Investigations into Bernie Madoff's schemes have revealed certain glaring irregularities in the invesment operations.
For starters the auditors to Bernie Madoff's $50-billion exclusive fund were an unknown firm consisting of a 78-year-old retiree living in Florida, one accountant and a secretary.
Further, the team technically operated from a small office in north New York state, which fact, investigators say, should have sent alarm bells ringing in the minds of investors.
Most of the investors comprising individuals, charities and hedge funds had never met Madoff, yet were more than willing to hand over huge sums of money, thanks to the funds allure.
With investigation revealing more duped investors, questions about the secrecy of Madoff's operations and how such a fraud could have escaped the eyes of regulators are now being asked.
Madoff had registered his investment advisory business with the SEC in 2006, however it was not until now that the operations had come under the regulator's inspection. It is understood that reason for the inordinate delay lies in the sharp rise in the number of registerd advisers since 2001.
The number of advisers shot up by about 50 per cent resulting in only roughly only 10 per cent of 11,000-plus advisers inspected every year.
But the SEC did have Madoff on its radar; it had conducted inquiries into his operations in 2005 and 2007. In 2005, he was found violating a number of rules relating to getting the best price for customers. In 2007 he had come under suspicion of front-running - where traders buy shares prior to buying for customers. However, nothing untoward could be found.
Experts however point out that even if the SEC had inspected his investment advisory operations the regulator would have probably drawn blank given the fact that Madoff had routed his clients' funds through an unregistered money management business. Consequently, investors can hardly blame the SEC as it was an unregulated pool of money they were investing in, the add.
Former SEC commissioner Laura Unger said that the SEC appeared to have no clear jurisdiction in the matter. According to Mark Brennan, former SEC lawyer, the SEC could not have stopped it even if it had known.
It will probably take months before investigators are able to get a clear picture of what exactly happened with Bernie Madoff's investment operations.
Meanwhie, hedge funds are bracing up for a wave of redemptions. The industry which is already suffering its worst performance on record is now in a damage control mode.
Hedge fund managers point out that many hedge funds use independent valuers and custodians, unlike Madoff. They add that the industry has also evolved its own set of codes and conduct. The European hedge fund industry, they point out, to buttress their claims is very well regulated and it would be very difficult for somone to pull off a fraud like this one in the UK.
(Also See: HSBC discloses $1 billion exposure to Madoff fraud)