Wall Street insiders had shunned Madoff for years

Regulators investigated widespread suspicions and exposed lies but failed to act

Numerous investors and banks across Wall Street refused to deal with Bernard Madoff for several years before his ultimate arrest on fraud charges, amid widespread rumours of suspect activity at his broking and fund management business, it is becoming clear.

And in an explosive new revelation, Wall Street's chief regulator, the Securities and Exchange Commission, actually investigated the rumours and discovered that Mr Madoff had lied to its officials – but gave him no more than a private rap on the knuckles.

As more investors in Europe and the US came forward yesterday to admit losses in the finance industry's biggest-ever fraud, investigators are hearing numerous tales from market participants who had long believed that Mr Madoff's impressive track record was being faked.

Astonishingly, many of these participants invested with Mr Madoff.

According to documents sent to the SEC in 2005 by Harry Markopolos, the Boston accountant who first raised red flags about Mr Madoff in 1999 and finally got the regulator to launch an investigation more than six years later, several hedge fund managers who were funnelling money into Madoff Investment Securities said they thought the Wall Street veteran was "subsidising" investment returns in down months and "eating the losses" to make his results seem smoother and less risky.

Mr Madoff was arrested last Thursday after confessing to two sons who worked in the broker-dealer arm of the family business that his investment management returns were "all just one big lie", saying his fraud could have cost investors $50bn. That would make it the biggest-ever so-called Ponzi scheme. In such a fraud, a money manager simply pays existing clients with money coming in from new ones.

A Wall Street veteran for almost 50 years, and a founder and former chairman of the Nasdaq stock exchange, Mr Madoff was widely respected. But there were many who were suspicious of the secrecy with which he guarded his investment technique. The system he said he used, buying shares and trading options, could not mathematically have produced the returns he claimed, many people thought.

According to one widespread rumour, he was using insider trading at his broker-dealer business to juice returns. The SEC investigated that rumour, among others, in 2005, in an inquiry that took in concerns that Mr Madoff operated as a "white label" hedge fund, running money on behalf of other funds without that fact being disclosed to their investors.

The SEC also took extensive testimony from Mr Markopolos, who had told them years earlier that – most likely – Mr Madoff was running "the world's largest Ponzi scheme".

The conclusion was that Mr Madoff was indeed evading disclosure rules, and the SEC forced him to register formally as an investment adviser, which would open him up to regular inspections by the organisation – but it did not subpoena documents or dig further.

In his testimony, Mr Markopolos had warned the SEC: "I've found that wherever there is one cockroach in plain sight, many more are lurking behind the corner out of plain view." The SEC has launched an internal investigation into its failures in the Madoff case.

Donald Langevoort, law professor at Georgetown University and a former special counsel at the SEC, said the latest revelations were "dumbfounding". He said: "What we've learnt is that the SEC actually investigated whether Mr Madoff was running a Ponzi scheme. They took aim at exactly the right target. And they missed."

The SEC and the FBI were continuing to examine documents at Mr Madoff's offices in Midtown Manhattan yesterday. They are focusing on the role of his wife, Ruth. Mrs Madoff, who has a degree in nutrition, co-edited a cookbook in 1996 called The Great Chefs of America Cook Kosher, but she was also involved in the family business and investigators are examining if she kept secret records tracking payments. Her lawyer said she had not been charged with any wrongdoing.

PROMOTED VIDEO
News
Rumer was diagnosed with bipolarity, attention deficit hyperactivity disorder and post-traumatic stress disorder: 'I was convinced it was a misdiagnosis'
peopleHer debut album caused her post-traumatic stress - how will she cope as she releases her third record?
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvOnly remaining original cast-member to leave long-running series
Life and Style
Couples have been having sex less in 2014, according to a new survey
life
Voices
Holly's review of Peterborough's Pizza Express quickly went viral on social media
voices
Arts and Entertainment
musicBiographer Hunter Davies has collected nearly a hundred original manuscripts
Sport
A long jumper competes in the 80-to-84-year-old age division at the 2007 World Masters Championships
athletics
News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
Walking tall: unlike some, Donatella Versace showed a strong and vibrant collection
fashionAlexander Fury on the staid Italian clothing industry
Arts and Entertainment
Gregory Porter learnt about his father’s voice at his funeral
music
Arts and Entertainment
tvHighs and lows of the cast's careers since 2004
Life and Style
Children at the Leytonstone branch of the Homeless Children's Aid and Adoption Society tuck into their harvest festival gifts, in October 1936
food + drinkThe harvest festival is back, but forget cans of tuna and packets of instant mash
Sport
Lewis Hamilton will start the Singapore Grand Prix from pole, with Nico Rosberg second and Daniel Ricciardo third
F1... for floodlit Singapore Grand Prix
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam