Harry Markopolos spent nearly a decade telling the Securities and Exchange Commission that Bernie Madoff’s returns were too good to be true. The SEC more or less ignored Markopolos, a securities analyst and forensic accountant. The greatest Ponzi scheme in history, as a result, rolled on for years, ultimately stealing billions of dollars from investors, large and small, before it all came crashing down in 2008.
Markopolos has written a first-rate memoir of his lonely one-man investigation into Madoff’s $65 billion fraud: No One Would Listen: A True Financial Thriller. In addition to being a compelling whodunnit (even though Markopolos knew who did it), this new book is a fascinating look into the important business of separating the wheat from the chaff when it comes to analyzing investment returns.

In the case of Madoff’s reportedly stellar results, there was no there there, Markopolos discovered starting in the early 1990s. Recalling the first time he looked at the apparent results of Madoff’s investing strategy, Markopolos recounts,

I glanced at the numbers. I’d spent countless thousands of hours preparing for this moment. And I knew immediately that the numbers made no sense. I just knew it. Numbers exist in relationships, and after you’ve studied as many of them as I had it was clear something was out of whack. I began shaking my head. I knew what a split-strike strategy
was capable of producing, but this particular one was so poorly designed and contained so many glaring errors that I didn’t see how it could be functional, much less profitable. At the bottom of the page, a chart of Madoff’s return stream rose steadily at a 45-degree angle, which simply doesn’t exist in finance. Within five minutes I told Frank,“There’s no way this is real. This is bogus.”

As I continued examining the numbers, the problems with them began popping out as clearly as a red wagon in a field of snow. There was a stunning lack of financial sophistication. Anyone who understood the math of the market would have seen these problems immediately. A few minutes later I laid the papers down on my desk. “This is a fraud,
Frank,” I told him. “You’re an options guy. You know there’s no way in hell this guy’s getting these returns from this strategy. He’s either got to be front-running or it’s a Ponzi scheme. But whatever it is, it’s total bullshit.”

And that’s when we began chasing Bernie Madoff.

With that, the book is off and running. As compelling as this story is as a tale of financial sleuthing, it’s also an indictment of how the SEC was asleep at the switch, or “comatose,” as Markopolos complains in an interview this weekend with The New York TImes. “It was a trip through the twilight zone,” he says of his nine-year effort at trying (and failing) to alert the SEC to the impossibility of the returns that Madoff was reporting. “They didn’t respond to heat and light, much less evidence of wrongdoing,” he tells the TImes’ Deborah Solomon. There’s a small army of investors who are poorer as a result.
We all need to understand what happened and why it happened. That alone is reason enough to read Markopolos’ book. The fact that it’s a dramatic page-turner only sweetens the deal. Truth is stranger than fiction in the genre of financial crimes and misdemeanors. In the case of No One Would Listen, it’s also fascinating and enlightening.