Madoffâ€™s Fraud Signaled in SEC Renaissance Revi
Madoffâ€™s Fraud Signaled in SEC Renaissance Review (Update1)
By Joshua Gallu
Sept. 4 (Bloomberg) -- The U.S. Securities and Exchange Commission failed to follow up on signs of Bernard Madoffâ€™s Ponzi scheme found during a routine examination of Renaissance Technologies LLC that revealed concerns he may be running a fraud, the agencyâ€™s internal watchdog said.
An SEC compliance examiner informed his supervisor about the internal e-mails at Renaissance, which indirectly invested in Madoffâ€™s fund through a swap agreement with another firm, saying Madoffâ€™s business may be a fraud, Inspector General H. David Kotz wrote in a 477-page report released today. While the agency started an investigation of Madoff, it didnâ€™t return to Renaissance to examine its information.
Renaissance e-mails said Madoffâ€™s secrecy, auditor and fee structure were significant red flags, the report said. Nathaniel Simons, portfolio manager for a Renaissance fund, said he didnâ€™t understand how Madoff made money or why he used a fee structure that gave such a large percentage of profits to feeder funds.
â€œAs we donâ€™t know why he does what he does, we have no idea if there are conflicts in his business that could come to some regulatorâ€™s attention,â€ Simons said in an e-mail dated Nov. 13, 2003, according to the report. â€œThrow in that his brother-in-law is his auditor and his son is also high up in the organization and you have the risk of some nasty allegations.â€
Madoff carried out his $65 billion fraud for more than 16 years as the SEC assigned inexperienced investigators and accepted â€œimplausibleâ€ explanations of his business, the report said. The information Renaissance used to analyze Madoffâ€™s business were available to the SEC, the report said.
â€˜Necessary, Basic Stepsâ€™
The agency â€œnever took the necessary and basic stepsâ€ to thoroughly investigate Madoffâ€™s business, Kotz said in his conclusion.
Madoffâ€™s fund base was â€œfar shortâ€ of what he needed, Paul Broder, the risk manager at East Setauket, New York-based Renaissance, said in an e-mail on Nov. 21, 2003, according to the report. â€œNone of it seems to add up.â€
At least six warnings from sources including a money manager, a â€œrespected hedge-fund managerâ€ and a firm that studied Madoffâ€™s business failed to spur a â€œthorough and competentâ€ probe, the report said. Kotz released a summary of Sept. 2.
The hedge-fund manager declined to be identified in the public version of the report, the inspector general said.
To contact the reporter on this story: Joshua Gallu in Washington at firstname.lastname@example.org.
Last Updated: September 4, 2009 19:21 EDT