A prophet without honor in his own industry, Harry Markopolos was a guy nobody wanted to listen to in 2005, when he offered in painstaking detail why he thought Bernard Madoff was a fraud. Markopolos’s 19-page, single-spaced letter to the Securities and Exchange Commission listed 29 reasons to doubt the purported profits at Bernard L. Madoff Investment Securities.
To make sure people would read the whole thing, Markopolos stated early in the missive that the best explanation for Madoff’s evergreen returns was that he was running “the world’s biggest Ponzi scheme.”
The SEC followed up by issuing some technical citations against Madoff, who remained largely unscathed and very much in business, rolling on toward infamy, which came a little more than three years later when he told an FBI agent he was running, well, the world’s biggest Ponzi scheme.
Markopolos, who worked for a rival money manager, in his list poked many holes in Madoff’s math, wondered why the firm didn’t have an independent auditor, why only family members had proximity to the books, why Madoff seemed to always time the markets so well.
But red flag No. 29, in retrospect, best got at how Madoff managed to rope so many funds of hedge funds into giving him so much money: “It seems like every single one of these third-party FoF’s has a ‘special relationship’ with BM.”
