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

to charge me, but my fifty million has to go in my separate account in Goldman Sachs.” Neil said this knowing it was an offer they had to refuse.

Maintaining a separate account meant that Neil would be able to see the execution of all the stock trades with the prime broker. And since no trades were being made and there would be nothing for him to see, there was no way Madoff could allow this. The marketer said, “Honestly, I don’t know if he’s done that before. I have to check.”

He called back the next day and as expected told Neil it wasn’t possible. Neil responded, “No shit. He can’t do it because his whole operation is a fraud.” Neil didn’t mention my name or tell him that he had been investigating Madoff for years. Instead he pointed out that no legitimate manager would refuse a $50 million separate account. The fees would more than offset the hassle. But this marketer refused to believe him. Like so many other people, he just had too much at stake to accept it.

When Neil e-mailed me with this response, I wrote back, “My belief is that the HFOFs [hedge funds of funds] like Fairfield are either in on the scheme or willfully blind. Willful blindness is not a defense.”

And when Neil offered, “Feel free to pass my notes on to SEC. Just remove my name,” I pointed out it would do no good. “I’m not sure sending the SEC anything would help those morons solve the case. They’re so lame, I’ll bet they don’t even catch colds in winter.”

I’d finally given up on the SEC. A month earlier I’d sent it my final submission—and as usual I’d gotten no response. I’d sent a prospectus from Prospect Capital’s Wickford Fund, another fund that channeled money to Madoff through Fairfield Sentry. But what made this one different was the fact that Madoff had started accepting leveraged money, a strong sign that he was running out of cash.

Frank Casey had found it in early June. He had been searching an Internet database for stable managers, trying to keep up to date with what Benchmark’s competitors were doing. As he remembers, “Eventually the Wickford Fund popped up as a fund of funds. I got on their web site and discovered that it was offering a three-to-one swap written with a counterparty bank that was willing to lend two dollars for every dollar invested in a manager strategy.”

Frank called me right away and said, “Madoff’s got to be running short of cash. He’s doing a three-to-one triple leveraged product with [and he named the bank].”

“My God,” I said. “He’s in trouble. He’s gotta be getting close because he’s willing to take in leveraged money. That means he’s running out of money. He’s getting desperate.” Equally interesting was the fact that one of the two Wickford Funds was offshore, registered in the Cayman Islands, which made it attractive to American citizens who wanted to hide money from the IRS.

The 3:1 offer was a big red flag that Madoff was in trouble. This was a win-win-win-win situation—everybody wins except the investor. Normally, the investor would put up one dollar, Fairfield would get one dollar, and Madoff would get one dollar as well. But they were able to find a bank stupid enough to lend the investor two additional dollars for every dollar invested, so the investor was then on the hook for three dollars. Prospect Capital would give three dollars to Fairfield and take triple its management fees. That’s one win. Prospect Capital is happy. Fairfield would invest three dollars in Madoff, so it is making three times its fees and profits. That’s two wins. Bernie would get the same three dollars instead of one dollar. That’s three wins. And the bank gets the interest rate spread, so it wins. If this were a legitimate investment, the victim would get three times the return minus the interest and fees that he or she is paying to borrow the money and invest. In a legitimate investment that would be a big win, but because this is a fraud, in addition to the initial investment the victim could possibly lose double that investment that he or she borrowed from the bank. In fact, I doubt the victim would ever have to repay the bank. The investor probably would have a strong lawsuit against the bank, but the best thing that would happen is a substantial loss and years of lawsuits.

“This is so odd,” I wrote to Neil. “If you’re a Ponzi scheme, why would you allow leverage? You end up paying well over double for each new dollar ‘invested.’ Is this a signal that Bernie is at the end of his rope and needs to offer juicier returns in order to keep the Ponzi scheme going? Is he this desperate for cash? My bet is Bernie is nearing the end of his run if he’s allowing triple leverage.”

With the possible collapse of his scam now somewhere just beyond the horizon, I began to wonder what the fallout might be—and if it was possible for him to ever get out of this without going to prison. I continued writing to Neil, “Let’s see now, if BM is a fraud and I am your typical dumb (bank) client and purchase the total return swap, when the underlying returns are found to be bogus, does that mean I receive nothing back or do I get my principle back and nothing else? What if BM is waiting for a systemic market crisis to occur and then says, ‘Oops, sorry, I bet wrong and lost 90 percent of your money, so, sorry, here’s the 10 percent that’s left. We’re closing down and we want you to have it back.’ That would be a great way out for him.”

I also wrote to Citigroup’s Leon Gross to see if he agreed with my prediction: “If Madoff is allowing a third party marketer to pitch this sort of product, my