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

The conversation grew increasingly more absurd. Given that Madoff had this perfect knowledge of the market, Neil asked, why does he need all these other funds? According to the model, Madoff was actually earning considerably less than those funds. So why didn’t he just eliminate the middlemen, set up his own hedge fund, and charge 1 percent or 2 percent fees and 20 percent of the profit? Neil told me that when Vijayvergiya said seriously that “Madoff doesn’t have the operational capability to set up a hedge fund structure,” he had to consciously stop himself from laughing out loud.

This guy actually expected Neil to believe that Bernie Madoff, who had helped found NASDAQ and who had built his own market-making operation, couldn’t set up his own hedge fund. It probably takes about $50,000, a computer, and some office furniture to open a hedge fund. There are no barriers to entry into the hedge fund world. All you have to do is copy someone else’s documents and file a few papers, and you’re in business.

Neil finally replied, “Well, I can’t believe Bernie couldn’t just open a hedge fund and hire all the people he needs around the world for less than $20 million a year and keep all the rest for himself. He wouldn’t have to deal with all the headaches that come with these other funds and he would keep most of the money himself. It makes sense. Why wouldn’t he do that?”

Vijayvergiya literally did not answer. Instead, he continued pitching the same nonsense we’d been reading about for almost eight years. Neil had to wonder how many people had listened to it and accepted it without questioning it, instead being seduced by the returns. Well, at least $7 billion worth. Obviously, there had been many other people who had heard it and walked away from the table; for example, none of the major New York investment houses had bought it. But this time Vijayvergiya was talking to someone who intended to call him on it. “Would you explain that to me? I’ve got to tell you, I’ve never heard anything like that before. Are you telling me that Madoff literally knows when the market’s going to go up and when it’s going to go down?” And basically, Vijayvergiya claimed that was true. Neil wondered, do you actually believe that? It’s been proven over and over and over by academic studies that no one can time the market, let alone time the market consistently for 17 consecutive years. It made no sense, so Neil asked, “Are you telling me Bernie basically has had perfect market timing every month for the last 17 years?”

Vijayvergiya didn’t respond directly to that.

“I just don’t get it,” Neil continued. “If you had perfect market timing like Madoff says he does, a split-strike conversion is the last strategy you’d use. I mean, if you really knew which way the market was going, you’d be buying leveraged futures or options. You could make a killing with a lot of other strategies, but this one actually limits you.”

Vijayvergiya basically had no answer for that.

Neil then asked him why Madoff traded over the counter (OTC) rather than doing listed trades. Again, he didn’t have an answer.

Neil asked him the cost of trading OTC against listed stocks. He had no answer.

Later, when Neil was telling me about this, he just kept repeating, “It was comical. This guy didn’t know anything. I kept asking him about how the trades actually get executed, and I was drilling him every which way. Are they instantaneous, does he do the options all at once, does he package trade, does he toss in a third market?—every possible question you could ask about how a trade is implemented. I was firing away at him and eventually he says, ‘There might be a three-or four-hour time lag from the time he actually does the stock trade verses the options.’ He estimated that about 20 percent of Madoff’s trades were done that way.”

Neil told me, “Immediately I was like, ‘Well, when you leg into a trade, when you only do one side and not the other side instantaneously, there’s always the risk of it going against you before you get the other side of the trade off. I’ve done that, and I know you can get burnt really hard, really fast. So how does he protect himself?”’

Vijayvergiya basically had no answer for that question, either.

Neil spent about 45 minutes on the phone with him. In hindsight, he was sorry he hadn’t stayed on the phone for hours and run through all our questions. But 45 minutes was all Neil could take. When he hung up, he was frustrated and angry. After all these years, Neil still thought there was a small possibility it was front running rather than a Ponzi, but this call settled that for him once and for all. He e-mailed me, “I can’t believe they have kept this Ponzi scheme going on for this long.”

Probably the only thing about this conversation that surprised us was the reality that Fairfield had so little respect for the people with whom it was dealing that they hadn’t even bothered to make up some sort of plausible answers to these questions. The attitude was, you want these returns? Then you accept what I’m telling you—or rather what I’m not telling you.

All you have to do to get rich is believe in Bernie.

Even after that disastrous phone conversation, the third party marketer called Neil and asked if he was still interested in giving several million dollars to FGG to handle. Neil made him an offer. “Tell you what,” he said. “I’ll give him fifty million dollars right now. I’ll cut you a check for fifty million bucks. I can get it done next week—but it’s gotta be done in my separate account with my prime broker and only with listed OEX options. He can charge me his two and twenty, whatever he wants