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anticipated they would be asked, primarily how the relationship between Fairfield Greenwich and Madoff theoretically was structured. “Your position is to say, listen, Madoff has been in business for 45 years, you know, he executes, you know, a huge percentage of the industry’s orders, he’s a well-known broker. You know, ‘We make the assumption that he’s doing everything properly.’ ” It appears from this conversation that Vijayvergiya had very little knowledge of what Madoff was actually doing, that he was little more than a middleman; he simply handed over his clients’ money to Madoff and distributed Madoff’s returns to those clients. So he needed to be told how their relationship would have worked if it was legitimate. For example, when Vijayvergiya asked Madoff how he would have been certain that his clients were receiving a pro rata allocation of profits based on their allocation if this was a real fund, Madoff replied that he should simply tell them that he knew it was correct because Bernie told him it was, but then Madoff reassured him: “You know, you don’t have to be too brilliant with these guys because you don’t have to be; you’re not supposed to have that knowledge and, you know, you wind up saying something which is either wrong, or, you know, it’s just not something you have to do.”

Madoff continually reassured Vijayvergiya that there was nothing to be concerned about, that the SEC basically was incompetent. “Fifty percent of the marketplace and the hedge funds operate in totally different ways than they used to. You know, you have all these funds; you know, it’s just, it’s just changed the landscape and the Commission has no idea what the hell is going on and of course they always think the worst, which is what they’re supposed to do.”

He concluded, accurately and derisively, “These guys, they work for five years at the Commission, then they become a compliance manager at a hedge fund.” And, he added, he knew that was true because every time an SEC investigator came up to his office he or she would ask for an employment application.

Remember, I didn’t know that my submission had led to an investigation. So I also didn’t know that Madoff testified voluntarily, without being represented by an attorney, on May 19, 2006. That was typical Madoff bravado; the natural assumption is that a man who is trying to conceal something certainly would bring his lawyer with him. There are many people who believe that in order to successfully manage this scam as long as he did without being discovered, Bernie Madoff had to be a genius. That reminds me of the story of the two hunters who were trapped by a bear. The first hunter said to the second hunter, “Don’t move. You can’t outrun a bear. Stand perfectly still and maybe he’ll go away.”

The second hunter looked at him, then took off running as fast as he could. “Don’t!” the first hunter yelled. “You can’t outrun a bear.”

As the second hunter picked up speed, he turned and yelled back, “I only have to outrun you!”

That was Bernie Madoff’s challenge. He didn’t have to be a genius; he just had to be smarter than the SEC. And as the inspector general summed up Madoff’s interview, “During Madoff’s testimony, he provided evasive answers to important questions, provided some answers that contradicted his previous representations, and provided some information that could have been used to discover that he was operating a Ponzi scheme. However, the Enforcement staff did not follow up with respect to any of the information that was relevant to Madoff’s Ponzi scheme.”

Madoff was smart enough to know that the lies he told could easily be checked by anyone with even moderate intelligence, and when they did check he would be finished. He made several statements that could have been confirmed or proven to be lies with just a single phone call. But there was no attempt to verify his claims. As he later admitted, “I thought this was the end game, over.” Fortunately for him, and unfortunately for the investors over the next two and a half years, he was dealing with the SEC. “I was astonished,” he said about not being arrested. “After all this, I got lucky.”

The SEC Division of Enforcement officially closed this investigation more than a year later, in November 2007. Their report acknowledged that Madoff had lied, or as they described it, “did not fully disclose” to the examiners “the nature of the trading conducted in the hedge fund accounts or the number of such accounts.” But even then they concluded, “The staff found no evidence of fraud. The staff did find, however, that BLM acted as an investment advisor to certain hedge funds, institutions and high net worth individuals in violation of the registration requirements of the Advisors Act. The staff also found that Fairfield Greenwich Group disclosures to its investors did not adequately describe BLM’s advisory role and described BLM as merely an executing broker to FFG’s accounts. As a result of discussions with the staff, BLM registered with the Commission as an investment advisor and FFG revised its disclosures to investors to reflect BLM’s advisory role.

“We recommend closing this investigation because both BLM and FFG voluntarily remedied the uncovered violations, and because those violations were not so serious as to warrant an enforcement action.”

In her 2007 performance review, Meaghan Cheung specifically cited her work in this investigation, writing, “In Madoff, we investigated the asset management services provided by a broker-dealer specializing in hedge funds who was not registered as an investment advisor. After our investigation, we conducted discussions among the staff, the Division of Investment Management, and Madoff’s counsel. We also held separate discussions with Madoff’s largest hedge fund client. As a result of those discussions, Madoff’s firm registered with the Commission as an investment advisor, and its hedge fund corrected its disclosure.”

What really bugs me is that the SEC caught Madoff lying to its investigators repeatedly, and

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