Part I

I was in college when news of the Madoff scandal broke, studying accounting and finance. I watched CNBC and read the Wall Street Journal on a near-daily basis. I had not previously heard of Bernie Madoff, but I remember adopting a feeling of outrage, telling my non-business-major friends it was ridiculous that this could have happened. I remember CNBC anchors asking how Bernie Madoff could have orchestrated this alone.

Part II


My first job out of college was working as a compliance auditor for a self-regulatory organization in the derivatives industry.  A manager of mine had audited a company that had invested with Madoff. He was obligated to ask about the investment. The owner of the company just said, “He seemed like a really nice guy.”


I was part of a team of three people auditing a trading firm in Texas. Before traveling to Texas, the owner of the trading firm had kind of yelled at me on the phone. I think he thought I was making requests that wasted his time. He said he wasn’t going to send me something I had asked for. The manager of our team then called the owner of the trading firm, and they both yelled at each other.

In person, the owner of the trading firm apologized. He was probably in his fifties. His hair was greying and he had a bowl cut. Everyone on my team was under 30. The owner said something like, “It just feels like after the Madoff scandal, all the regulators feel like they have to prove something. It seems like an order went out to take a hostile attitude.”

Part III

I read the REPORT OF THE 2009 SPECIAL REVIEW COMMITTEE ON FINRA’S EXAMINATION PROGRAM IN LIGHT OF THE STANFORD AND MADOFF SCHEMES just before it was released publicly. It was an internal review of FINRA’s own audit (or “examination”) process. FINRA had shared the report with other financial regulators — when I read it — and then with the public. They were ostensibly admitting their errors in the name of the public good, so as to prevent such situations in the future. I remember feeling that it was brave of FINRA to release the report, because the report seemed so damning.

Standing in contrast to the impression I had as a college student — that Bernie Madoff had been running a very large and famous hedge fund, gossiped over by Wall Street broadly, and that Madoff must have been a criminal mastermind to pull off such fraud — FINRA’s report concluded that FINRA’s employees had not caught Madoff’s Ponzi scheme because they were unaware that Madoff had customers funds at all. They believed that Madoff only engaged in “proprietary trading activities” (trading with his own money). They weren’t looking for a Ponzi scheme because they didn’t know that was even a possibility. It seemed like FINRA was admitting that they were oblivious as to the significant actors in the industry they regulate.

In particular, when I think about Bernie Madoff, I think about footnote 63 from this report:

According to the cycle examiner and other personnel from the New York district office, as of 2007, except for confirming the internet address of a firm’s website, FINRA did not routinely run internet searches prior to conducting a examination. The cycle examiner ran a Google search prior to the exam to find out more about Madoff, whom he understood to be an innovator in electronic trading and a prominent member of the financial community. His Google search did not reveal that Madoff was managing money or acting as an investment adviser. The use of pre-examination internet searches has increased since the Madoff scandal broke, but FINRA has not issued any guidelines on how such searches should be conducted or the kinds of information they should target.