by Roger Tan, Vice President / Head of Reserach , SIAS Reserach
No More Excuses to be Cheated
On an early morning on 11 December 2008, “two FBI agents knocked on his (Bernie Madoff’s) front door and asked him if there was an innocent explanation. He shook his head, saying, “There is no innocent explanation”. The two agents immediately placed him under arrest. The largest Ponzi scheme in history had finally collapsed.”
The news of Bernard Madoff’s arrest shocked the world. Bernie was turned in to the authorities by his two sons after he had confessed to them the day before that their company, Bernard L. Madoff Investment Securities LLC, was actually a Ponzi scheme. The Ponzi scheme had cheated investors off an initially estimated US$50 billion.
However, a group of people was not surprised by the fact that Bernie was running a Ponzi scheme; but by the fact that his arrest was finally made because Benie had turned himself in and was not detected and investigated by the Securities Exchange Commission. This group of people included Harry Markopolos and his “gang” of investigators.
Markopolos started investigating Madoff in 1999 after he was asked to develop a hedge fund strategy that could match Madoff’s investment returns. Markopolos tried to backtest Madoff’s performance using the strategy that Madoff claimed he was using, but he concluded that Madoff was either front running or running a Ponzi scheme. Markopolos’s book, ‘No One Would Listen’, recaps his “adventure” in his attempt to expose Madoff.
The book started off a little slow. The first few chapters introduced Markopolos himself and the hedge fund he was working with. It also recapped how Madoff’s investment strategy was introduced to him. His initial conclusion after looking at Madoff’s numbers was “he’s either got to be front-running or it’s a Ponzi scheme. But whatever it is, it’s total bullshit”. That was when Markopolos and his gang started ‘Madoff’ chasing.
Then, the book got more interesting as Markopolos recapped the reactions of different people he had approached to share his thoughts. He had approached people in the fund management industry and the reactions were shocking. Markopolos said, “…many people knew Madoff was a fraud…but even those people who had questioned his strategy had accepted his nonsensical explanations – as long as the returns kept rolling in”. He also mentioned how some industry experts tried to convince him that Bernie was a genius by absorbing or subsidising losses to provide consistent profit to his investors so that he could keep them happy.
But Markopolos’s most shocking discussion on the financial professionals should be the one on the feeder funds. Markopolos said: “They (feeder funds) knew as much as they wanted to know…they knew if they kept their money with him (Madoff) for six years, they basically would double their original investment, so they were betting against the clock.”
As I read on, I realised that Markopolos was not only recapping his journey of exposing the trickery of Bernie Madoff, but also recapping his accidental journey in exposing the incompetence of an important regulator – the Securities Exchange Commission (SEC). Markopolos had submitted his findings that concluded that Madoff was running a Ponzi scheme five times between 2000 and 2008 to the SEC, but the regulator apparently did not conduct any comprehensive investigation on the company to uncover the scam. According to Markopolos, the SEC would have kept the Ponzi scheme size to between US$3 billion and US$7 billion, instead of the US$50 billion now, if they had taken action in the year 2000.
Markopolos reasoned (in his Epilogue) that one of the main factors that contributed to SEC’s failure to uphold their mission of protecting investors and detect fraud was that there were too many lawyers in SEC. Markopolos argued that “very few lawyers understand the complex financial instruments of the 21st century. … A primary reason the SEC has reached this point is that historically, the SEC commissioners have been lawyers who may know where to find the best power lunches in Washington D.C., but don’t have a clue as to how the financial industry actually operates…”
You could also feel Markopolos’s cycle of excitement and frustration as he uncovers Madoff’s scam, gets gleams of hope from different agencies who were open to helping him expose the scam, and then faces the dismal truth that they were just entertaining him without interest in doing anything. At one point, Markopolos was even fearful that Madoff would send someone to “silence” him. At the end of the book, I could not help but also feel Markopolos’s proud moment as he testified in front of the congressional committee on how SEC had not acted on his submissions.
The book not only contains Markopolos’s whistleblowing journey, but also includes some interesting discussions of various financial terms and concepts. For example, Markopolos attempted to explain what Ponzi schemes are and what funds of funds do. This added to the value of reading this book.
Collecting finance and economics books is one of my hobbies. I will not hesitate to buy a book that I deem as “good reference”, but at times, I do add a few (and I stress, only a few) “bad” books into my collection. Why do I do that? The good books are there to help me understand concepts when I need enlightenment; the bad books are there to remind me what good books really are. Markopolos’s book definitely does not fall into my “bad” books category.
This book is a good read. People should use this book to remind themselves that “there are no more excuses to be cheated”.
This book review is sponsored by John Wiley & Sons (Asia) Pte Ltd. Order this book by June 30, 2010 and receive a special 20 per cent discount. Fill up the order form here and send it by e-mail to [email protected] Just quote Promotion Code 2485 with the book ISBN in your e-mail order and save! Please include your billing and delivery address together with your contact number in your e-mail order. Delivery charges apply.