As the SEC's complaint makes clear, Madoff and DiPascali did almost anything you can think of to fool people. False statements spit out by the infamous 17th floor computer, a hoked up phony computer system that made it seem like the Depository Trust Company held securities for Madoff's investment business, telling American questioners that Madoff's counterparties were European and telling European questioners that the counterparties were American because in each case this would make the questioners less likely to check with possible counterparties, refusing to give the names of claimed counterparties, hoking up extra trades at the end of the year for investors who were to receive more than others (doubtlessly co-participants, I think, in what they at least knew to be a fraud even if they did not know that the exact nature of the fraud was that it was a Ponzi scheme), purporting to make trades over several days rather than on one day alone when the amount purportedly traded would be so large as to arouse suspicion if the trades all took place on one day, making sure that claimed prices on a given day were within the actual price band on that day and claiming his statements showed an average price when this was necessary to avoid suspicion, refusing to describe his alleged methodology on the ground that it was proprietary, using only large cap stocks so that the trading volume in the market would be large enough that people wouldn't question whether he had in fact made trades, creating special accounts for the purpose of fooling the SEC, claiming that securities were held by European financial institutions, creating false records of supposed trading -- Madoff and DiPascali did all these things. You name it, they did it.
We may hear a lot more about all this in future, because Madoff's and DiPascali's extraordinary, shrewd (and usually successful) efforts to hide their fraud are likely to come up by way of attempted defense in the hosts of lawsuits that will be brought against the SEC, FINRA (which so far, with but one exception that I know of, has received a free pass that is exceedingly unlikely to be permanent), the IRS, feeder funds that failed to do adequate due diligence, and others.
Of course, Madoff did not fool everyone who looked into what he was doing. Markopolos was not the only one who suspected fraud. There were large institutions and very wealthy people who looked into Madoff (or who because of their enormous wealth heard the word on Wall Street) and decided they wanted no part of this guy. There also were huge investment banking houses -- Goldman, Sachs, for example -- that refused to do business with him because they did not believe he could be for real. One lawsuit even alleges that, as of sometime in 2008, Madoff's main bank, J.P. Morgan Chase, knew he was a fraud -- and consequently pulled out 250 million dollars from a Madoff fund even though Madoff was the only investment that wasn't losing money.
The institutions and the wealthy -- who hired experts in due diligence -- that were wary of Madoff had several reasons, many of which have now been widely bruited, e.g., that he used a one man accounting shop, his refusal to discuss his investment strategy, the family nature of his business, the inability of experts to replicate his results, etc. All of these things should have been, in Markopolos' words, red flags to all sophisticated, major institutions, feeder funds, due diligence experts working for wealthy individuals, and governmental and quasigovernmental bodies. But there were two things that government (and others as far as I know) should have done, but did not do, that would have blown the whistle on Madoff despite all his efforts at concealment and trickery. That government, and others who were expert, did not do these very simple things is inconceivable to me. They also seem to me to be of increasing importance as we learn more about Madoff's vast efforts at concealment, because they are things that Madoff could not have controlled, could not have faked his way past, though they are quintessentially simple, and would only have required a few phone calls to initially carry out.
First, Madoff claimed that he bought and sold securities about four times a year and was in Treasuries. Many of the securities were supposedly held by the Depository Trust Company, which, as I understand it, performs this function for most or all of Wall Street. All that the SEC, the IRS or FINRA had to do was to get in touch with the DTC and inquire whether its records showed that Madoff heavily bought securities -- billions of dollars worth of them -- four times a year, held them for awhile, and then sold them (and replaced them for a period with Treasuries, if the Treasuries too were held by DTC, which I do not know). By this simple means, by the proverbial means of a phone call, the government would have found out that Madoff had been doing no such thing, and his fraud would have been exposed.
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