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

through a lot of mathematical data, trying to simplify it wherever possible, but understanding did require at least a basic comprehension of the way the market functions. Red Flag #5, for example, read as follows: “Assuming BM bought 3 month out-of-the-money OEX put options that are 3% out-of-the-money, and that he paid 3% for them, then the market would have to drop 6% in order for his investors to recoup their cost on the puts. More importantly, the individual stock call options sold against each stock holding would not earn enough of a return to offset losses in the stocks during periods of significant market decline. Yet BM had only ONE MONTHLY LOSS OF 6 BASIS POINTS during 1997’s Asian Currency Crises, the 1998 Russian and LTCM Crises and the market blood bath of 2000-2002. According to Fairfield Sentry Limited’s return data (attachment 1) BM posted a -0.06% loss in August 2002. These return numbers are too good to be true! And, in my experience, whenever a hedge fund has posted returns that are too good to be true they’ve turned out not to be true.”

I finished this report with a series of predictions about what would happen if Madoff was a Ponzi scheme. “Congress will be up in arms,” I wrote, “and there will be Senate and House hearings....”

And then I outlined the financial version of A Christmas Carol, pointing out to them the good things that might happen for the SEC if it took action: “The SEC will gain political strength in Washington from this episode but only if the SEC is proactive and launches an immediate, full-scale investigation into all of the Red Flags surrounding Madoff Investment Securities, L.L.C.,” but also warning what could happen if it didn’t: “Otherwise it is almost certain that NYAG Eliot Spitzer will launch his investigation first and once again beat the SEC to the punch, causing the SEC further public embarrassment.”

Boston SEC Branch Chief Mike Garrity didn’t understand the numbers, but unlike so many of the other people I’d met at that agency, he knew it and was willing to admit it. Most important, he wanted to learn. That was surprising. I met with Garrity and several other people in an SEC office on October 25. Garrity was a former journalist and an attorney, so he knew how to ask questions and the legal consequences of the answers. He’d read my report, he said, and thought it was very credible. He had hours’ worth of questions to ask. There was a whiteboard in the front of the meeting room, and when there was something he didn’t understand he had me outline it on the board until he got it. I spent hours drawing charts and diagrams and guiding him through the mathematics. A lot of it was high school algebra and trigonometry, basic math. I worked from an x-axis and y-axis, explaining complex calculations in simple layman’s terms. When we know the market goes both up and down, it wasn’t that difficult for him to look at a performance line rising at a 45-degree angle and understand that something was very wrong. He wouldn’t let me sit down until he was confident he understood the point I was making. He asked endless questions: What are the stocks doing? What should the stocks be doing? What can’t they be doing? What are the options doing? How are they affecting the portfolio’s returns? At one point he and I discussed the possibility that I was totally wrong. “You’ve got two fraud theories,” he asked. “What if his returns are real? Is there any possible explanation for that?”

Actually there was one conceivable explanation, I said, and unfortunately I’d left it out of my submission. “The only way these returns are real is that Bernie Madoff is an alien from outer space who has perfect foreknowledge of what the capital markets are about to do.”

Mike Garrity considered that in the spirit in which I’d proposed it. If I was right, he suggested, and Madoff is an alien, it would destabilize the U.S. financial industry. “Investors don’t want to have to trade against aliens,” he pointed out.

“No, that wouldn’t be fair,” I agreed, laughing, pleased with the knowledge that Garrity was deeply suspicious about Madoff’s reported returns.

By the time we finished that meeting, Garrity not only understood the math, he understood the threat that Madoff posed to the world economy. He explained that he would immediately begin an investigation and would respond to me as quickly as possible. I left that meeting more excited than I had ever thought possible. I thought Garrity was smart, tenacious, and talented. And he got it. He called me less than a week later. “Harry, I’ve investigated,” he said. “I’ve found some serious irregularities that are very disturbing. I’m not at liberty to share them with you, but I think it’s so serious that I need to put you in touch with our New York regional office.

“If this was taking place in our jurisdiction I’d have teams in there tomorrow tearing the place apart. Unfortunately, it’s not. It’s in New York, and I have to tell you we don’t have a great relationship with that office.”

He promised me he would do as much as he could before passing it along to New York. He gave me the names of the two people he would be contacting. The only thing that I asked for in return was that my identity be protected. I said, “I want only two people in New York to know who I am, the branch chief and the investigation’s team leader. Just forward the submission to them and tell them it came from the Boston whistleblower. I’ll call one of them and identify myself as the Boston whistleblower and reveal my identity to them. But really, I want only those two people to know my name.” I assumed that based on Garrity’s recommendation New York would finally send in investigators, and I wanted the people on the