Picard and Sheehan succeeded by extracting settlements from the banks and brokerages that fed investors to Madoff, as well as clawing back gains from investors who had pocketed phantom profits from Madoff prior to his exposure.
That's not to say that the investors didn't suffer more than merely the average 20%. Many had based their retirements and children's college funds on their expectations of gains, only to see those plans upended.
On the other hand, almost all were guilty of violating a couple of cardinal rules of wise investing — if you can't understand your advisor's strategy, don't invest; and if something appears to be too good to be true, it probably is.
That brings us to the SEC.
Like many investors, the agency seemed to be snowed by Madoff's sterling reputation on Wall Street. He had served three times as chairman of the Nasdaq stock market and maintained the facade of a legitimate trading firm occupying three floors of a high-profile office building in midtown Manhattan. Outsiders weren't permitted to see the offices where the fraud was being perpetrated, however.
As an investigation by the SEC's inspector general revealed, the SEC had received enough "detailed and substantive complaints over the years to warrant a thorough and comprehensive examination and/or investigation" of Madoff for operating a Ponzi scheme.
These included six complaints that "raised significant red flags ... about whether Madoff was actually engaged in trading," including a detailed report by brokerage executive Harry Markopolos demonstrating that Madoff's claimed returns were mathematically impossible.
The SEC investigated some of these complaints, but generally confined itself to narrow issues such as whether Madoff needed to register as an investment advisor.
"The relatively inexperienced Enforcement staff" failed to understand the analyses challenging Madoff's returns and treated the complaints with "skepticism and disbelief," the inspector general found.
The SEC staff caught Madoff in lies and misrepresentations, but didn't follow up. "They simply accepted as plausible his explanations," the inspector general wrote.