How Madoff kept scam going so long

Peering into Bernard Madoff's investment advisory business, a government lawyer found it odd that he was trading different securities, and at different times, for clients.

He was claiming the same strategy for all of them. So why so many variations among accounts?

For that and other reasons, Genevievette Walker-Lightfoot of the Securities and Exchange Commission became wary of Madoff in 2005, the Washington Post reported this year.

The funny part is that Madoff and his top sidekick, Frank DiPascali, went to a lot of trouble to make it look as if they were trading at various times for different clients specifically to allay suspicions, thinking it would make their make-believe trades look authentic, the SEC says in a complaint against DiPascali filed this week.

The SEC has made public a 31-page complaint showing the lengths to which Madoff and DiPascali went to hide their gigantic pyramid scheme.

"Every trade, every order ticket, every account statement, every confirmation and all other related records were fictitious," the SEC says.

DiPascali admitted his guilt to a host of criminal charges this week, joining Madoff who pleaded guilty in March.

The document details bogus reports, the moving about of assets, the fake computer trades, the fake computer that hid their thievery.

Coming from the agency that should have busted them long ago, the unspoken message is that Madoff & Co made it really, really hard to figure out what was going on.

In covering its own failings, the SEC all but lauds Madoff for the creative ways he hid the truth. Hiding such a vast scam involving a regulated industry is not easy.

The easy task was the part that is the most difficult when the trading is real: beating the market. Looking backward, Madoff and DiPascali could see when stocks plummeted or peaked and timed their bogus trades accordingly. They invented something they called a "split-strike conversion" strategy to hedge their bets. That was a fiction, too.

With billions of dollars in investor funds, they had to devise a way to make it look as if the trades were individually made, at different times, or so they thought, so they used a random number generator programme to create the appearance of trading at different intervals.

None of the securities they claimed to be trading showed up in the records of the Depository Trust Corp, the central securities depository for the US because DiPascali "and others" essentially counterfeited them, according to the SEC.

One way they covered the fact that they had no counterparties in their options trades was to claim European financial institutions were handling them for US investors, and US dealers were doing the European trades.

This was meant to discourage regulators and auditors from looking further, the SEC says.

To limit exposure, Madoff hid the immense size of the investment advisory business from regulators. He revealed to authorities only 10 to 25 "special" accounts out of the thousands he oversaw. With a relative few accounts, generating fake documents was more manageable. None of that explains how the SEC could have missed the fraud.

There were at least five times the SEC took a look into the Madoff operation, but no one came away with a view of what was really happening.

Alerted by inconsistencies in various documents, Walker-Lightfoot reported her suspicions to higher-ups at the SEC, to no avail, the Post reported.

However creative, hard-working or deceitful the Madoff-DiPascali team, it was not only their work that kept the Ponzi going so long. It was the SEC's failures at detection, even when told the operation looked amiss.

- BLOOMBERG