Harry Markopolos And Dogs Of Fraud (w/ Ponzi Hunter) | Adventures In Finance Ep. 21 | Real Vision™

I realized that finance was and math is truth and I just applied math and accounting proof to things that look too good to be true and when you look closely everybody else assumes genius I say both until I can prove it and tell that it's to me it's fraud meet Harry Markopolos now some of you may not know who he is but you absolutely should Harry was a guy who blew the whistle on Bernie Madoff when no one would listen the same Bernie Madoff who lost investors 18 billion dollars before the great financial crisis of 2008 well Bernie he only went up 45-degree angle and when you see a 45-degree angle and Finance 45-degree angle and Finance means one thing fraud and worst of all accounting firms that are supposed to vet financial statements and protect investors I mean not only were they asleep at the wheel but they were incentivized to drive the damn thing off the cliff name the big company killing multibillion-dollar frauds games that were caught by the big four accounting firm I can't there aren't any now if I asked you around named all the big multi-billion dollar accounting frauds that's a big four aided and abetted we could be here all afternoon Harry doesn't even get up to go to work unless the fraud is greater than five billion dollars so I just raised my minimum five billion like current minimum for a public company accounting fraud I can't touch them under that I just let them go there's so many that are larger working under the cover of darkness Kerry assembles a team of financial accounting and tax experts to take down Ponzi schemes that no one else is willing to touch so I have a group of individuals that love doing Ponzi schemes and they're basically in the hedge fund industry so I get young men that have professional certifications that are really good at accounting and math and they do it part-time unbeknownst to their employers so the nice and weekend their Ponzi hunters and if Harry and his team of fraud Buster's have you in their sights look out this week on adventures in finance Harry Markopolos [Music] [Applause] [Music] also coming up in this week's episode we have our long short segment where Aaron and I discussed the good and the not-so-good stories of the week I am long LeBron James because he just pledged 87 million dollars and collaborating with the University of Akron Ohio yes to provide guaranteed four-year scholarships to the school for students in his I promise program and I'm short Chinese bike sharing now we've all seen cities across the world now these look blue in London they're called the forest bikes and what they call them elsewhere but these to pick up at one place fail see and you and you drop up somewhere else and China a company called Wukong bike has shot it last week and in a favorite segment of our is called things I got wrong we speak with the market expert about an investing mistake they made and then we asked them to share an investing lesson they derived from that experience yeah we got a good one this week Marin KATUSA good friend of mine who is a professional investor and the founder of Catoosa research he talked about a mistake he made when he became almost accidentally the biggest investor in a mining company at a remarkably young age I'm Grove Williams I'm Erin Chen and this is adventures in finance [Music] it is June 22nd 2017 and welcome to episode 21 of adventures in finance to my writer James and grant how you guys doing Hampton alright good good I'm reserving chatter after this I think depending on changes but how you doin exactly hey I resent that remark well he's sitting between us so he can't really get up too much but we'll see guys it's been pretty stormy here and came in and I think we have a tropical storm headed our way we did a Brit or Brit as the Kiwis would call him were this in the southern hemisphere but yes tropical storm Brit is is firing up and looking ready to take aim at us this weekend I think this is gonna be my first hurricane or tropical storm season in Cayman actually anywhere for that matter so James do you have any line of excitement there really them you call the cone of death today as we were looking at the chart make sure that you're not in the cone of death and you're fine that's it I think that actually is a reasonable lesson to live throughout your whole life Erin just try to stay away for anything called the code of here yeah but you know disrupting financial media cone of death well listen you guys hardly realize I guess you could probably stay close to something called a cone of death in Agra bail spear we should probably move on yes why don't we and let's move on to our long short segment where Grant and I talk about the good and not-so-good stories of the week grant you started last week I did what so why don't you take us away this way yeah let me start off here and I'll start with something a little more optimistic and I am long LeBron James interesting okay yeah so a couple weeks back Brent Johnson a friend of the show and the friend of real vision was on I think he was talking about basketball as well but he was on the Lakers yes there's a lot of Lakers and I am long LeBron James because he just pledged 87 million dollars and collaborating with the University of Akron Akron of Accra Akron Ohio yes to provide guaranteed four-year scholarships to the school for students in his I promise program and this program basically it's to help inner-city kids and kids from where he's from who don't have the opportunity to go to college to basically free for your scholarship that's awesome I mean James famously skipped college I went straight the NBA after high school yeah yeah yeah haters phenomenal it is you know and I don't mean to you know because it is a great story and it's nice to see someone who you know you just finished he just lost in the NBA Finals but you know now he's out here and helping the community days from I just sometimes wonder if you know these people who have influence and can reach so many people if they understood actually what was behind like you know if our education are but if the u.s. education system wasn't as messed up as it was with the with gigantic bureaucracy subsidies subsidies from the government someone like LeBron James one just you know just sounds like feels like he's throwing money at the problem and I almost wish that these people who have so much influence would dig a little bit deeper into whatever you know what what's actually wrong with the system as it was just throwing money well the trouble is you can make a lot of good positive changes whether you seven million dollars think about what you would have to go through if you would try to get yourself involved in the quagmire that is the bureaucracy around in surrounding education not just in the US but in every country when James 2022 well here may be I mean this this may be where things are going but it's it's tough as as the leader of the free world is demonstrating once you even get the big seat it's tough to actually get stuff done even then so it's a it is a morass but hey good honoring LeBron James for stumping up some cash at that's phenomenal I don't see no story finally up my original long and short was going to be golf this week I'd watch the US Open which is something I enjoy doing and I have to say the last day this this pastime there was fantastic to see but you know I watch Brooks kept could win this thing and just in an incredible performance totally in control of his emotions and everything and then when he won I realized he wasn't in control his emotions at all he just had no emotion it was it was amazing to see someone reach the pinnacle of a sport and be so matter-of-fact and showed no emotion about it whatsoever alright I was astounded but I threw that one out because I got something way way better than now and it start off with my short and I'm short Chinese bike-sharing now we've all seen in cities across the world now these are blue in London they're called the Boris bikes and what they call them elsewhere but these cities obviously or CA exactly you sponsor bikes that you that you pick up at one place pedal for in you and you drop up somewhere else in China a company called Wu Kong bike has shut it last week it was 40 what they called a strategic company restructuring now what happened was the company didn't bother embedding GPS chips into their bikes that might be a problem yeah the service cost half a you one or about 7.3 US cents to a top range of about one yuan for an hour it had 1,200 bikes in the southwest city of Chongqing but most of the bikes were quote-unquote lost because there were no GPS systems and by the time they decided that they stick devices in them they basically run out bikes and money so I'll show Chinese bikes as are Wukong it would appear you know next time I lose my bike I think I might have to do some kind of strategic restructuring but you're amazing Aaron is that there are two other companies mobike and Oh fo I believe the M is silent and they they have received at least a billion dollars in investments for these companies and investors or $0.10 bertelsmann in the US and financial obviously which is swallowing up the world in China right but it's amazing that the money has been thrown at these things you would think that putting GPS chips in the bikes would have been job number one but it wasn't to be well there's such a rush I feel like to get into these markets and to you know replicate some of the strategies that they exist in US and also in Europe so it doesn't surprise me in some ways that they would overlook this I mean over the running joke back then and maybe still now is that it you know made in China it's made it's missing some parts or you know you bought a shirt and missing a sleeve and obviously it's you know well you know lucky she's here but to me today your first bike goes missing is the day you think you know what maybe we should put GPS chips in them not not when the vast majority of the 1,200 vanished a literal day one I guess who knows yeah anyway that's my short I will jump in with my long but I have a horrible feeling changes about to interrupt us looking at that face well I was just looking over your shoulder at the photograph of the bikes in question and they're bright yellow yeah like hard to steal yeah I mean you you would think that they could just drive around and picking up all the bright yellow light shine of the big place man this is I'm sure there are chop shops where they respray bike I would have difficult thing to do anyway my long now this is a sad long for me actually my long is is blame culture and to to articles I read recently one which I read with a smirk on my face it's written by a lady called and Pettifer who is one of the fellows at the Policy Research in macroeconomics or prime which is a book that using word Keynesian think-tank but she wrote an article called we need a public inquiry into the economics profession and as a few quotes that I want to pick on because it's this idea of blame they're having to be somewhat to blame for everything is remarkable and bearing in mind economists are essentially tasked with seeing the future so we know they have no chance no reason why they could get this right but now I've have my issues of economists but reading some of the quotes from this article by unpaid for is extraordinary it says if the British economy crashes as a result of brexit it will not vindicate economists it will simply illustrate once again their failure I am my colleagues of Policy Research in macroeconomics believe there is urgent need for an independent public inquiry into the economics profession and its role in precipitating both the financial crisis of 2007 the subsequent very slow recovery and in the British European referendum campaign economists have once again proved themselves not only irrelevant but a dangerous river irrelevance for too long they resisted call after call for reform if they do not do it themselves and it's time for others to take control the profession should be brought to account through a public inquiry into the failure now call me old-fashioned but if you sit someone down and said okay I want you to predict the future and then punish them for getting it wrong it's remarkable now I understand her point about the influence these guys have right but at the end of the day you are allowing people predict in the future to exert influence now the problem is not were there the problem is perhaps with you for allowing them to exert that influence and the second the second prong of this story was actually a lot more saddening to me there was an article in the UK Guardian a couple of weeks ago the title was it's not just the 1% the upper middle class is a prize no one else to now this to me I I tweeted this and I called it trickle populism and it's it's frightening to me Brookings Institute fellow Richard Reeves has written a book called dream hoarders and he notes that while the US has always had a class system the upper-middle class which he remarkably to me defines as those earning a hundred and twenty thousand a year or more it's not only widening to get between itself and everyone else but also hoarding opportunities in a way that makes it difficult for any outsiders to climb up to it he says the one percent is getting richer even more quickly but there aren't enough of them to hold opportunities on a massive scale and this you know very sadly it brought to mind the famous Martin niemöller poem about the Nazis where it starts you know first they came for the Socialists and I want the Socialists I didn't speak out as a tragic poem and this this blame culture and this angst and the feeling of there has to be a need and an outlet at which to direct your ire it is really troubling to me you know that was I think a lot of root cause of the u.s. really election and the sort of divergence of opinion since it's happening in the UK with some of the terrorist acts in the response to them and this this need for someone to blame I think is a very very dangerous development it seems like a natural outgrowth of this sort of like untethered open-loop system that we you know fiat system that we have too rare I mean ground on the one hand when an Pettifer is talking about you know bringing economists to account part of me wants to see that happen like I almost want to see some kind of Nuremberg trial for these central Paulo or stereo stereo stereo now that's that's that's a step too far look I understand her point but the problem is when you say to people okay make up fiction about the future then give them carte blanche to act on that that the problem is not as I said it's not with them it's the power you give them to effectively play witch doctor and then invest public money and invested future populations in their deliberations yeah it's it's a it's a it's a very dangerous thing to do ya know that's true I I don't think all the blame is should be heaped onto the economist I mean we shouldn't also forget about the political angle here to rebels you know certain schools of economics lend itself to politicians who want to promise and and and acquire power and votes well absolutely what the what the central bankers and the economists and policymakers have suggested over the last several years is a politician's dream so of course there's just a self-reinforcing circle but when you start looking for small groups of people to blame it's it's a very thin end of a very wide wedge to me anyway so as I was a log of that not because I think it's a good idea but because I see it increasing yeah and unfortunately I think you're right and we'll only see increase or grant before we run out of time let me move on to my short for the week which is actually not I don't know if which one is more is sadder but I'm short GE and recently Jeffrey ml who is the CEO so we're talking about Jeffrey Moe announced a transition plan and who you know John Flannery who's going to be taking over as new appointed CEO for GE and basically it's they talked about how GE has the largest pension shortfall out of all the S&P 500's P 500 companies and of any corporation in the United States and so they have essentially a 31 billion dollar pension hold on their balance sheet meanwhile the past couple years gene has spent forty five billion dollars on share buybacks yeah this I saw this article and I thought it's shameful frankly and but again we're talking about blame some of the blaming asked to go to shareholders you should be in those shareholder meetings agitating and making a lot of noise about this and saying hey what they live in but of course the buybacks boost the share price and so yeah this is all about incentive systems the incentives for executives to get paid off perform share price performance and shareholders to see the valuation of stocks got plus of course you've got the fact that GE is I don't know how many ETFs it suggests because that is your very heart of but that none of that helps this either but I saw the article I totally agree I think it's absolutely shameful yeah it's shameful and and unfortunately probably gonna see more of these that you know in these headlines emerge Carolina is prevention in the slug sisters actually and has a lot to do with our commentary feature this week where we're going to be revisiting one of my all-time favorite real vision TV interviews Harry Markopolos now Harry's irreverent style and just just going after what most in the industry would consider sacred I think it's incredible it's just him exposing the frauds and blazing this trail that's littered with you know these hucksters and on the side of the road it is just an incredible interview and I'm so excited to get you in RAL to sit down and revisit us get out graph it's fantastic to get somebody like Harry Markopolos he's got brilliant name but also Harry is kind of legendary for the guy who went to the SEC I don't know how many times like nineteen times or whatever it was in short come atoms into you to tell them that madoff was a fraud he had the bee in his bonnet he kept telling everybody and nobody would listen you know it's amazing that people and it happens in financial markets all the time people just don't want to listen when somebody says well that's not right and Harry proved the whole thing in the end and kind of cleared his name has now become a famous kind of super sleuth if that is your famous whistleblower who uncovers fraud everywhere and it was just a great interview he's a really fun entertaining charming and great guy I was a derivative professional managing billions and assets in Boston and I came across Bernie Madoff and that's how I got onto the Madoff case but I have other cases that I've done you've probably heard of I've done the foreign exchange cases so as a result of those cases and the settlement from those cases with various states attorney generals in the Department of Justice and Securities and Exchange Commission having enforcement actions there the spreads and for necks for investments Fester's are cut in half I'm saving probably in fact the SEC I give the SEC credit for that they save more they save investors more every week than their budget is for the year pretty well five trillion dollars a day trades in the Forex yeah the spreads for investors have been cut and a half as a result of the foreign exchange cases and so they're making investors money and they they don't even know it but they are so the SEC isn't a good other and so what are the other cases you votes on I'm doing some large size Ponzi schemes currently I have a 500 million dollar minimum on Ponzi scheme so I tend to concentrate on the bigger one and for public company accounting fraud my minimum there is five billion u.s. so how did you get into this to become a fraud investigator I realized that finance was bullsh and math is truth I just applied math and accounting proves two things that look too good to be true and when you look closely everybody else assumes genius I say until I can prove it and tell then it's to me it's fraud so the finance industry is going to be perfect for that because it's full of purported geniuses and there's a lot of money at stake so I guess fraud is you know is ever-present my motto is assume fraud first until genius is proven and I just use math and accounting techniques and I want to see if it's really genius or if it's something else usually it's fraud there's only one Apple one Google everybody else probably a fraudster brilliance Harry is so entertaining and it's just his view of the world is so deeply cynical and deeply black-and-white I mean that's it right there either geniuses or frauds nothing in between there's no bumbling people you know kind of making it through you know what you said there about math is truth that to me underpins not just the fraud side of things but the credit the leverage what the feds doing ultimately I keep saying this but the only laws that politicians and central bankers can't rewrite our physics and mathematics and the these laws of math that Harry uses to determine frauds are going to come around and bite people in the arts at some point anyway we should listen to more of this and see what how the story develops made up is one of my competitors and he was using a strategy that was unworkable because he was really bad at portfolio construction mathematics he was pretending to replicate the OEX standard and poors 100 stock index but he was doing it rather foolishly he was saying he was only using 30 to 35 stocks to replicate that 100 stock basket and a true derivatives professional would have never assumed the single stock company specific risk that Madoff did he would have just neutralized that risk by investing in the index and in the appropriate market cap weight he couldn't have made off had to be picking stocks because of the way he constructed his so-called getting portfolio he would have had an only pick stock that went up or stayed the same but never went down and I didn't think that was possible so you got the shot beer in your head what do you do I sent our marketing guy Frank Casey he was our senior VP of Marketing you been out of New York find out what this Madoff guys doing he comes back with a terror sheet and in five minutes I knew it was bull allowed to say that on TV of course you got his real vision okay good so you realize it's all dissipating what makes you then want to take this challenge on to get him prosecuted or tell the world about it and nobody wants to hear what you got to say well you're stealing my clients you're stealing the clients of every legitimate asset manager his Sharpe ratios are in the high to low threes and so everybody's investing in Bernie and so there's no room for me because my returns are real I can't run a Sharpe ratio like that the market goes up and down and my strategy will - well Bernie he only went up 45-degree angle and when you see a 45-degree angle and Finance we don't have those in finance those are textbooks from high school geometry and trigonometry 45-degree angle and Finance means one thing but yeah exactly right so however was that process of you starting to build the case against him how did you start building the case and then who did you present it to how did that process will work well first I presented it to my bosses they wanted me to Rhian reverse engineer Madoff strategy so we could offer it to our client obviously so I did I looked at it it took five minutes it looks like a Ponzi then I spent a few hours of modeling it I said well it's definitely a Ponzi I told my bosses we can do it let's reverse engineered it it's easy Bernie's offering 12% returns and he's giving you four percent of all we'll do 14% returns with four and a half percent of all will own the market for that Fonzie's strategy they thought I was kidding and they didn't listen to me they said well he's smarter than you he's a market maker he has better math skills so I had wounded pride and I said well that's kind of a she's stealing everybody's clients I got to stop this and your reputation as well now yes now my reputation is on the line so I started working on it at nights and weekends but I to the team so had our marketing guy Frank Casey I had my other portfolio manager who worked for me Neil cello and we recruited a senior investigative journalist Michael oak Ron and we went after Madoff and took us about nine years to no avail [Music] l hath no fury like a monopolist che look given the correct question Harry comes after you with the big guns but I think what was great about that is if you strip away all the hairy isms in there it's down to knowledge get a Harry knew his stuff yeah and when you know your stuff you know when something's not right and you know he understood index arbitrage which is one of the strategies that he was talking about in the beginning and how a tracking error of the index by not choosing all the right stocks would mean that that they they could create enormous losses not just profits and what that means to people who don't understand anything arbitrage is basically you would sell the futures contract if it trades slightly expensively compared to where the basket of stocks should trade does underline that futures contract and most index arbitrage is buy all 500 shares in the S&P 500 or whatever index but what Madoff was doing is apparently buying a subset but managed to only pick ones that went up so we had this super return from index arbitrage which is impossible because that would be a risk-free super normal return strategy which doesn't exist but that's basically what he was peddling and Harry figured out that that had to be fraud the thing that struck me when I first watched this interview came back just to kind of rave it about your time with Harry and I watched the footage of this and what struck me in that clip I remember the time was how quickly he saw it and how slow everybody else was to pick it up you know I was like any derivatives guy will know this for what it was straightaway and he was on it immediately but this this cocoon that Madoff had around it because of his reputation because of his time at the one of the chairman of Nasdaq he had that credibility and people just refused to entertain the fact that it could be a Ponzi scheme the same way they refused in 2007 to believe the market could top out the same way a lot of people now refuse to believe that the Amazon could go down or Netflix would go down you know this this this challenging of the pervading narrative is so important for people to do and to your point when you get guys that really know their stuff it's so clear to them straight away I also just think how is such a great character because he's really smart he's really engaging he's funny he's deeply cynical I think we should make a documentary about him I think that is so much good it takes it takes big political people to recognize each other I think Toby went in with about a half a dozen red flags but the seac at that time was very dysfunctional it was run by lawyers was over lawyered and of course they didn't understand any financial math they didn't know what derivatives were and so my presentation quickly ran found its way into the circular file they put it in the trashcan and it went nowhere and I had one champion there who was a chartered financial analyst who had spent 25 years in the industry at the Boston company and fidelity and his name was ed Manion and Ed said you got to come back in we've got some new people and following year in 2001 I was back in there presenting again same result very very disappointing for both ed Manion and myself and finally in 2005 he calls me back and says we have a totally new team these people will get it you come in and meet them and they actually did it did get it Boston I went into the Boston SEC spent hours diagramming the concepts on mark erase board and colors and I knew not to use derivatives math or anything like that because these are lawyers but I had very simple explanations for everything and at the end of that meeting he said this is rather serious if this was in Boston we have multiple teams in there the next day tearing this place apart unfortunately it's in New York where we don't have such a good relationship so give us it we're going to investigate this and we'll get to ask you very shortly and they did a week later and get a call from Mike Garrity the Boston office we found something very disturbing when I'll have to share it with you this case we were forwarding it to New York with an urgent recommendation and that's where it died the people in New York could have cared less if they're getting something from Boston there's a big rivalry between those two offices like the Yankees and the Red Sox and there's no way in New York was believing that a big case came to them from Boston that was any good wouldn't be possible they would have kept it for themselves which was not the case and so they put probably their worst team on it and they that's litigated Madoff and they didn't find anything I could think about farming well the exam team was convinced that Madoff was front-running because that's what he was basically that was his cover story he's trading five to ten percent of the daily stock exchange volume of the New York Stock Exchange and he would wink wink wink when people would ask what's a burning your option strategy we know you're not doing that what are you really doing as well I'm trading five to ten percent of the daily stock exchange volume wink wink wink and I know that if my customers are selling big stocks the S&P 500 is gonna go down and so I know it ahead of the market well that doesn't make any sense he only knows five to ten percent in this and what he doesn't know is 90 to 95% what's going to determine future pricing direction so 90 to 95% that Madoff knows nothing about simple math techniques will solve big fraud cases and the people on Wall Street who are not even capable doing simple mathematics all you have to do is do a teach art because the bad guys give you enough information to solve their case to your case you take what they say put it in math terms five to ten percents what he's saying and does not equal what ninety to ninety five percent just do a t-chart and that will solve most of your cases you can solve most of your big fraud cases on a cocktail napkin sometimes with the complex ones you may have to use the backside of that cocktail napkin again he puts it brilliantly just so well but the point is again is most of the time it's staring you in the face yeah but you don't want to leave it it's like when Enron went down when I learned that a hundred percent of their entire pension fund was in Enron shares nobody said I was is that right what why would you do that it was like oh they're so clever they know their stocks going up because their colors smart the smartest guys in the room after that was a fraud yeah when you listen to that it's I found it quite shocking when I listen to this just the ineptitude of the regulators you know you listen to this and this is a real-world case when we could all we can all poke fun at regulators and officials of various colors but when you hear a story of this with some guy going to something which he's seen immediately and he's giving him a story on the back of a cocktail napkin and they ignore him they kick it out they don't get it he's very deliberately not using derivatives Murthy he understands his audience and that petty rivalries in the middle between the Boston office of New York office get this stuff cost people billions of dollars I took your billions I mean this is basically part of the TV series billions you know the investigators office and you see the kind of shenanigans and that looks like drama or overdramatized on television but yet Harry's saying no this is exactly how it is exactly what happens is people looking off their own careers instead of the fiduciary duty to invest it it is shocking yeah again you know we talk a lot about finance it's not entertainment these guys it's not about their career as you say it's about the life savings of millions of people nothing we did stop the Nader the authorities refused to listen what stopped Madoff with the financial crisis and no one trusted the banking system and other hedge funds had gates and other asset classes for instance the fixed income markets were frozen you couldn't get a bid on corporates and so where are you going to find liquidity they went to Madoff there was no gate they went to him like an ATM and pulled her desperately needed cash out stay afloat and he saw his cash account at JPMorgan he saw his checking account dwindling the last few hundred million and he turned himself in on December 11th 2008 if we talk about mathematics it's almost improbable speer to lose as much money as he did well you have to be spectacularly bad it was about 65 billion notional losses but the real money in was only maybe 20 billion maybe twenty three billion cops the 65 billion is what people thought they had that's what appeared under statements in November 2008 of course those returns were phantom illusory they weren't real and so 20 billion evaporated and if you look at who got hit the hardest you'd have to say it would be the Swiss certainly in the US we got hit pretty hard I'd say it hit about 11 percent of the feeder funds in the United States and when hit about 29% it was like a nuclear bomb going off over Geneva about 14 billion and wealth just evaporated in Geneva Wow so they were hit the hardest I would say Europe was hit a lot harder than the US but you only read about the case in the US and not in Europe because the European investors were never paying taxes that would always undisclosed hidden money dirty money that's the sport in Europe it's tax evasion not soccer and so they could admit in Europe that they had these losses because they never declared the income the money and the result you they were silent victims we're in the u.s. the victims are very noisy they immediately retained counsel and started suing the theatre fund the banks the service providers anybody that got them involved with Madoff they sued and how much did they recover the recovery still ongoing here we are almost eight years later and the cases are winding down through the courts pretty slowly I think they'll be over in another few years but some investors will get a hundred percent on $170 but they'll have waited eight years for it now others who have got nothing if you went into a feeder fund that wasn't solvent and didn't have any kind of Insurance Scheme behind it you may get nothing [Music] what Harry said is beginning of that clip it's important to remember and I think people forget this that Madoff wasn't caught right these guys didn't get it Harry gave him all the evidence all the information they needed set them on him and if it hadn't been for Lehman and o8 who knows where this would have ended up because he ended up having to turn himself in because he realized the game was up because all these people are taking their cash out here this the biggest Ponzi scheme we've seen in living memory if not in all of history and it was circumstance that uncovered it despite Harry Markopolos laying out exactly what the guy was doing to the regulator but let's just go back to my point that I made in that video is how bad a trader was this guy he might have been the worst trader ever because he was an operation violent at 15 20 years and he managed to consistently lose money and hide it so much so they lost 20 billion dollars of it that take some do it and his winners versus losers ratio must have been one of the worst ever imagine if you're just taking the other side of every trade he ever did we'd be worth twenty billion dollars grow exactly right yeah very good just comes back to how was this not found out how was it not discovered when you've got that kind of an aptitude on one side and you've got someone like Harry on the case like a bloodhound on the other side I mean it's just it just boggles the mind all right it actually irritates me yeah it irritates me that the system just doesn't want to realize finance is too powerful in the global economy and it's a bugbear of both of ours how powerful its to come and it's not fair on people because finance just goes to lobby Parliament they Parliament's or government they force things through they obsolete things they make friends with politicians they just don't allow any kind of transparency of what's going on it's just not right the biggest beneficiary was the Securities and Exchange Commission this case took them to their agency's all-time low they were founded in 1934 and in 2009 they were the laughingstock and they knew they needed to get better and there's an old saying I had school my headmaster when the going gets tough the tough get going and the sec to their credit got going I met with the chairman about a month after two months after the fraud became public and I said you really need a whistleblower program because the way I came in I was totally ignored you have no way to collect all the intelligence from all these people coming into the SEC reporting fraud you have 11 regional offices and you have a headquarters in Washington you have 12 different ways of dealing with whistleblowers none of them the right way and you need to incentivize integrity and the Department of Justice has a program that pays 15 to 30 percent and they get high quality multi-billion dollar cases and they're about 20 25 times more effective than you are she said Larry we need to be 20 25 times more effective so I showed her the statistics on whistleblowers and she said we're going to do this and truer words were never spoken and we now the whistleblower program and ASUC is doing really good cases the other thing the SEC did to reform itself was they didn't have enough finance people there they had a bunch of attorneys well attorneys are very smart people but not at math they went to law school for a reason they don't do well at math they're very good at the English language they're very good at rational thought and reasoning and logic but math is not a strong suit for them so they're not going to catch anybody on Wall Street so they needed to have finance professionals and they do they have finance professionals that they never had working there before they're getting people toward the end of their careers and their 50s people been laid off they're not going to get re-employed in the industry they have a valuable skill set and they have a financial toolbox second to none up here and now they work for the SEC and they're subject matter experts and they have experts for every niche in finance it's something that didn't exist there before and they're very aggressive about doing large cases for the most part other than in the New York office I think other regional offices love big cases [Music] he really does not like the New York office okay he's not perfect yet just listen to that it's it's good and bad for me as better sweeted it's so sad that it took something like this for these guys to get their act in order and I think we all know the reason they got their action was because they were under public scrutiny and were made fools of so they decided to get their active you know I think if Harry had taken this whistleblower program to them two years earlier he would have been laughed out of the office but on the on the plus side thankfully this is now ongoing they've had a bloody nose I don't want another one so there are to be more vigilant it does mean for investors that more of these things are going to come to light because now they are incentivized to track them down so you know we have to be vigilant but you know it is a shame that that it takes something like Madoff and people losing billions of dollars to energize regulators to do the right thing as over bureaucracy of the system always gets in the way of this kind of stuff but yeah I mean it's good at least they're trying to do something now let's hope that they are more vigilant on this kind of stuff and get people earlier on because the problem is Madoff it was too big so that really damaged people it's it's it's okay it's not okay but it is less bad when it's a small 20 million dollar for all the hedge funds based out of Miami or something but when it comes to these massive things that's been so big for so long it's you know it's it can break the system if you're not careful what Ares point finance guys know finance and so it's it's a good thing that some of these guys Harry sis was into their career with all this knowledge or in this position you had one Harry Markopolos in that SEC office in New York when this happened this thing would have been uncovered straight away so so thankfully difference has been made and hopefully for the better you look at the history of accounting name the big company killing multibillion-dollar fraud schemes that were caught by the big four accounting firms go ahead round named them come you can't and that's there's a reason for that there aren't any now if I asked you round name all the big multi-billion dollar accounting frauds at the big four aided and abetted we could be here all afternoon so the incentives are totally screwed up in the accounting industry there's no way the company should be paying the audit fees it should be the shareholders it should be a fee every time you buy a share a certain number of basis points should be allocated to audit fees because the audit fees are currently - way too low management brags about how low they've gotten the audit fees so audits become a commodity the people doing the audit 80 to 90 percent of your contact hours are by somebody in their 20s who's going to catch fraudsters when you're in your 20s the only way you're going to catch fraudsters is to have thinning hair gray hair or no hair you have to been around of law and then burn several times before you're able to catch fraudsters and he's young twentysomething the turnover right there at the big four the hours that these kids work twenty five percent turnover minimum year there's very little training that goes into a big four account they have some training programs but they carefully navigate their way around fraud the other thing they do is they don't do a lot of substantive testing because that's expensive so what they do instead is they do an analytical test they just run some numbers - algorithm that they have and they say well that's our test and then they do very little substantive testing for instance most of the accounting firms they'll take 75 sample transactions and that's what the audit and it might be something very stupid the way they do it could be the 25 largest transactions of the company for that year it could be the 25 newest and 25 something else well many companies will have millions or tens of millions of transactions and you're auditing 75 and you're saying that statistically revelant relevant I say that's not relevant at all and they said well we did the sarbanes-oxley testing and they have great internal control so 75 should be sufficient well it's never sufficient that's why they miss all the fraud it's quite funny cuz the backdrop to this interview he was actually speaking at a conference here in the Cayman Islands to all of the auditors and the large accounting firms who are based here basically telling them cuz he did a speech based around some of this stuff basically telling them that they're clueless and there's no point they're kind of a bunch of overworked kids he said you're never going to catch a fraud and you guys are just going to keep getting prosecuted because you keep missing every fraud you know it but it's true it's the sad state of in centralization in the industry you know because audit is not very profitable so they just put the youngest cheapest people on it the partners who are senior enough to be running that business are overseeing like a million audits often you know obviously exaggerating but a huge number of audits that I really care it's just a numbers in numbers out make a small margin business and yeah the propensity to make error is huge but isn't overall that was just a he's just a really amusing fabulous guy to listen to yeah and and you know a real bulldog right when he gets his when he gets his teeth in your leg you're not shaking him off and he's smart as hell you know covered up by the kind of undercover comedy routine that he has as well I mean he's he's incredibly smart very focused and yeah you don't want him on your tail you know it was what's interesting when he talks about the stuff and again you know sit there talking about the issues with accountancy firms but you know that presentation that we saw recently on how blockchain is going to disrupt this this industry you know perhaps we'll talk about it another week but but this industry is right for disruption not just by the Harry Markopolos of the world that want to tear it down from the inside out and get rid of the inefficiencies but also things like blockchain that will revolutionize this and perhaps go some way to making sure these kind of frauds don't happen again yeah exactly right but you know overall good for Harry you know the world needs more people like him people he wasn't being compensated for this I mean he does that he makes money now from whistleblowing but he wasn't being compensated he just realized that there was a something wrong and something needs to be done about it and you know the world needs more people like that he's a true hero I wasn't honored to interview him and called him friend segrand I recently read a headline saying how Harry has now focused his attention on the Boston Metro Authority pension where he's claiming that they are fraudulently understanding the liabilities by a hundred percent yeah I saw that story too I saw the headline you know Harry Markopolos ysabellabrave this site so I couldn't read it fast I'm like wow okay was he gonna go this day you haven't listened to Harry's conversation route you realize if he's making this public he's a long way into this thing and so it's good to be one to sit back and watch I'm folder and I the thing about what Harry does it's it's numbers and and generally speaking numbers don't lie you can be creative with them but when someone wants to get to the truth and his numbers based it's not that difficult thing to do so I you know I when Harry says something like this for me it's a case of okay he's right until he's proved up people until he's proved wrong rather than the other way around you know it arises to me is not assumed in these cases because again incentives it's in these guys best interests to understate these liabilities you know maybe this is a function of some of the time I've spent and family recently but I imagine Harry must be a pretty intimidating guy like you know his daughter or sons bringing someone her first you okay exactly right especially if he was to see your estate your finances before you take his daughter out on a date right yeah he what does that line he says I assume everyone is a fraud until proven otherwise exactly right oh man that's that's pretty rough well great let's move on to our final segment called things I got wrong where we speak with a market expert about something they got wrong and then we ask them to share that pearl of investing wisdom that they derive from that experience so hopefully listeners can avoid those same mistakes yeah this week we had the good fortune to sit and chat with a good buddy of mine Marin KATUSA who is a professional investor in the resources space which is a place where you become a professional investor very very quickly and 99 times out of 100 the hard way Baron founded KATUSA research and he told us a story about him going all-in in a mining company that was a scarily early age all right well joining us this week on things I got wrong it's not a great friend of mine Marin KATUSA the founder of Catoosa research and KATUSA funds and there's a really good reason why I wanted to do this segment with Mary and I'm so excited to have him on us because Marin more than just about anybody I known finance is so happy to own his mistakes and talk about them and revisit them and try and help other people learn so Marian's fantastic to have you with us buddy always a pleasure so you know I don't like we didn't like doing this to people but the response we've had to this segment has been tremendous people really appreciate as you and I spoken in the past that how few people are happy to say hey you know what I screwed up but this is what I took away from it and the response has been fantastic well you should ask my wife she dare leave anymore we've only got 10 minutes we've only got cemetery there it's not about praying being in determiners uh you know I'll give you one that I think your younger audience will appreciate as you know I was pretty young when I got into the sector I had some pretty big success early on and it came quite quickly so I spent a lot of time breaking up the sector and as you where a good one grant is a project I took you to where I became the largest individual investor in the company at the time as a private company and I thought you know what this is going to become a mine and at the time in 2006 I had my mentors like Rick rule and Ross PD and all these guys look at me and go are you nuts you're going to go build a mine I had a five-year business plan and I put way too much money up because I thought the world worked on my business plan and you know I'm into my third five-year business plan now I've been on the board for five years but the better story is from when you go private to the first public on the junior Exchange Neary's over 400 million dollars for a company it went from 3 bucks to 30 cents in that oh wait crisis and I believed in it I ended up selling my house and going all-in and that's a lesson that the key lesson there grant is you know don't put up all your money now based off of what you think it should be because you know I did not expect me to be sitting here twelve years on the board and as long as I've been on this company but the world takes you in a different way and then from oh it to 2011 it went from you know 40 cents to 8 bucks and then today I went down to 80 cents so the question people should ask themselves is okay maybe I put up 50 percent of the money that I intend to buy and over the next 2-3 years things will happen that you can't plan and ours was the price of copper went from over 4 bucks to about 50 then it went back to 4 bucks and then went back to 2 bucks so you know that that's a key lesson for the younger guys out there and even the older folks that you know buying tranches and buy very slowly as the company grows there's nothing wrong with averaging up not just averaging down you know it's a it's a great story and it's it's so such a frequent occurrence in the resource industry but you know what you talk about and what a fascinating to know is how you know because you get these things that happen as I said all too often when you're in the resource sector where these stocks can get cut in half get cut in half again several times over and a logic would tell you at some point you have to cut your losses and move on you were so close to the company you were right there in amongst it you knew what was going on you the value of the asset but how do you how do you pull yourself out of that and take a cold hard look at the reality of fair value versus that gut instinct that tells you you know I know I'm right they're always wrong or this is just this is just a blip how do you make yourself a dispassionate observer of it and understand when to sell your house and go all in and when you're just doing it for the wrong reasons because you're stubborn grant there is a reason I had a quadruple bypass at 33 you don't really know look you try to be as balanced as you can possibly be but you've got to control your emotions and you know the key factor there you said it I was so involved I was up at site I've been to the project hundreds of times I could jump in my car just like I took you there and back in a day I know everybody there the money wasn't being spent you know on nonsense it was moving the project forward and I just believe that if copper would correct we would be okay and it was a clean concentrate in today's that their largest producer in the country so it's worked out but look it hasn't always worked out for me another great lesson was I personally lost over a million bucks off of what all of the major the big banks in Canada and all the top research forms were giving a wild like low-risk buy on a service company which essentially when you look at it back going to you should make so much sense that this was a fraud I was called Poseidon and I remember all the banks phoned me going there we want to get you on this I said I don't know I don't really know the story I just got back from my surgery and they're like no no it's got to be really good it's going to move forward and they had all these accounts receivables that all of the bank analysts were assuming would get all paid and there's a story of wait a second you know these these payables didn't ever come in and what type of payables what kind of accounts receivables were they and management basically were fraudulent so there are times grant you're going to get caught I've been caught but that's a good example that all of the big banks all of these analysts got caught and I invested on a normal I assumed that these banks did their due diligence and went to the clients who they they you know these banks were putting in twenty thirty forty million dollars I thought okay well I'll put a couple of million bucks in and they didn't go and find out who the clients were that had these accounts receivable and it disappeared they went to money heaven so there's a stock that went from $20 to zero and I jumped in trying to catch the night so never ever try to catch a knife I bought stock at six bucks thinking honest with the aldi analysts for giving a fifteen dollar target when I was six dollars I thought okay I'll jump in what I should have done was okay by maybe 10 or 20 percent of my desired position and ease into the position and get to know it or make sure that I know someone personally that has been to the project and that's where it comes down to investing in the people grant you got to believe that the guys who are running it have more percentage of their net worth they have skin in the game than you do because at the end of the day you can't go and know everything about every project but make sure that the guys running it are honest legitimate and we'll make it work and follow the insider selling and looking back at it the presiding guys or many of them were blowing out their paper but they didn't report it till later so there's an example of you got to make sure that you know when it's time to sell you just got to say look I was wrong I'm out and move on man I want to change gears a little bit and actually ask you a question what we because you said you started investing we were pretty young and so far our younger listeners here what was what was that like what was the learning curve like and did you seek out any mentors to help you through this process ah yeah I always seek out mentors I started out you know going through the CFA program and you sit there and you're like okay go to these conferences and you got someone like Rick road KC talking about warrants and like to use that board doesn't even exist and CFA program and you realize that investing in the real world is very different than X books the guys who you're taking these lessons from aren't the movers and shakers in the industry so it's kind of like gearoids behind by a few years initially it was overwhelming and you know I'd follow these gurus the fact is most of these gurus or Canadians they're either crooks or they're paid for or they're living off a success from you know a stock pick they made 30 years ago so be very careful who your guru is is he a you know just a poseur or is this guy the real deal the other thing that was the biggest lesson was I started out as a high school math teacher physics teacher that I got teaching into college and you know from there and left but I was very sharp mathematically that was my strengths but I remember I found this company online and I had a question about the geology and I did geology and University my you know I knew a bunch of the guys in the sector because in Vancouver I have the benefit of being in the epicenter of the resource world for financing which is Vancouver for the junior resource sector specifically and literally like 80% of all the companies are located in Vancouver and I was so nervous phoning the company and the first phone call I ever made was to a guy that became a very close friend of mine Ron peratt and he ended up selling his company that eventually got into Newmont so he was more than happy to answer my questions and the biggest lesson is these guys are there to not just share their information but educate people so don't be shy to ask questions like pick up the phone and call go to the conferences and today more so than you know 16 17 years ago you can get a hold of virtually anybody whether it's through Twitter or you know emails or phone calls remember the mining sector are crusty old gos you know 15 years ago email is just kicking into the sector so today most of them know how to use email not all of them but most of them so get out there and ask go to these conferences there Steven teleconferences or blog sites there's so many ways to get to know people yeah it's a great point very that community the mining community I think there's a there's a real kind of brothers-in-arms feeling about it because they get so beaten down from time to time and you're absolutely right I've lost count to the number of people that come up to me at these conferences and ask really smart questions and you can't help but engage with people that ask your really smart questions and you know ask them as best you can and offer them all the help that you can give them not just that but you know you could be sitting beside you know mining Hall of Famers grant in my conference in San Fran 2015 when you know you were sitting in there you and I are on stage but yet David Lowell yeah for the University of Arizona's named after he's sitting front row next to him is Ross PD got Doug Casey you got Eric Sprott you got right just go there and these guys are there because they love the industry so you know they're they're like a fan also and they would love to share hey I like this company or I'm bearish on silver I'm bullish on silver and you can always learn something and they always have business cards on them and they hand them out you know look at Rick rules it has been an amazing mentor of mine and we became partners and then you become kind of like colleagues and he'll phone me up taymir and your get stronger on this side can you do this for me or vice versa or whatever and you establish that rapport with these guys well you know I met Rick 16 years ago and grant I don't know if you know started but I met him at a mining conference and he sat there for over an hour after everybody left it was a Sunday night and bonny his wife is like right we got to go to this dinner if his wife didn't drag him out Rick would have stayed there all night now why would he do that was he because he thought I was a nice guy no he was captivated with the conversation and he loved the industry so much that's what he want to do he hasn't the guy doesn't have a TV he has no interest in watching anything zero knowledge of pop culture but we sat there and it was like he gave me his business card he goes feel free to call me any time so I did and you know what was it maybe eight years later we were partners in a fund yeah it's great I mean Rick so I've got to know Rick over the years I've had exactly the same experience he's happy to share and you know whenever you're around Deming I know you know this he just gets deluge by people who want to do that and want to talk to him and it's amazing how how patient and how you know kind is with these people and he's you know he's he will take the time to talk to people so yet I think it's a great lesson ask Rick looks at every person as a potential client too so there's no chance for Rick yeah well Maron in the interest of engagement and learning and sharing knowledge for our listeners who want to read more with your work or even get in touch with you via social media how can they do that I got a website KATUSA research comm so that's a starter we got a free newsletter their Twitter Boyd's whatever kind of fancies my interest I'll just tweet sometimes I won't treat for a month sometimes I'll tweet a few things a day or you know whatever and for any of them is really good so just phone the office I've got a crew of eight that work for me here in Vancouver and you know we can there's always a way to get a hold of someone and my conferences I think the San Francisco show November and then the January show in Vancouver I think grant are you going to come to the one in San Fran or the banker everyone hey listen II I get the invite I'm there you know that well I gave you the invite last time you didn't show up hey that's don't say I did like I came in November then I've been my January will I will confess to that perfect well then just to confirm its I think you have two Twitter handles you have Marin KATUSA and Yosef KATUSA research so we asked people I'm Marin KATUSA so the the back offices that KATUSA research got it so yeah alright alright that's a you start running things you lose control of what there's two handles Merrin Mae it's always a pleasure to talk thanks so much for doing this I really appreciate I know people gonna love getting a your perspective on this stuff you bet anything else I'm always here guys I'll see you soon thanks a lot take care guys bye bye new ground when I listened to Marin and just trying to appreciate you know his risk appetite he's been around he's still thriving and I want to ask you like what separates people like him you know and those who would have quit a long time ago in some other phase of the resource supercycle because these things do go in cycles so what do you think separates someone like Marin from those other other people who have quit you know a lot of it it always comes down to how you handle adversity particularly in the resources space and because it's so cyclical there's an element to it of the time you get in if you happen to catch the rising part of the cycle it can be very good for you can make a lot of money but the danger of that is that you can be fooled into thinking you're a genius very very easily and you get bolder and bolder and bolder until you're always at the top of the cycle and then you get crash on the way down so you know for Marion having tough experiences around him at the beginning helped him understand how you can go wrong and I think in any investment understanding what the risks are and understanding how badly you could be impacted by certain things happening is so crucial to learn the other thing Marin did and does brilliantly is find out who the right mentors are and and and cultivate them and reach out to these guys and the mining industry you know it's one big brother people are very open with sharing their their information and their wisdom and mary recognized that and went out and got people like Rick rule to mentor him they've subsequently become great friends and you know understanding that guy like Rick would be open to help there is a crucial thing to understand it's not just Ritz the first name that springs to mind but there are plenty guys the industry that have taken some serious knocks themselves and are happy to help young smart hungry guys avoid those pitfalls yeah I remember was a Rick rule immediately came to my mind as well and I remember listening to an interview did I think about a year and a half ago and he's saying yeah like I've made fortunes you know multiple times over and lost them yeah well times as well and and just to have the opportunity to learn from those kinds of people must be just tremendously valuable and and hopefully like you know people can actually spend the time to identify those mentors that you that you can I guess relate to and also I mean with Twitter nowadays it's the barrier to actually speak to any people solo it's a great point but I think the other lesson for me from that was a make sure every time you get beaten up you learn a lesson from it yeah it's so important to not just curse dumb luck but to understand okay what could I have done differently to ensure a different outcome yeah absolutely well unfortunately it brings us to the end of this episode just a quick legal disclaimer before we end anything you heard on this episode should not be considered as trading advice these are our opinions and the opinions of our contributors only so do your fundamental research chart your technicals place your stops and trade responsibly yeah thanks we'll be back with a usual long short as things I got rogue segments and for next week's documentary feature we will be continuing our series on financial history we'll be telling you a story about the father of central banking and one of his early ventures that led to a massive bubble and crash a couple decades before the fomenting of the French Revolution and the complete upheaval of French society it's a fascinating story more than any other of its kind I think it highlights the links between monetary policy and societal of evil just just brilliantly but in the meantime if you have an interesting question about this week's show or as I keep saying anything else for that matter we would love to hear it so send us an email or leave us a voice note podcast at real vision com and if you enjoy what you heard please subscribe and leave us a review on iTunes Grant I'm figuring out that review I'm figuring enough well is the day you figure it out we're going to make a lot of money out of that knowledge if you want to keep up to date with the latest interviews research publications and podcast episodes then is to follow us on Twitter at real vision you can find us hanging out on Facebook and LinkedIn just search for real vision and you can follow me on Twitter at tt My gah finally you can follow me at macro DX and that's it from us we will see you back here same time next week [Music]

Channel: Real Vision Finance

Views: 7,638

Keywords: Investing videos, finance videos, finance interviews, finance 101, business finance, finance major, investing, trading, economy, real vision, real vision app, real vision tv, real vision videos, real vision finance, adventures in finance podcast, bernie maddoff, bernie maddoff ponzi, finance podcast, fraud, grant williams, harry markopolos, harry markopolos interview, marin katusa, marin katusa interview, podcast, ponzi scheme, real vision podcast, aaron chan

Id: _tC1Yv6lS6k

Length: 64min 53sec (3893 seconds)

Published: Tue Jul 11 2017