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

leading brokers for stocks? How do you guard against front-running? How do you explain your lack of a down month?

Who are your traders? Where did they learn how to trade your strategy? Can I sit on your trading desk for a day to get a feel of how you run your operation?

What scenario keeps you up at night? What are your strategies’ worst-case scenarios?

I was having fun writing them, and I continued writing them even though I knew there was absolutely no hope he would be able to answer many of them. If he was to be honest, his answers would all have to be nothing, zero, we don’t, I don’t know, and (most often) never. How large is your compliance staff? We don’t have one. Who does your trades? We don’t make trades. How do you explain your lack of a down month? We just make up the numbers. What scenarios keep you up at night? Getting exposed. What is the maximum size that your strategy can handle without watering down returns? As much money as you’re willing to hand over to a Ponzi scheme.

I was actually very excited about this conversation. In all the years we’d been investigating, other than Mike’s 2001 interview and the few questions we’d asked the former employee of his broker-dealer operation, we’d had very few opportunities to get a really good look inside Madoff. As we later verified, the Fairfield Sentry Fund was his single largest feeder fund. When we’d started our investigation, it had about $3 billion in assets; by this time that had increased to more than $7 billion—and every penny of it had been channeled to him. The fund charged its clients 20 percent of profits and a 1 percent management fee, so on a 16 percent gross return, which is roughly what Madoff supplied, it earned close to $40 million for every billion invested. Considering that Fairfield Sentry had $7 billion with Madoff they were earning approximately $280 million per year in fees to look the other way and not ask the tough questions.

So Fairfield Sentry had several million reasons to protect Bernie.

As Neil told me later, Vijayvergiya was pleasant but officious. He certainly wasn’t prepared for the barrage of questions Neil asked, and wasn’t able to answer many of them. He began by explaining the relationship between Madoff and Fairfield Sentry. Madoff was registered with the SEC—he didn’t mention he had been forced to register after the 2005 SEC so-called investigation—and his broker-dealer had $640 million in capital. FGG had been investing in Madoff since 1990 and at that point, according to Vijayvergiya, had slightly more than $7 billion with him. “So about how much is he managing overall?” Neil asked.

Vijayvergiya admitted he didn’t know, but estimated Madoff had a total of $14 billion under management with a dozen people. The head of risk management didn’t know how much money the man who was handling $7 billion for them was managing? Neil took a deep breath—that was astonishing. Within five minutes, he told me, “I was thinking this whole thing was a joke, an absolute joke. He couldn’t have been serious.”

It wasn’t a joke; it was a tragedy. When Neil started asking specific questions, it got worse. Neil asked who took the other side of all the trades Bernie was making. Amit replied that for large trades Bernie got quotes from three or four big brokers and took the best one, then instantly got filled on the option side.

Neil was sitting at his desk in Tacoma shaking his head in disbelief. One of the first things I’d taught him was to be very careful about approaching multiple buyers for a quote on the same trade, because there was nothing to prevent a buyer who didn’t get the trade from front-running—buying or selling before I could make my deal, knowing that my deal was going to move the market. It’s illegal, but it’s absurd to believe that someone with this information isn’t going to take advantage of it. It’s part of the reality of the marketplace.

Neil pushed Amit on this, asking repeatedly who was taking the other side of these deals, because these large deals Madoff supposedly was making didn’t seem to be showing up anywhere. “If they’re off-loading it,” Neil said, “the easiest way of doing it would be to go into the S&P or the OEX pit, and how come no one’s ever been able to find a trace of any of these trades in the market?”

Amit told Neil that it was an interesting question, then claimed he’d never really thought about it. In other words, he just plain didn’t know.

Neil eventually focused on Madoff’s split-strike conversion strategy. It had become obvious to him that Vijayvergiya didn’t understand that this strategy couldn’t produce the rates of return Madoff claimed. “What am I missing here?” Neil asked. “You basically need to have some directional bias, whether the market’s up or down or flat. Is there some kind of arbitrage I don’t know about? I have to tell you, Amit, I don’t understand how he does it.”

This was a question Amit had been prepared to answer. He told Neil that Madoff was market-timing the entry and exit of all his trades. “Bernie’s got a proprietary model that helps him decide when to put trades on and when to take them off,” he said. “It’s got three core factors—momentum, volatility, and liquidity. That allows him to be long when the markets go up and out of the market when it is not favorable.”

“Let me be clear,” Neil pressed. “When you put a trade on, you have to put it on with some kind of bias, right? What I want to know is how is he doing that?”

“Well, he’s got a market-timing model.”

Neil asked him why, if this strategy had been so incredibly successful, other people had not been able to duplicate it. Amit attempted to answer that question, pointing out that no one else had Madoff’s proprietary model, which told