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6005301848.Pdf ffirs.indd ii 1/9/10 10:04:33 AM NO ONE WOULD LISTEN ffirs.indd i 1/9/10 10:04:32 AM ffirs.indd ii 1/9/10 10:04:33 AM NO ONE WOULD LISTEN A True Financial Thriller HARRY MARKOPOLOS with Frank Casey, Neil Chelo, Gaytri Kachroo, and Michael Ocrant John Wiley & Sons, Inc. ffirs.indd iii 1/9/10 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, or transmitted 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 America 10 9 8 7 6 5 4 3 2 1 ffirs.indd iv 1/9/10 10:04:33 AM To all the victims—you above all others deserve to know the truth. ffirs.indd v 1/9/10 10:04:33 AM ffirs.indd vi 1/9/10 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 in Wall Street History 203 Chapter 9 Soaring Like an Eagle Surrounded by Turkeys 237 Epilogue Mr. Pinkslip Goes to Washington 267 vii ftoc.indd vii 1/11/10 4:06:35 PM viii CONTENTS 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 viii 1/11/10 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 ix 10/7/11 2:55:59 PM x FOREWORD 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 flast.indd x 10/7/11 2:55:59 PM Who’s Who 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 Offi cer Fairfi eld Greenwich Group Douglas Reid, Managing Director Amit Vijayvergiya, Chief Risk Offi cer xi flast.indd xi 10/7/11 2:55:59 PM xii WHO’ S WHO Financial Wizards and Wall Street Brains Dan DiBartolomeo, Founder, Northfi eld 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 Offi cer, 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 Offi cer, DKH Investments in Boston, Massachusetts Chuck Hill, CFA, succeeded Markopolos as president of the Boston Security Analysts Society Daniel E.
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