No One Would Listen: A True Financial Thriller, by Harry Markopolos

Part crime story part indictment of the U.S. government, this book tells the story of a few investment specialists who determined that Bernie Madoff was running a multi-billion investment scam, but also how they handed the story to the Securities and Exchange Commission (SEC) and various journalists with barely any attention given to the story.

Harry Markopolos is a math geek, slightly OCD, and what is known in the investment industry as a “quant”, someone who studies the statistics and patterns of various stocks and bonds and then designs investment products for investment firms.

Working in Boston, some 200 miles from the financial center of the world in New York City, Markopolos first ran into the investment company being run by Madoff when he started being nagged by a manager to design a product that was as attractive to investors as what Madoff was offering. Madoff was a former chairman of NASDAQ and founded the investment company Bernard L. Madoff Investment Securities LLC in 1960. When he came to Markopolos’ attention his firm was running an investment program that consistently earned 1% per month returns, with the investments supposedly increasing in a nearly straight upward line. He claimed that over several years his firm lost money for clients in only three months.

This is, basically, impossible. If you look at any stock graph the graph will always go through periods of increase and decrease, even on a single day. The objective is to earn money over an extended period of time, with losses and increases along the way. He was claiming to outperform all stock exchanges and all other investment firms in existence,

Markopolos, with several friends, began to investigate how Madoff managed this. Even with stocks Madoff was claiming to buy and sell they couldn’t figure out a way to match the performance. It finally became clear that Madoff was involved in one of two illegal activities. He was “front running”, or basically buying based on illegal insider information, or he was running a Ponzi scheme, where he would pretend to invest but was actually paying dividends to older clients by using the money from new investors. Imagine a friend gives you $10 to invest. Instead of investing you get another $10 from another friend. You don’t invest that either, but you pay your first friend a “dividend” from the second ‘money. The more people who get excited about the program the more successful you can pretend to be. Madoff was doing this, but was requiring a minimum investment of $1,000,000 from new clients. He took money from individuals and companies from all over the world.

Markopolos took evidence to the SEC (the federal agency that is supposed to protect investors) three times. The SEC went to Madoff and asked some basic questions, decided that he was doing nothing wrong without even looking at the bookkeeping, and left. Usually with the investigators asking if they could leave a resume with Madoff.

Things finally fell apart in 2008 during the housing bubble. People were suddenly facing financial troubles and began trying to withdraw their money out of Madoff’s company. The money wasn’t there. Madoff told his sons that the company was a sham and they went to the FBI the next day. By then Madoff had taken around $65-billion from his investors. People lost their life savings, some investors committed suicide.

Markopolos details his attempts to get the attention of the authorities for several years, often fearing the Madoff might hire someone to kill him. He found the SEC to be poorly staffed with people who didn’t understand business. They were underpaid, and the SEC refused to pay for basic news like the Wall Street Journal (they had to pay for it out of their own salaries). None of the offices were equipped with either research books or Bloomsburg terminals (a computer system that tracks stocks and investments, available in every investment office) because of the expense.

Markopolos closes the book with a description of his own testimony to Congress, as well as personal stories by some who lost everything and suggestions for changes in government regulators.

It can be a scary read for anyone, even if you don’t invest in stocks yourself but are hoping to rely on a pension at retirement, as many of those pension funds invest with companies not entirely unlike Madoff’s.