Book Review: No One Would Listen (Harry Markopolos on Bernie Madoff)

You can't really criticize Harry Markopolos. He was right. He had spotted something wrong with Bernie Madoff years before the biggest Ponzi scheme collapsed. Unlike many others, Markopolos contacted the Securities and Exchange Commission about his suspicions. They ignored him. Markopolos went to the press, but no meaningful article came of it.

When Madoff's scheme collapsed and he  turned himself in, Markopolos became lauded by the press, testified in Congress about the failings of the SEC, and was even offered the job of Chairman of the SEC by an ill-informed Congressman. No One Would Listen is another step in the Markopolos victory lap.

He celebrates his brilliance in discovering the fraud and the incompetence of the SEC for not stopping it. He fills his attacks with similes:

"His returns were as reliable as the swallow returning to Capistrano."

"As I continued examining the numbers, the problems with them began popping out as clearly as a red wagon in a field of snow."

Markopolos lays out how he first ran into Madoff and the years he spent trying to figure out how Madoff was generating his returns. Eventually, he came to the conclusion that he couldn't do it. Since Madoff ran a big trading organization, he could have been front-running orders to generate illicit profits. Effectively, he would be stealing from his brokerage customers and giving it to his money management operations.

The other likely possibility was that Madoff was making up his returns and using new funds coming in to redeem those leaving. Markopolos could not find any footprints of Madoff's split-strike trading strategy. There didn't seem to be enough options traded on the markets to support the amount Madoff had under management.

I think it's important to see why Markopolos was focused on Madoff. The principals at his firm wanted him to reverse engineer Madoff strategy so they could offer a similar product to their clients. Markopolos could not figure out how Madoff was generating his steady returns. He first contacted the SEC as a way to get his boss off his back. If he could prove Madoff was a fraud, his boss would quit demanding that Markopolos duplicate the Madoff strategy.

Markopolos starts off  No One Would Listen by stating that he made five separate submissions to the Securities and Exchange Commission over a nine-year period. So far, I've only seen one, his December 22, 2005 letter. Frankly, I found the letter to be a rambling, half-coherent diatribe. It was penned by a competitor who couldn't figure out the trading strategy of the legendary Bernie Madoff, the founder of NASDAQ.

As Chris MacDonald notes "Markopolos is a bit of a strange cat. He's a likeable guy, and apparently a man of integrity, but also a bit paranoid-sounding." (He had seen the new movie, Chasing Madoff, based on the book.)

Clearly the SEC was unable to stop Madoff. Was it their fault?  Yes. They relied on the well-established credentials of Madoff and dismissed the paranoid ramblings of an eccentric analyst. Markopolos's barbs against the SEC are over-the-top and eventually got distracting. On top of that, I was often distracted by his misuse of "principle" instead of "principal" in the book. You would think that a financial analyst would know the difference.

For additional commentary on developments in compliance and ethics, visit Compliance Building, a blog hosted by Doug Cornelius.

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