Madoff sat on a committee of academics, regulators and executives formed in 2000 by former SEC Chairman Arthur Levitt to advise the Securities and Exchange Commission on new stock market rules in response to the growth of electronic trading. Madoff has led the trading committee at the Securities Industry Association, Wall Street's biggest trade group, and served as chairman of the Nasdaq Stock Market.
Since 2000, he has given at least $100,000 to the Democratic Senatorial Campaign Committee and more than $23,000 to the party's candidates, including Senator Charles Schumer of New York and Senator Frank Lautenberg of New Jersey, who heads up a charitable foundation that invested with Madoff.
"You can see where people would pull the shades down over their eyes in terms of recognizing what could be one of the great frauds of our time," Levitt said in a Bloomberg Television interview. "I've known him for nearly 35 years, and I'm absolutely astonished."
The Madoff scandal highlights "holes in regulation," says Laura Unger, a former SEC commissioner. The SEC, which is charged with protecting investors, is already under fire for lax enforcement and for failing to better monitor the risky behavior that triggered the financial crisis.
Unger, a former SEC commissioner, told CNBC Monday morning that the Madoff affair is proof "the regulatory structure is just so broken." She noted that not all the details are out yet but that Madoff's fund flew under the radar because it involved only "sophisticated investors."
Meanwhile, investigators have reportedly found evidence that Madoff ran an unregistered money management business alongside his firm's brokerage and investment advisory subsidiaries. Even though he was accumulating investor funds and choosing how it was invested, he wasn't a registered investment adviser until 2006. The SEC should have examined the firm within one year of its registration.
The agency sent reporters the following statement:
The staff of the SEC's New York Regional Office completed two inquiries into Bernard L. Madoff Investment Securities LLC in 2005 and 2007. Staff from the Office of Compliance Inspections and Examinations completed a broker-dealer examination in 2005, finding three violations of 'best execution' rules. Staff from the Division of Enforcement in New York completed an investigation in 2007, and did not refer the matter to the Commission for enforcement action. In response to recent new evidence, the New York Regional Office recommenced its investigation of Madoff and referred the matter to the Commission for enforcement action on December 11, 2008.
Clearly this adds to doubts about the SEC's ability to effectively police financial markets at a time when the markets can ill afford to have new doubts emerge about the federal government's oversight. - Donna Block
Bernard Madoff kept his friends close and apparently securities regulators even closer. That may be one answer to why any suspicions about Madoff may have been damped. 
