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As Madoff Investors Count Up Losses, Questions Raised About Oversight

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In the wake of Bernard Madoff’s arrest for securities fraud, the Securities and Exchange Commission (SEC) is facing criticism for ignoring warning signs about his investment-advisory business. Meanwhile, as federal officials and others investigate the regulatory failure that allowed Madoff’s alleged fraud to occur,  investors are left to trying to asses the extent of their losses.

Those investors did receive a small bit of good news yesterday.  According to the Associate Press, a federal judge signed an order allowing clients of  Madoff’s private investment business to seek relief under a federal statute created to rescue cheated investors.  The order was signed after the Securities Investor Protection Corporation (SIPC) asked that steps be taken to protect investors in the scheme, the Associated Press said.

According to the report, Congress created the SIPC in 1970 to protect investors when a brokerage firm fails and cash and securities are missing from accounts. Funds can be used to satisfy the remaining claims of each customer up to a maximum of $500,000.

Last week, the 70-year-old Madoff was arrested on one count of securities fraud.  According to the FBI,  Madoff allegedly ran a giant Ponzi scheme that defrauded wealthy investors, charities and other of billions of dollars.

Madoff is the founder and primary owner of Bernard L. Madoff Investment Securities LLC. The firm is 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 a report in The Washington Post, over the past decade various financial analysts had raised concerns with the SEC about the unrealistic returns Madoff claimed for his investment-advisory business.  A 1999 letter to the SEC actually referred to that business as a Ponzi scheme, but as the Post reports, the agency did not look into such charges until last week.

Now, with estimates saying Madoff’s alleged fraud may have cost investors as much as $50 billion, many are asking why the SEC did not act on these and other suspicions.   One reason could have been Madoff himself, who before the scandal broke was well-regarded.  In addition to being a former chairman of the exchange, Madoff helped found Nasdaq.  He also maintained both professional and personal ties with officials at the SEC, and was a regular donor to political campaigns, the Post said.  His stellar reputation may have protected his business from closer scrutiny.

According to the Washington Post, Madoff’s running of a legitimate business – Bernard L. Madoff Investment Securities LLC – may also have helped him hide the alleged fraud.  That highly visible, regulated business was well-regarded by many in the investment community.

Madoff’s other investment business, however, escaped regulation in part because the federal government allows looser oversight of private investment pools.  According to the Post, Madoff constructed this investment business to avoid most oversight. The SEC said Madoff did not register with it as an investment adviser until September 2006.

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