Madoff’s Fraud Signaled in SEC Renaissance Revi
Madoff’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 Madoff’s Ponzi scheme found during a routine examination of Renaissance Technologies LLC that revealed concerns he may be running a fraud, the agency’s internal watchdog said.

An SEC compliance examiner informed his supervisor about the internal e-mails at Renaissance, which indirectly invested in Madoff’s fund through a swap agreement with another firm, saying Madoff’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 didn’t return to Renaissance to examine its information.

Renaissance e-mails said Madoff’s secrecy, auditor and fee structure were significant red flags, the report said. Nathaniel Simons, portfolio manager for a Renaissance fund, said he didn’t understand how Madoff made money or why he used a fee structure that gave such a large percentage of profits to feeder funds.

“As we don’t know why he does what he does, we have no idea if there are conflicts in his business that could come to some regulator’s attention,” Simons said in an e-mail dated Nov. 13, 2003, according to the report. “Throw 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.”

Madoff carried out his $65 billion fraud for more than 16 years as the SEC assigned inexperienced investigators and accepted “implausible” explanations of his business, the report said. The information Renaissance used to analyze Madoff’s business were available to the SEC, the report said.

‘Necessary, Basic Steps’

The agency “never took the necessary and basic steps” to thoroughly investigate Madoff’s business, Kotz said in his conclusion.

Madoff’s fund base was “far short” 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. “None of it seems to add up.”

At least six warnings from sources including a money manager, a “respected hedge-fund manager” and a firm that studied Madoff’s business failed to spur a “thorough and competent” 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

Last Updated: September 4, 2009 19:21 EDT
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