That Bernard L. Madoff was running a massive Ponzi scheme wasn’t news to many industry professionals who were skeptical of his amazingly consistent returns during inconsistent markets. But what is becoming more apparent is that it shouldn’t have been news to the Securities and Exchange Commission (SEC) either.
Bernard L. Madoff Investment Securities LLC (BLMIS) was a registered broker dealer and a registered investment advisor (RIA), giving the SEC access to Madoff’s operations. The SEC suggested that move when it found Madoff was acting as an investment advisor to hedge funds and high-net-worth individuals in violation of the Advisors Act.
The SEC also found that client disclosure documents didn’t adequately reflect Madoff’s advisory role and that Madoff misled the SEC about the nature of the strategy implemented in several funds.
All of this was brought to light in January 2006, while the SEC was investigating fraud allegations against Madoff. “The Commission has learned that credible and specific allegations regarding Mr. Madoff’s financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action,” noted Christopher Cox, SEC chairman.
In a whitepaper delivered to the SEC dated Nov. 7, 2005 and entitled “The world’s largest hedge fund is a fraud,” Harry Markopolos, then a competitor of Madoff’s, examines the BLMIS corporate structure and debunks the claimed returns of the “split-strike conversion” strategy that Madoff purportedly used. In all, Markopolos lists 29 red flags indicating that BLMIS was either front-running customer order flow or was the world’s largest Ponzi scheme.
Madoff founded the firm in 1960 and held numerous executive positions at the Nasdaq Stock Exchange including chairman. The fraud is estimated at as much as $50 billion. In mid-December, the Southern District Court of New York granted the Securities Investor Protection Corporation’s application to liquidate the firm’s holdings and named a Trustee.