The SEC's own Inspector General( OIG) has found that between 1992 and 2008 the SEC received six substantive complaints about fraudster Bernie Madoff's hedge fund operations yet never conducted a thorough and competent examination of them. The SEC conducted two investigations and three examinations based on credible complaints about Madoff's operations but never verified Madoff's trading or conducted a Ponzi scheme probe.
One complaint submitted in 2005 was titled, "The World's Largest Hedge Fund is a Fraud" and, according to Lawrence Velvel, dean of the Massachusetts School of Law at Andover, "detailed approximately 30 red flags indicating that Madoff was operating a Ponzi scheme, a scenario the complaint described as 'highly likely.'" Velvel is one of Madoff's defrauded investors and has made an extensive study of the gigantic swindle.
Another complaint charged Madoff had comingled $10 billion owned by his deceased investor client Norman F. Levy with funds controlled by his firm, and that Madoff kept two sets of records, the more interesting of which "is on his computer which is always on his person." This apparent insider information also was ultimately disregarded.
"In investigating this complaint," Velvel says, "the Enforcement staff simply asked Madoff's counsel about it, and accepted the response that Madoff had never managed money for this investor. This turned out to be false." When news of Madoff's Ponzi scheme broke, it became evident that Levy was one of Madoff's largest individual investors.
Yet another complaint in May, 2003, this one from a respected Hedge Fund Manager, questioned whether Madoff was actually trading options in the volume he claimed and noted that Madoff's strategy and purported returns were not duplicable by anyone else. The complaint further stated Madoff's strategy had no correlation to the overall equity markets in over 10 years and that in aggregate his actions were "indicia of a Ponzi scheme."
The SEC's Office of Compliance Inspections and Examinations (OCIE) conducted two lame examinations based on the above Hedge Fund Manager's complaint, Velvel says. Both were characterized by (1) "significant delays" in getting started despite their urgency; (2) "the teams assembled were relatively inexperienced;" (3) there was insufficient planning; (4) the probes were "too narrowly focused on the possibility of front-running" and (5) "no significant attempts were made to analyze the numerous red flags about Madoff's trading and returns."