A top Securities and Exchange Commission compliance official who worked for the SEC when it found no problems at Bernard Madoff's firm in 2005, later began to date and married Madoff's niece, who was a compliance lawyer for the company.
A spokesman for Eric Swanson, who has since left the SEC, said Swanson "did not participate in any inquiry of Bernard Madoff Securities or its affiliates while involved in a relationship" with Shana Madoff.
"The Securities and Exchange Commission failed the American people," said Senator Charles Grassley (R-IA).
Since 1992, the SEC has at least twice dismissed concerns about Madoff's firm, following complaints.
At a business roundtable meeting last year, Madoff boasted of his "very close" relationship with a SEC regulator, chuckling as he said, "in fact, my niece even married one."
A spokesman for Swanson, the former SEC official who married Madoff's niece and compliance lawyer, said Swanson met the niece "through her trade association work in the industry. Throughout his career, Eric has displayed the highest ethical standards and his reputation has been – and continues to be – above reproach."
Madoff formally registered with the SEC as an investment adviser in 2006, but the SEC failed to conduct the standard review that normally follows such a new registration.
Madoff made headlines last week when an unsealed criminal complaint in federal court in New York charged that he has been running a decades long Ponzi scheme that defrauded investors of $50 billion dollars.
A former chairman of NASDAQ, Madoff was an investment advisor who catered to a handful of high net worth clients, one of whom told ABC News that Madoff was so sought after that, as recently as two months ago, he was turning down potential new business. His handful of clients routinely expected -- and received -- double digit returns, up market or down.
According to a SEC document filed in Jan. 2008, and cited in the complaint, the firm had between 11 and 25 clients for the fiscal year ending Oct. 2007 and managed about $17 billion in assets in 23 different accounts.
Bernard Madoff Investment Securities, in addition to that private client practice, is also a market maker that trades with other dealers in bonds, the S&P 500 and NASDAQ, according to Bloomberg News.
The firm was the 23rd largest market maker on NASDAQ in October, handling a daily average of about 50 million shares a day. The firm specialized in handling orders from online brokers in some of the largest U.S. companies, including General Electric Co. and Citigroup Inc., Bloomberg News reported.
But on Dec. 10, Madoff allegedly told senior employees at his firm that his entire business was a fraud. According to the federal complaint, Madoff told those employees that he was "finished" and that "it's all one big lie." Madoff estimated "the losses from the fraud to be at least approximately $50 billion," the complaint states.
At that time Madoff also told those employees that he intended to surrender to authorities, but before he did he planned to use $200-300 million he had left to make payments to "selected employees, family and friends," the complaint states.
Madoff started his business in 1960 with $5000 in savings. He resides in New York City and, according to clients, also maintains a posh waterfront home. Known to his clients as Bernie, he has a long and significant history on Wall Street and has been a chairman of the board of the NASDAQ and was a founding member of the board of the International Securities Clearing Corp. in London.
The Web site for Madoff's firm, in its company profile, says, "Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."
Madoff was arrested last Thursday morning by FBI agents and charged with criminal securities fraud by federal prosecutors in Manhattan. The complaint states that he used "manipulative and deceptive practices." The complaint cites two senior employees in describing how Madoff kept his client records "under lock and key" and how he left them in the dark about how he managed the private client funds. One of those employees, in interviews with the FBI, said that Madoff was "cryptic" in his statements. This, according to clients, is in keeping with the aura that Madoff cultivated among his clients, some of whom have kept funds under management with him for generations.
But by the first week of December, when clients began clamoring for redemptions -- to the tune of $7 billion -- the complaint states that Madoff began a struggle to obtain the necessary liquidity. The stress began to show, the employees said.
In a meeting at their boss's Manhattan apartment -- held there following a confrontation in the office Wednesday because Madoff wasn't sure "he would be able to "hold it together" if the conversation took place in the office -- the employees came away believing that Madoff was "saying, in substance that he had for years been paying returns to certain investors out of the principal received from other, different investors."
The next day, Dec. 11, Madoff spoke with FBI agent Theodore Cacioppi and invited the agent and another agent to his apartment. Cacioppo stated in the complaint that he told Madoff he came by to see if "there's an innocent explanation."
"There is no innocent explanation," Madoff replied, according to the sworn complaint.
Madoff's lawyer, Dan Horwitz, a partner at Dickstein Shapiro in New York, said his client is cooperating fully with the federal investigation.
"Bernie Madoff is a long-standing leader in the financial services industry and he is cooperating fully with the government investigation into this unfortunate set of events," Horwitz said.
Madoff was released on $10 million bond following a court appearance in Manhattan. He is expected back in court today.