Regulators' questions were fairly routine and centered only on the broker-dealer business. The SEC completed an examination in 2005 that resulted in three violations of "best execution" rules. The SEC also completed an investigation in 2007 that did not include any referral for enforcement action. The Financial Industry Regulatory Authority took five disciplinary actions against the firm since 1975, according to filings, the most recent on Aug. 27, when it accused the firm of not reporting accurate trading information. The firm was fined $25,000 and didn't admit or deny the findings of the action.
But it was the other part of Madoff's firm — the advisory investment management unit — that was at the heart of the alleged scandal. And there was little oversight of that business until Sept. 12, 2006, when it was registered with the SEC.
Investors didn't seem to care. Marketers of investment funds told potential clients that part of their money would be put under Madoff's care if they invested in four relatively unknown funds.
"Madoff was the carrot to get people in other funds," says Jon Najarian of option trading research firm OptionMonster. Meanwhile, current investors with Madoff were nervous to pull their money out, fearing they wouldn't be able to get back in later.
The stickiness of investor funds gave Madoff a pool of cash to play with until the redemptions hit amid the credit crunch. "He was a brilliant marketer in an evil way," Najarian says.
It all started to unravel, according to the SEC complaint, in the first week of December when investors asked for $7 billion in redemptions. That was the one variable Madoff couldn't mitigate.
The alleged Ponzi scheme lasted so long and became so huge because of Madoff's sterling reputation, says Barry Minkow, co-founder of the Fraud Discovery Institute, who served time in prison after defrauding investors as founder of ZZZZ Best. "It's always the last person you'd expect."
Lieberman, Gogoi, Howard and McCoy reported from New York; Krantz reported from Los Angeles
Contributing: Del Jones in McLean, Va.