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SEC Investigator Raised Madoff Concerns Years Ago, Was Asked to Look Elsewhere

Her concerns would later prove to be on the mark. Earlier this year, the Justice Department accused Madoff of fabricating his strategy, generating false account statements and trade confirmations, and lying to investigators.

In early March 2004, Walker-Lightfoot shared her concerns with her supervisors, said a former SEC official and another person aware of the conversation.

Donohue, who still works for the SEC, was not available to comment for this article, an agency spokesman said. Swanson, no longer with the agency, declined to comment.

In response to Walker-Lightfoot's concerns, Donohue asked her to describe what additional information she wanted from Madoff, a person familiar with the discussion said.

So she sent Donohue an e-mail with nine follow-up questions she wanted to ask Madoff's firm, documents show. Several focused on the unusual trading patterns she had noticed. Others touched more broadly on questions about how Madoff ran his business.

"Do you hold any other form of brokerage account statements or accounting documents for these accounts?" Walker-Lightfoot asked. "Do you have the prime brokerage or custodial banking agreements for these accounts?"

If pursued, these questions may have led to discovery of the fraud. That's because Madoff was in fact maintaining personal custody of investors' assets, unlike the practice followed by many investment companies. These firms use a third-party custodian to hold investors' funds, and that helps assure investors that their funds are where the companies say they are.

In a separate e-mail to Donohue later in March, Walker-Lightfoot put some of her suspicions in writing.

For instance, documents show, she detailed her findings on two accounts at Madoff's firm. One belonged to a hedge fund called Tremont and the other to a smaller hedge fund called Sway.

Madoff had told the SEC that all his accounts traded based on the same specific conditions. But in her e-mail, which she copied to colleague Jacqueline Wood, Walker-Lightfoot noted "significant differences between the Tremont and Sway account transactions." The variation in the dates of trades seemed to contradict a key part of his strategy and "does not make sense," she wrote.

She also flagged other doubts about Madoff's strategy. He was supposed to buy and sell stocks and then trade options as a hedge against any loss. But his financial records suggested that he often completed trades without the corresponding hedges or hedged without completing the corresponding trades. As she wrote, "the corresponding equity activity/or hedge restructuring" didn't occur. In reality, the later criminal complaint said, many of the trades never happened at all.

One month after Walker-Lightfoot raised her concerns, Donohue told her to focus on a separate probe into mutual funds, documents show. At the time, there was intense pressure to investigate this industry. The press and other regulators, such as then-New York Attorney General Eliot L. Spitzer, were challenging industry practices. About a dozen of her colleagues were already assigned to pursue the issue.


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