No One Would Listen: A True Financial Thriller by Harry Markopolos (i wanna iguana read aloud .txt) 📕

Madison Avenue, New York, NY 10022 which had over $450 million invested with BM as of mid- 2002. The majority of this FOF’s investors are European, even though the firm is US registered.

c. Broyhill All-Weather Fund, L.P. hadmillion invested with BM as of March 2000.

d. Tremont Capital Management, Inc. Corporate Headquarters is located at 555 Theodore Fremd Avenue; Rye, New York 10580; T: (914) 925-1140 F: (914) 921-3499. Tremont oversees on an advisory and fully discretionary basis over $10.5 billion in assets. Clients include institutional investors, public and private pension plans, ERISA plans, university endowments, foundations, and financial institutions, as well as high net worth individuals. Tremont is owned by Oppenhiemer Funds Inc. which is owned by Mass Mutual Insurance Company so they should have sufficient reserves to make investors whole. Mass Mutual is currently under investigation by the Massachusetts Attorney General, the Department of Justice, and the SEC.

e. Kingate Fund run by FIM Advisers LLP is headquartered in London at 20 St. James Street; London SW1A 1ES; telephone # +44 20 7389 8900; fax # +44 20 7389 8911; www.fim-group.com/. However, their US subsidiary, FIM (USA) Inc. is located at 780 Third Avenue; New York, NY 10017; telephone # 212.223.7321 or fax # 212.223.7592.

f. During a 2002 marketing trip to EuropeFOF I met with in Paris and Geneva had investments with BM. They all said he was their best manager! A partial list of money managers and Private Banks that invest in BM is included at the end of this report in Attachment 3.

4. Here’s what smells bad about the idea of providing equity tranch funding to a US registered broker-dealer:

a. The investment returns passed along to the third party hedge funds are equivalent to BM borrowing money. These 12 month returns from 1990 - May 2005 ranged from a low of 6.23% to a high of 19.98%, with an average 12 month return during that time period of 12.00%. Add in the 4% in average annual management & participation fees and BM would have to be delivering average annual returns of 16% in order for the investors to receive 12%. No Broker-Dealer that I’ve ever heard of finances its operations at that high of an implied borrowing rate (source: Attachment 1; Fairfield Sentry Limited return data from December 1990 - May 2005). Ask around and I’m sure you’ll find that BM is the only firm on Wall Street that pays an average of 16% to fund its operations.

b. BD’s typically fund in the short-term credit markets and benchmark a significant part of their overnight funding to LIBOR plus or minus some spread. LIBOR + 40 basis points would seem a more realistic borrowing rate for a broker-dealer of BM’s size.

c. Red Flag # 2: why would a BD choose to fund at such a high implied interest rate when cheaper money is available in the short-term credit markets? One reason that comes to mind is that BM couldn’t stand the due diligence scrutiny of the short-term credit markets. If Charles Ponzi had issued bank notes promising 50% interest on 3 month time deposits instead of issuing unregulated Ponzi Notes to his investors, the State Banking Commission would have quickly shut him down. The key to a successful Ponzi Scheme is to promise lucrative returns but to do so in an unregulated area of the capital markets. Hedge funds are not due to fall under the SEC’s umbrella until February 2006.

5. The third party hedge funds and fund of funds that market this hedge fund strategy that invests in BM don’t name and aren’t allowed to name Bernie Madoff as the actual manager in their performance summaries or marketing literature. Look closely at Attachment 1, Fairfield Sentry Ltd.’s performance summary and you won’t see BM’s name anywhere on the document, yet BM is the actual hedge fund manager with discretionary trading authority over all funds, as agent.

Red Flag # 3: Why the need for such secrecy?If I was the world’s largest hedge fund and had great returns, I’d want all the publicity I could garner and would want to appear as the world’s largest hedge fund in all of the industry rankings. Name one mutual fund company, Venture Capital firm, or LBO firm which doesn’t brag about the size of their largest funds’ assets under management. Then ask yourself, why would the world’s largest hedge fund manager be so secretive that he didn’t even want his investors to know he was managing their money? Or is it that BM doesn’t want the SEC and FSA to know that he exists?

6. The third party FOF’s never tell investors who is actually managing their money and describe the investment strategy as: This hedge fund’s objective is long term growth on a consistent basis with low volatility. The investment advisor invests exclusively in the U.S. and utilizes a strategy often referred to as a “split-strike conversion.” Generally this style involves purchasing a basket of 30-35 large-capitalization stocks with a high degree of correlation to the general market (e.g. American Express, Boeing, Citigroup, Coca-Cola, Dupont, Exxon, General Motors, IBM, Merck, McDonalds). To provide the desired hedge, the manager then sells out-of-the-money OEX index call options and buys out-of-the-money OEX index put options. The amount of calls that are sold and puts that are bought represent a dollar amount equal to the basket of shares purchases.

7. I personally have run split-strike conversion strategies and know that BM’s approach is far riskier than stated in 6 above. His strategy is wholly inferior to an all index approach and is wholly incapable of generating returns in the range of 6.23% to 19.98%. BM’s strategy should not be able to beat the return on US Treasury Bills. Due to the glaring weakness of the strategy: A. Income Part of the strategy is to buy 30-35 large-cap stocks, sell out-of-the-money index call options against the value of the stock basket. There are three possible sources of income in this strategy.

1. We earn