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Wall Street Insiders' Doubts on Madoff Never Made Public

Feb 16, 2009 | Parker Waichman LLP Many Wall Street insiders had doubts about accused Ponzi schemer Bernard Madoff, but never made them public, according to a recent New York Post investigation.  While several were willing to speak with federal regulators if they were allowed to remain anonymous, the Securities and Exchange Commission (SEC) never took them up on their offer, the Post said.

Madoff was arrested on one count of securities fraud on December 11.  Madoff - once a chairman of the Nasdaq stock exchange - was the founder and primary owner of Bernard L. Madoff Investment Securities LLC. The firm was primarily known for its business in market-making, or serving as the middleman between buyers and sellers of shares. However, Madoff also oversaw an investment-advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.

According to the FBI complaint against Madoff, that business was largely a Ponzi scheme.  The FBI said Madoff  “deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars.”

Madoff’s scam allegedly went on for decades, and the SEC has faced a great deal of scrutiny because of its oversight failures.  Earlier this month, Harry Markopolos, a fraud investigator who spent nearly 10 years investigating Madoff, blasted the SEC for its oversight failures.  In testimony before the House Financial Services Committee, Markopolos  told lawmakers that in 2000, he had spotted Madoff’s fraud in “about five minutes” by looking at his promotional material.  Markopolos said that he and a team of investigators brought 29 specific red flags regarding Madoff’s operations to SEC offices in New York, Boston and Washington, DC,  but no one at the commission ever acted on his tips.

Now it seems, in 2005 Markopolos also had contacted  several high ranking Wall Street executives from Citigroup, Goldman Sachs, and Wright Capital Management who were willing to talk with the SEC about their Madoff doubts as long as they could do so anonymously.  According to the Post, the information was included in 700 pages of documents Markopolos filed with the SEC. While the SEC ignored their offer of information, the Post found that some did repeat their concerns to friends and colleagues.  

According to the New York Post, in 2005, Madoff's fraud amounted to about $7 billion - not pennies, but still substantially less than the $50 billion it may have reached by the time he was arrested.  One lawyer representing Madoff's victims told the Post that anyone who knew about Madoff's scheme, or had doubts about his business, "should have considered it their duty to shout it from the mountain top."

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