December 18, 2008

Harry Markopolous's 19-page letter to the SEC in 2005: "The World's Largest Hedge Fund Is a Fraud"

Various laws attempt to protect and reward insider whistleblowers who call to public attention wrongdoing by the institutions that employ them. But little incentive exists for outsiders to point out big shots' fraud and misinformation, other than public approbation. So, let's take a moment to salute Harry Markopolous, who first brought Bernie Madoff's Ponzi scheme to the Securities and Exchange Commission's awareness in 2000 and then wrote them a 19 page letter in 2005 listing 29 Red Flags (you can read it here; thanks to Clusterstock).

Of course, the SEC didn't do anything substantitive about it (other than one SEC official marrying into the Madoff family). Markopolous tried to talk the SEC into taking action by warning them that if they didn't move fast, Elliot Spitzer would beat them to it. (But now we know that the Spitzer family real estate firm, like so many New York real estate businesses, had money with Madoff.)

One thing that stands out is that Markopolous wasn't alone. He was just the guy who kept complaining about it. Markopolous's 2005 letter cites numerous experts, either by name or by position, who figured out this was a fraud. But Markopolous was one of the few to do anything about it.

Also, at least two journalists, one for Barrons and one for a trade paper, exposed this scam early in this decade, but nobody cared.

There's just not much of a market for debunking. People want to believe in geniuses. Look how many people believe Malcolm Gladwell is a genius. If he isn't a genius, everybody asks, how come he's so rich? Hunnh? Hunnh?

Malcolm, himself, is dimly aware that he's kind of an idiot, but he believes that the true geniuses are the people he profiles so credulously. In turn, the folks Malcolm writes up probably had doubts about their own brilliance, too, at least until they saw themselves acclaimed in The New Yorker. After all, you can't put anything over on The New Yorker -- they've got a hung-over Jay McInerney checking the facts! So, they must be legit.


anon2 said...

Chris Cox is a total moron (Minnesota born) and James Cramer has been slamming this stooge on a regular basis. George Bush let Henry Paulson become the bailout Czar and he made his Wall St friends as whole as he could

So here the Jewish fellow looks a lot smarter and a lot more interested in the public good than the laissez faire waspy guys and calling them to account

I'm just presenting the other other side of "the Jews done it" argument.

Anonymous said...

Today's American literary elite is positively Trotsky-errific. Read The End of Intelligent Writing published 30 years ago. And so much more "progress" has been made since then.

Speaking of the good old days: just when the hell are they finally going to make a film version of Radical Chic? I can see it as a sort of modern "Rope" with the long, clever-but-frightening chats in the NYC penthouse.

For extra sizzle in Act III maybe they could graft on that related David Horowitz storyline about the white chick who got "panthered".

Definite Oscar material with all of the yakking! And plenty of meaty roles for black actors. It's a win-win. Of course, they would have to change the names to protect the innocent, but I think it would make a nice holiday film.

rast said...

Steve, the Gladwell hate is getting old. Unless someone has been ghostwriting all his stuff for him, the man has an IQ of 125 -- minimum. He's no idiot. He just doesn't care enough about the truth to make himself unpopular.

John Mansfield said...

Let's just be glad that there's only one Bernie Madoff, and no one else on Wall Street is currently doing anything similiar with the billions under his care.

Anonymous said...

Just read Markopolous's letter front-to-back. Fascinating stuff, though it doesn't support the 'affinity scam' theory. A few observations:

1) Most of the investors didn't even know who Madoff was, and weren't told by their hedge fund fund-of-fund (FOF) managers.

2) Further, most of the investors appear to have been foreigners, and not American Jews.

3) The scam seems to have been driven mainly by a combination of greed, (perhaps willful) ignorance, and innumeracy on the part of hedge fund FOF managers. Markopolous's point about how the graph of Madoff's returns in one FOF's marketing material isn't consistent with the cumulative, geometric performance that would have resulted from compounding Madoff's claimed annual returns is telling.

4) The scam seems to have been sustained by two factors. First, the Madoffs were too hooked-in to the industry self-regulating organizations (NASD) that, as Markopolous notes, have never been vigorous regulators anyway. Second, the SEC seems to have been populated mainly by lawyers and not folks with anywhere near the quantitative finance chops Markopolous has. Not entirely surprising, since quants could have made a lot more money in the private sector during this time period.

5) Markopolous doesn't seem to share the Jew-obsession of some here. He makes no mention of Madoff's Judaism, or his donations to Jewish charities. He also lists a Jew as a derivatives expert who also thought Madoff was a fraud, Leon Gross. In addition, he tells the SEC that if they don't do something about this, then-NY AG Eliot Spitzer would. Of course, Spitzer didn't, and his inaction may have been due to his family's investment with Madoff, his ignorance of Madoff's fraud, or his lack of a quant finance background to understand the fraud. It seems unlikely that he would have left Madoff alone because Madoff was a Jew, when Spitzer went after other Jews (e.g., Hank Greenberg of AIG).

- Fred

Chaitanya Sai said...

Why the petulant dig at Gladwell. I understand that he glosses over a lot of details and seems to take credit for others research. Among all the people who think his books are a great and light read, no one I know thinks he is a genius.
The reason for invoking him in this post is tenuous; even the dimwitted attribute riches to something other than genius (Ok, in non-geeky fields and finance is a neo-geeky field). They might not attribute it to luck, which may often be the case, but definitely not to genius.

Anonymous said...

Maybe all of Made-off's victims can get together class-action- style and sue the SEC for incompetence, and get taxpayer monies paid to them THAT way.

I will be UBER-ticked off if the defrauded get paid by the taxpayer in this case. We have all had investments go bad. My Fidelity Fund had a "Red Oak Tech" or some such stock that went from $44 a share down to pocket change, and nobody bailed out my dear ol' dad, who lost over $100K on this stock ALONE. Neither should anyone bail out Mort Zuckerman.

Truth said...

Steve, I just wanted you to know that Gladwell is deeply hurt by your constant criticism. He just called me from his private jet to tell me.

Anonymous said...

Malcolm, himself, is dimly aware that he's kind of an idiot,

That has to be the best insult I have ever seen.

As to the other issue: Regulatory Capture.

Anonymous said...

LOL at the last two lines. !!
good job Stevie!

Jamie said...

Three year old story here:

"SEC/Spitzer is going to shut down Madoff financial and all of their hedge funds for SEC violations. Can anyone confirm this?"

Anonymous said...

Can you make it a little less obvious that you follow Carney and vice versa?

Jewish Atheist said...

Gladwell is a genius. It's just that his genius lies in speaking and writing, not in analysis or understanding. He's really a phenomenal writer and speaker. I find him mesmerizing even when I think what he's actually saying is full of shit.

Anonymous said...

Steve's Gladwell hate is at least partly driven by resentment ("Why don't I make $1 million per year in speaking fees?), as much as disagreements. A person of Steve's views will never write for The New Yorker, nor will he attend fancy parties with hipster literatis.

josh said...

Malcolm Gladwell is certainly funny looking. With his afro and John Lennon granny glassess he looks like he is trying to look like some kind of '60s oh-so-deep Marxist professor-bedding-his -young-pretty-whitegirl-students. Hmmm...Re John Mansfield,they better NOT try any funny stuff with that money! Henry Paulson is on the case!

moneybags said...

Today's American literary elite is positively Trotsky-errific. Read The End of Intelligent Writing published 30 years ago. And so much more "progress" has been made since then.

Anonymous: 12/18/2008

Good comment, good book, lots of quotes at this link:

Jim Bowery said...

How much money do the elite have to acquire through despicable means and then misappropriate before they lose their social status in the eyes of fertile young women?

What does this say about the fate of civilization over evolutionary time?

albertosaurus said...

Now you tell me?

I assumed that you endorsed Malcolm Gladwell and recommended his book. Therefore on that supposed recommendation I bought his book.

The first chapter or three was entertaining but soon the bloom was off the rose. He revealed himself to be like the late Steven Jay Gould - a clever defender of political correctness with anecdotes and sophistries.

My first hint was when he comforted all those who are troubled by the notion that some other people might have more talent than they do themselves, by explaining that Mozart wasn't realy a prodigy he just had practiced a lot.

Gladwell claims that exeptional acheivement is not due to any sort of inherent advantage but just to practicing 10,000 hours or more. Mozart he argues never wrote anything very good until he was 21, by which time he had gotten in his 10,000 hours. This is an astounding assertion. It is breathtakingly wrong headed.

What about his opera Mithradate, Re de Ponto written when he was 14? This was no juvenile exercise. It is a six hour opera seria (serious work) that was mounted on the contemporary stage and has remained in the repertory for more than two hundred years. There are many modern recordings and at least two videos.

Gladwell does not make serious assertions just anecdotes. If he were serious he would have to consider all the other composers who had also put in their 10,000 hours practice. The simple fact is that in the 17th century there were plenty of other opera composers but no other Mozarts. Haydn was closest, but Cimarosa and Salieri were very much inferior - and all three had had more practice.

Gladwell's ideas only amuse as long as you don't think about them very long. He promotes a fuzzy headed defense of extreme 'nuture' and a stout hearted attack on any kind of 'nature'.

beowulf said...

This guy was running a con game on a global scale. The sophisticated investors knew Madoff was crooked, but they thought they were buying into an insider trading scheme, when in fact they were being milked for a Ponzi scheme. Beautiful really, it reminded me of a line from Guy Ritchie's Revolver:

"The bigger the trick and the older the trick, the easier it is to pull, because--
1. They think it can't be that old,
2. They think it can't be that big... for so many people to have fallen for it."

Statsquatch said...

I saw Gladwell at a corporate function once. He was a pretty run of the mill speaker. A little more smug than most but certainly not inspiring. At the time I thought his "genius" was in telling lower middle managers what they wanted to hear: "you are an expert and nobody should question your decisions by asking for actual data." But maybe there is more too him if he is pissing Steve off so much.

Mark said...

It is time to analyze Mr Sailer's obsession with Malcolm Gladwell. My intuition tells me something more than professional jealousy is involved.

Truth said...


I think Mark is insinuating that you are gay.

ben tillman said...

Second, the SEC seems to have been populated mainly by lawyers and not folks with anywhere near the quantitative finance chops Markopolous has.

You don't have to practice law for very long before you realize that lawyers are generally more numerate than accountants, and accountants recognize and joke about that fact all the time.

ben tillman said...

Why the petulant dig at Gladwell.

It may have something to do with the fact that he makes money by telling lies that hurt people. Good people try to rectify situations like that. That's what Steve's doing.

grate said...

as a high profile dispenser of political correctness gladwell is either a trotskyite or he is a useful idiot.

either way he deserves scorn. keep up the good work steve.

headache said...

Congrats for actually reading the book. Your comments seem to underpin Steve's assessment of Gladwell. And I hope its not jealousy that makes Steve criticize Gladwell. First he doesn't need it because his logic is on a much higher plane than Gladwell's. And second I would stop reading Steve if he were to hit the NY jet set. Where's an ordinary white male engineer like me, who by definition is a failure according to PC, going to get his data from? It will be the wilderness all over again.

And that bit about Mozart: Bach must be the quintessential repudiation of the nonsense Gladwell wrote.

headache said...

I second ben tillman on Steve vs. Gladwell.

Anonymous said...

Mr. Truth, you forgot your "Not that there's anything wrong with that."

Truth said...

"Mr. Truth, you forgot your "Not that there's anything wrong with that."

You mean being gay, or the insinuation?

Irish1 said...

I believe if you read the NY Times or the Boston Globe story you will see that there was 1 SEC official who did something about it. Edward Manion took Mr. Markopolous's complaints seriously and acted on them the best he could. He is not allowed to conduct any interviews and reveal what happened from his point of view. However, it is his paper trail in the Bureau that substantiates Mr. Markopolous efforts from the beginning. It is my opinion that the workers in the SEC who couldn't go after investor frauds suffer the same frustration as other Bush-era civil servants who couldn't protect labor in the Dept. of Labor, couldn't protect the environment in the EAP and couldn't protect our resources in the Dept. of the Interior. Just to name a few of the Government agencies who were held hostage by an administrations' efforts to promote greed at all cost.

Anonymous said...

As a person of Greek decent, I note Mr. Markopolous' contribution and warning to the SEC with pride. For me it is akin to the ancient runner,Phidippedes, who ran barefoot 140 from Athenian camps to Spartan camps twice to elicit helpl in defeating the Persians, then after fighting in heavy armor, ran another 26 miles to warn of the Persian fleet--after which he dropped dead of exhaustion.

Mr. Markopolous raised the banner of integrity which knew no friends among the policy makers of Wall Street or the political forces in Washington. Like the protagonist in Postman Always Rings Twice, his Greek voice was trampled by less scrupulous forces.

As in the first days of the Christian Church, Greeks make the observation that the Jewish converts seem to be hasn't changed in 2000 years.