims Act fraud investigatorJeb White, President, Taxpayers Against Fraud

flast.indd xiiflast.indd xii 10/7/11 2:55:59 PM10/7/11 2:55:59 PM

Burt Winnick, Managing Partner, McCarter & English in BostonBill Zucker, attorney, McCarter & English

Journalists

Erin Arvedlund, Barron’s magazine reporterReuben Heyman-Kantor, 60 MinutesAndy Court, 60 MinutesJohn “Front Page” Wilke, Wall Street Journal reporterGreg Zuckerman, Wall Street Journal reporter

Government Offi cials

Securities and Exchange Commission (SEC)David Becker, General CounselSteve Cohen, attorneyChristopher Cox, former ChairmanDavid Fielder, Assistant Inspector GeneralNoelle Frangipane, Deputy Inspector GeneralRobert Khuzami, current Director of EnforcementDavid Kotz, Inspector GeneralLori Richards, former Director, Offi ce of Compliance, Inspections and

ExaminationsMary Schapiro, current ChairmanJonathan Sokobin, Deputy Chief Economist, Offi ce of Economic

Analysis, and Director of Risk ManagementHeidi Steiber, Senior CounselLinda Thomsen, former Director of Enforcement Andrew Vollmer, former Acting General CounselJohn Walsh, Chief Counsel, Offi ce of Compliance, Inspections and

ExaminationsChris Wilson, Senior CounselDavid Witherspoon, Senior Counsel

Boston Regional Offi ceJim Adelman, former senior enforcement attorneyDavid Bergers, former New England Regional Director of Enforcement,

who replaced Grant Ward, current Regional Administrator

Who’s Who xiii

flast.indd xiiiflast.indd xiii 10/7/11 2:55:59 PM10/7/11 2:55:59 PM