No One Would Listen

January 26th, 2015

No One Would Listen by Harry Markopolos front cover

There was an element of exclusivity to Bernie Madoff's long-running operation. Not just anyone could get an account with him. As an investor, doing business with Madoff involved investing through so-called feeder funds. These funds would ostensibly perform due diligence on your behalf to ensure that your money was in safe hands. Once you were in, you were practically sworn to secrecy, Madoff claiming that the success of his proprietary strategy was dependent upon investors not spreading the word.

Of course, his proprietary strategy was a complete fraud, so he'd be wise to keep it under wraps.

Investors were lured into Madoff's scheme with the promise of steady monthly returns of one to two percent. Knowing that markets go up and down over time, the constant climb of Madoff's returns month after month, year after year was one of the danger signs that set soon-to-be whistleblower Harry Markopolos' alarm bells a-ringing in 1999.

Markopolos tells the story very much from his own perspective, although insight is gleaned from his team members in the field. One such instance occurs when Madoff obligingly accepts team member Michael Ocrant's request for an interview and suggests that Ocrant drop by immediately. I could almost see Madoff laughing in the face of danger, hiding in plain sight as he openly and at great length answered Ocrant's questions. He must have been very sure that he wouldn't get caught.

Sadly, these glimpses into the mind of the fraudster are few and far between, and there isn't much nuance to the story, which comes across as Markopolos vs. the world. This may be a by-product of the mystique and secretiveness surrounding both Madoff's and Markopolos' operations.

It would be nearly a decade before Madoff's empire finally fell apart, but as it turned out, Markopolos' biggest foe during the whole ordeal would be the Securities and Exchange Commission, the government agency set up in the early 1930s to protect investors in the aftermath of the stock market crash of 1929.

In multiple submissions to the SEC, Markopolos presented dozens of red flags explaining in no uncertain terms that Madoff was a fraud and provided ample reason for them to initiate a thorough investigation, yet they did nothing. Markopolos' encounters with the SEC are described with increasing amounts of contempt for the agency's non-handling of the case as the years passed.

The SEC weren't the only ones sitting on their hands as Madoff's shenanigans continued. Everyone seemed to be turning a blind eye:

  • Feeder funds were not performing the due diligence which would have exposed Madoff's fraud to them.
  • Mega-corporations within the financial industry weren't invested with Madoff — which meant they must have suspected something — yet they never acted on that suspicion.
  • Overseas investors felt untouchable because the U.S. courts had no power over them, so as long as they got their returns they didn't care where they came from. (Little did they know that they themselves were being scammed.)
  • The Wall Street Journal missed out on a great opportunity by not jumping on the story when Markopolos presented it to them in 2005.

You have to salute the unflinching intrepidness shown by Markopolos and his team in the face of particularly the SEC's ineptitude and borderline complicity. The team pursued Madoff for the better part of a decade, when no one wanted to touch the case, through new jobs and relocations, and in the case of Markopolos, leaving his job and working for years as a whistleblower without seeing a dime and living off his wife's paycheck.

To sustain a Ponzi scheme requires a constant flow of new investors to pay off existing ones. When panicking investors withdrew their money from hedge funds as the market collapsed in 2008, Madoff had no money to pay the few that stuck around. On December 10, he confessed to his sons, and he was arrested the following day. Only then did the SEC react, but since the cat was already out of the bag, they were stuck with trying to save face.

I can imagine the immense frustration Markopolos must have felt during his investigation, and his unique perspective ensures that you won't hear the story of his struggle in such detail anywhere else. The thing is, trying to open someone's eyes to Madoff and failing, then repeating the process several times, didn't make for a very enticing narrative. A gallery of fund managers, state representatives, SEC employees, investment officers, investigators, attorneys, and journalists was introduced, but many of them played the same role of a wall for Markopolos to bang his head against.

His account of his team member's outrageous conversation with the chief risk officer at one of Madoff's feeder funds, and the events in the aftermath of Madoff's fall — with Markopolos racing to secure his files from an SEC in damage control mode, the ensuing media frenzy, and Congressional hearing — were highlights which brought some spark to the proceedings, but there just wasn't enough forward momentum to maintain my interest throughout. It certainly wasn't the thriller that the subtitle touts it as being.