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Red Flags Didn't Stop Colossal Madoff Fraud

Steady returns, tiny auditors prompted questions

By Matt Cantor, Newser Staff

Posted Dec 13, 2008 10:58 AM CST

(Newser) – Bernard Madoff's investment operation—found this week to be a massive Ponzi scheme that lost as much as $50 billion—raised plenty of red flags over the last decade, the Wall Street Journal reports. As far back as 1999, Madoff’s steady returns in wide-ranging markets seemed unrealistic to some observers, and at least one tried to blow the whistle. “Madoff Securities is the world's largest Ponzi Scheme,” a rival wrote to the SEC that year.

The accusations were sent to the SEC repeatedly over the last 9 years, the Journal reports, but a 2007 investigation ended without action. Routine scrutiny of the company was minimal because Madoff controlled a securities firm, enabling him to process trades for clients himself, rather than using an outside firm, as a hedge fund would, the New York Times reports. Indeed, some wondered why Madoff didn’t take the more lucrative hedge fund route, and became suspicious. His auditor was just a three-person company, including a 78-year-old in Florida and a secretary.

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Investors inquiring about their money and others gather in the lobby of the building where Bernard L. Madoff Investment Securities LLC has its offices, Friday, Dec. 12, 2008, in New York. (AP Photo/Diane Bondareff)

Bernard L. Madoff, chairman of Madoff Investment Securities is seen on his Manhattan trading floor in this photo taken Dec. 30, 1999 in New York. (AP Photo/New York Times)

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There's no smoking gun, but if you added it all up you wonder why people either did not get it or chose to ignore the red flags.
- Jim Vos, investor adviser

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Red Flags Didn't Stop Colossal Madoff Fraud