What happened?
For years, Bernard Madoff ran a massive Ponzi scheme, using new investor money to meet obligations to existing customers rather than investing the money as represented. On December 11, 2008, the SEC charged Madoff with securities fraud. Madoff later pleaded guilty and was sentenced in June 2009 to 150 years in prison.
After the fraud surfaced, the SEC’s Office of Inspector General (OIG) investigated the tips, examinations and Enforcement investigations that had brought the agency close to Madoff over the years without uncovering the scheme. This article uses the Public Version of the OIG report whose cover is dated August 31, 2009.
Rather than retelling how Madoff’s fraud worked, this article follows the concrete moments documented by the OIG: what SEC staff had in front of them, what they asked, what they did not verify, and what happened next.
12 passages that stood out
Across 477 PDF pages, the report records details that are much more concrete than the phrase “regulatory failure”: an examination described as “Deady” after nearly a year of inactivity, two SEC teams that learned about each other from Madoff, a Barclays response showing no trading, and a promotion recommendation that cited work on the Madoff examination.
The source is the original English-language SEC OIG report. Page references use the printed page numbers in that report.
After nearly 11 months of inactivity, an SEC e-mail described the Madoff examination as “Deady”
In 2004, an SEC headquarters examination team shifted to another priority while numerous questions about Madoff remained unresolved. The report says only about another day and a half of work was later performed on the Madoff examination.
Roughly 11 months after the team had stopped working on it, Eric Swanson e-mailed Mark Donohue in March 2005 to ask about the status of the Madoff “hedge fund thingy.”
The reply was: “Deady. We never found any real problems.”
The official who wrote “Deady” later told the OIG that he thought they did not know what to do next and that the phrase meant not much work was being done on the matter at that time.
Two SEC teams were investigating Madoff. Madoff was the one who told them about each other
The SEC’s headquarters examination staff and its Northeast Regional Office in New York were both examining Madoff.
But the headquarters group had not entered its examination into the agency’s tracking system, and the New York team did not know that headquarters was examining almost identical issues. A former OCIE director told the OIG that two teams should never be examining the same entity at the same time without being aware of each other.
The two SEC groups learned about their parallel Madoff examinations through Madoff himself, not through the SEC’s internal tracking or communication.
The OIG titled this section “OCIE and NERO Learned of Their Parallel Examinations From Madoff.”
Madoff named the next SEC Chairman weeks before the announcement — and said he himself had been on the “short list”
New York examiners told the OIG that Madoff repeatedly dropped the names of senior SEC officials and emphasized his stature and connections during the examination.
Examiner William Ostrow said Madoff told him and Peter Lamore that Christopher Cox would be the next SEC Chairman a few weeks before Cox was officially named. The examiners were “pretty amazed,” and Ostrow believed Madoff was trying both to impress and intimidate them.
Ostrow also recalled Madoff saying that Madoff himself “was on the short list” for SEC Chairman.
A June 1, 2005 e-mail from Lamore places that claim in the earlier selection of Chairman Donaldson. The OIG did not establish that Madoff had actually been a candidate.
In a separate exchange between SEC teams, New York examiners also recalled being told that Madoff was a powerful and well-connected person. These are attributed recollections in the OIG report, not independent findings about Madoff’s actual influence over the SEC.
The SEC asked Barclays to verify Madoff's trading. Barclays said there was no relevant activity — but there was no U.K. follow-up, and the examiners did not recall seeing the response
During the 2005 examination, the SEC contacted Barclays Capital in an effort to check Madoff’s trading.
Barclays replied that the U.S. account had been opened in February 2005 and that there had been “no relevant transaction activity” during the March 1–31 period the SEC asked about. The response also noted a trading relationship with a Madoff-affiliated entity at a U.K. affiliate.
The supervising official did not treat the “no relevant transaction activity” response as a red flag, while the two examiners later said they did not recall ever seeing the letter or having it shared with them.
The supervisor inferred that Madoff must have traded through the foreign broker-dealer and did not follow up with the U.K. affiliate. The expert team retained by the OIG concluded that the Barclays response was a major red flag that should have prompted further verification.
A supervisor wrote “keep your eyes on the prize.” The examiner later said he did not know what the prize was
Examiners raised unresolved questions about whether Madoff should be registered as an investment adviser and about the status of his London office.
Their supervisor told them to push those matters aside and keep the examination focused on the original front-running issue — whether Madoff was improperly trading ahead of customer orders.
Questions about investment-adviser registration and the London operation were still unresolved. Even so, the examination was redirected to front-running, leaving those other questions aside.
The e-mail said, “Be sure to keep your eyes on the prize.” Examiner William Ostrow later testified that he did not know what the prize was.
The supervisor told the OIG that by “the prize” he meant the front-running issue.
The Madoff examination ended without uncovering the fraud. Work on that examination later counted toward a promotion recommendation
The 2005 Madoff examination ended without uncovering the Ponzi scheme.
In September 2006, two supervisors separately recommended that SEC examiner Peter Lamore be promoted.
Both recommendations cited his work on the 2005 Madoff examination as part of the case for promotion. The letters praised, among other things, his discovery that a large source of Madoff’s revenue came from a business division that had not been disclosed to staff at the outset of the examination.
Lamore received the promotion to Staff Accountant effective November 12, 2006.
The OIG itself titled the section “Lamore is Promoted, In Part, Based on The Madoff Examination.” The report does not say the Madoff examination was the sole reason for the promotion.
The SEC received “The World’s Largest Hedge Fund is a Fraud” with about 30 red flags. New York staff still discounted the tip
In October 2005, financial analyst Harry Markopolos made his third submission to the SEC about Madoff.
Its title was “The World’s Largest Hedge Fund is a Fraud.” It identified about 30 red flags indicating a Ponzi scheme and described that scenario as “highly likely.”
The red flags included the extraordinary consistency of Madoff’s returns and the unrealistic volume of options he claimed to trade.
Even so, New York staff discounted the information in part because Markopolos was not a Madoff investor or insider and because they questioned whether he had a competitive or financial motive.
SEC officials in Boston, by contrast, considered Markopolos credible and thought the matter warranted investigation.
His submission also stated that he would not qualify for a bounty if Madoff was running a Ponzi scheme.
Two days before Madoff's testimony, an options expert called the SEC's questions “extremely basic” and told staff to do more homework
On May 17, 2006, two days before the SEC was scheduled to take Madoff’s testimony, staff called NASD options specialist Gene DeMaio for help understanding the claimed options trading.
DeMaio told the OIG that he answered “extremely basic questions” and came away feeling the staff did not yet understand enough to question Madoff effectively.
DeMaio recalled telling the SEC staff that they “needed to do a little bit more homework” before talking to Madoff. They said they would proceed as scheduled, and they did.
DeMaio also said that after the call he and a colleague were shaking their heads because some of the options strategies seemed over the staff’s heads. He offered additional help but was not contacted again.
Madoff thought a Monday call to DTC would end everything. The SEC never verified his trades through those records
During Madoff’s May 2006 testimony, SEC staff asked whether the securities in his advisory accounts were held at the Depository Trust Company (DTC) and asked for his account number. Madoff answered “646.”
After the fraud collapsed, Madoff told the OIG that those questions made him think he had finally been caught.
Madoff recalled thinking, “I thought it was the end game, over. Monday morning they’ll call DTC and this will be over … and it never happened.”
The staff later contacted DTC but did not obtain the records needed to verify the trading Madoff claimed. One SEC attorney acknowledged to the OIG that obtaining the DTC records after the testimony most likely would have uncovered the Ponzi scheme. After Madoff’s collapse, the absence of the claimed trading was confirmed through DTC in a short period of time.
The SEC never asked Madoff for bank records showing where investor money actually went
A basic way to test a suspected Ponzi scheme is to trace whether investor money actually moves to the counterparties and securities transactions the operator claims.
The OIG found that, in the 2005–2006 investigation, Enforcement staff never asked Madoff for bank records showing the use of investor funds to purchase equities or options. During Madoff’s testimony, they did not ask where the relevant bank accounts were or request bank statements.
SEC attorney Simona Suh told the OIG that the issue of getting bank records was “never raised, never suggested.”
When asked whether bank records showing no money going to the claimed counterparties would have been decisive evidence of a Ponzi scheme, she answered, “of course.”
The SEC's failure to find the fraud became a credibility boost for Madoff
Private investors had their own doubts about Madoff. Employees at Renaissance Technologies, for example, used public information to analyze his reported trading and identified multiple problems with his explanations.
Yet Renaissance did not immediately remove all of its Madoff-related investment. Portfolio manager Nat Simons cited their understanding that the SEC had examined Madoff and given him a “clean bill of health” as one reason.
The OIG concluded that the SEC’s failure to uncover the fraud actually had the effect of encouraging additional investors to place money with Madoff.
Madoff also acknowledged to the OIG that he told prospective investors about SEC examinations and investigations because they lent credibility to his business.
An SEC official involved in a Madoff examination later married Madoff's niece. The OIG found no evidence the relationship influenced the examination
SEC official Eric Swanson had been involved in an OCIE examination of Madoff that began in late 2003. He later began a romantic relationship with Madoff’s niece, Shana Madoff. They became engaged in December 2006 and married in September 2007.
The OIG investigated the relationship through e-mails, testimony and other records.
The OIG found that the romantic relationship began nearly a year after the examination was completed and found no evidence that it influenced the SEC’s Madoff examinations.
The OIG did find that Swanson had communicated with Shana and attended industry events she helped organize while he was involved with an examination of her uncle and father’s firm, creating what the report called the appearance of a potential conflict of interest. It also found no evidence that Swanson shared SEC examination or investigation information with Shana while he was at the agency.
What the report says about the background
The OIG identified repeated opportunities to uncover Madoff’s fraud in five examinations or investigations based on substantive complaints. It did not conclude that every routine examination of his market-making business should have revealed the scheme (printed p.456).
The report repeatedly identifies reliance on information from Madoff himself, investigations focused too narrowly on other violations, inexperienced staff, poor communication across SEC offices, and failures to pursue contradictions and red flags. For the 2005 NERO examination, the expert team retained by the OIG concluded that appropriate staffing and basic third-party verification could have uncovered the Ponzi scheme (printed pp.229–235).
This article preserves the report’s distinctions among documented events, witness recollections and OIG findings. Statements about what Madoff or SEC personnel thought are presented as their attributed accounts rather than as independently established facts.
Corrections to this article
Corrected William Ostrow’s name and the historical Northeast Regional Office designation. Named the Deady email participants, distinguished the earlier Donaldson shortlist claim, paraphrased a source transcription typo and retained examiners’ lack-of-recollection qualification. Clarified DTC contact versus verification and limited the bank-record claim to the 2005–2006 investigation. Expanded references for staff skepticism, trading checks and the OIG credibility finding, corrected evidence labels and distinguished routine examinations from substantive complaint-driven opportunities.