SEC alerted to Madoff in ’04

WASHINGTON – An investigator at the Securities and Exchange Commission warned superiors as far back as 2004 about irregularities at Bernard L. Madoff’s financial management firm, but she was told to focus on an unrelated matter, according to agency documents and sources familiar with the investigation.

Genevievette Walker-Lightfoot, a lawyer in the SEC’s Office of Compliance Inspections and Examinations, sent e-mails to a supervisor, saying information provided by Madoff during her review didn’t add up and suggesting a set of questions to ask his firm, documents show.

Several of these questions directly challenged Madoff activities that much later turned out to be elements of his massive fraud.

But with the agency under pressure to look for wrongdoing in the mutual fund industry, she wasn’t able to continue pursuing Madoff, according to documents and two people familiar with the investigation, and her team soon concluded its work on the probe.

Walker-Lightfoot’s supervisors on the case were Mark Donohue, then a branch chief in her department, and his boss, Eric Swanson, an assistant director of the department, said two people familiar with the investigation.

Swanson later married Madoff’s niece, and their relationship is now under review by the agency’s inspector general, who is examining the SEC’s handling of the Madoff case.

Madoff confessed in December to running “a giant Ponzi scheme” worth potentially $50 billion, and he was sentenced Monday to 150 years in prison.

Authorities are continuing to investigate other people and firms that might have abetted the fraud.

The SEC’s inability to detect Madoff’s fraud was a high-profile embarrassment for the agency, which was already under scrutiny for the collapse of investment banks under its watch, helping fuel the financial crisis.

At least five times over nearly 20 years, the SEC has investigated Madoff’s business, but it never discovered the tremendous fraud. In 2007, for instance, the agency reviewed his activities after warnings from a one-time rival, Harry Markopolos, that Madoff was probably running a Ponzi scheme.

Three years before, in early 2004, Walker-Lightfoot was assigned to examine Madoff’s relationship with various hedge funds.

The agency ordered Madoff to turn over reams of information – accounting statements, trade confirmations and other documents – and told him to detail his strategy, called “split-strike conversion.” Madoff told the SEC that he used sophisticated trading practices to buy and sell stocks, employing stock options as hedges to limit losses. He told investors he never lost money.

Walker-Lightfoot, a staff lawyer, had previously worked at the American Stock Exchange, where she developed an expertise in specialized trading strategies. When she reviewed the paper documents and electronic data supplied by Madoff, she found it full of inconsistencies, according to documents, a former SEC official and another person knowledgeable about the 2004 investigation.

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.