Which of the following practices would you associate with watertight due diligence among Wall Street investment firms?
a) An auditable model that stress-tests an organisation's processes; b) A seven-year investment record that can be verified with multiple public sources; c) A handwriting sample that is faxed across to a graphologist for analysis.
If you chose a) or b), you are more likely wrong than right. Option c) was used by at least one third-party investment marketing firm to verify a fund manager running some $21 billion in assets. The manager was Bernard (Bernie) Lawrence Madoff, the brain behind the biggest Ponzi scheme in US history.
This and other anecdotes make No One Would Listen the fast-paced, yet grounded, read it is. Written by self-proclaimed whistleblower Harry Markopolos, an investment manager and a quantitative analyst, the book ranks in the league of masterpieces such as Den of Thieves, a non-fiction book on Wall Street insider trading that has been through eight reprints since 1992.
Madoff first came on the radar of Markopolos in 1999, when his boss at Rampart Investment Management Company in Boston, an institutional asset management firm, asked him to check how Madoff's operation turned in between one per cent and 1.25 per cent returns month after month.
Markopolos discovered that Madoff, who established an eponymous investment firm in 1960 and ran it till his arrest in December 2008, grew his investments like a 45-degree rising curve with a six per cent correlation to the larger market. This was a statistical impossibility. Madoff's investment history showed that compared to the 26 "down months" of the US markets, Bernard L. Madoff Investment Securities LLC had recorded just three down months. Its worst performance: A 0.55 per cent fall in a month in which the market lost 14.58 per cent.
Markopolos, 53, sensed Madoff was running a con operation within five minutes of looking at the numbers. He doggedly made filings before the Securities and Exchange Commission (SEC) to no avail, had combative arguments within his investment fraternity, roped in four people to help him with his investigation, and unsuccessfully tried to tell the media his story.
Along the way, Markopolos rubs shoulders with the high society of Europe and is amazed that no one blinks at obvious red flags in the Madoff empire—hand-written trade tickets that don't match with the day's prices, auditing done by a two-person accounting firm and the secret veil over its clients, to name just three. Madoff was "perfect": A former NASDAQ chairman, he was in New York's upper crust, and generously donated to charities and the community.
Eventually, it was not Markopolos' efforts that did in Madoff; it was the US housing market collapse that had federal agents at the disgraced billionaire's door. Investors in Madoff reached for the phone to discover they had been scammed. More than Markopolos' math training, which he uses with fine ability to explain the core of how Madoff and US hedge funds work, it is his narrative that makes the book unputdownable.