Book Review of: No One Would Listen: A True Financial Thriller by Harry Markopolos

376 pp., including three Appendices, Note on Sources, and Index

(Reprinted from The Analyst, December 2010 issue.)

In December 2008, Bernard Madoff confessed to running the world’s largest Ponzi scheme. This real-life thriller by Harry Markopolos details his five unsuccessful attempts to get the SEC to put a stop to a$65-billion investment fraud. Harry Markopolos spoke to the Toronto CFA Society about his experiences in September 2010.

Early in his Wall Street career as a portfolio manager, Markopolos heard about a fund with an extraordinarily consistent one percent a month return. “I knew what a split-strike strategy was capable of producing, but this particular one was so poorly designed and contained so many glaring errors that I didn’t see how it could be functional, much less profitable.” He spent many hours trying to replicate the strategy and over the years continued to “snoop” on Bernie Madoff’s operations with the assistance of a small band of friends. Eventually he quit his day job to investigate fraud cases (especially market timing) full-time.

Markopolos reported Madoff to the Securities & Exchange Commission (SEC) five times over nine years. The complaints were either ignored or resulted in trivial changes. The most damning evidence was an in-depth 2005 submission to the SEC with 30 red flags about the Madoff operation; these comprise the first half of the book. Turns out discovering and documenting the fraud was not the hard part—getting the SEC to take action was. This book gives some clues why: Markopolos is at times abrasive and the SEC staff, perpetually suspicious of bounty hunters, have grave systemic problems.

After a series of Kafkaesque encounters with the SEC bureaucracy, Markopolos realized he needed to attract the attention of the financial media both for ethical reasons and to ensure his own safety. He established a relationship with a Wall Street Journal senior reporter who, time and again, postponed covering the Madoff story. When the reporter died (of pancreatic cancer), Markopolos writes, “…I didn’t know where else to turn. The government had proven to be wilfully blind to Madoff, and now my attempt to bring the case to the attention of the public had failed. I had been working on this for too many years, and I was finally beginning to consider the possibility that Madoff was untouchable… [he] was the ultimate insider; … [and] I was some quant from Boston nobody had ever heard of.”

After Madoff’s confession in December 2008, the media and Madoff’s victims demanded to know why U.S. regulators did not uncover the Ponzi scheme sooner. Soon the news surfaced that a whistleblower had indeed come forward: five times in nine years.

The SEC cover-up forms the core of the second half of the book. Markopolos captures well the sweet vindication he felt as he testified for two hours before the US Congress: “The SEC is … captive to the industry it regulates, and it is afraid of bringing big cases against the largest, most powerful firms.” When delivering his statement, he writes, “Anytime I had the slightest thought of holding back, I thought about the victims.”

The epilogue includes fifteen far-reaching recommendations on how the SEC could improve (beginning with firing half the staff for lack of capital markets know-how).

It’s a highly enjoyable read, with memorable phrases (“more red flags than the Soviet Union”), and colourful anecdotes (such as how a young Markopolos analyzed shift inventory numbers to pinpoint a thief working in his family’s restaurant). Only two items marred it for me: basic typos – “principle” was often used to refer to the “principal” (for example, “principle-protected notes”) – and an incomplete index (for example, an audit by the Toronto office of PricewaterhouseCooper is mentioned on p. 179 but does not appear in the index as one of the firms that audited Madoff).

You may have followed the Madoff scandal in the press, but this book, written by the whistleblower himself, is well worth the read. Markopolos takes you through the earliest stages and many of the background scenes, straight through to frank recommendations about cleaning up the industry. The appendices include a 2001 article that was skeptical about Madoff; the 2005 submission to the SEC; and an online resource guide. ª

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