Bernard Madoff, now facing fraud charges as a result of an alleged Ponzi scheme that might amount to $50 billion US, is shown in his firm's New York office in 1999.Bernard Madoff, now facing fraud charges as a result of an alleged Ponzi scheme that might amount to $50 billion US, is shown in his firm's New York office in 1999. (Ruby Washington/New York Times/Associated Press)

U.S. Securities and Exchange Commission chair Christopher Cox said Tuesday his agency repeatedly failed for at least a decade to pursue allegations of wrongdoing by Wall Street figure Bernard Madoff, the alleged perpetrator of a $50 billion US Ponzi scheme.

Cox ordered a probe by the SEC's inspector general, saying the agency's staff had never brought the Madoff matter to the attention of commissioners.

Ponzi scheme

Charles Ponzi (1882-1949) made millions in New England in 1920 off the scheme that bears his name, before it collapsed and he spent years in jail. The basic premise of a Ponzi scheme is simple: high returns are promised to investors, but the company doesn't make profits from real investments. It uses money from later investors to pay the earlier ones.

Ponzi schemes collapse eventually, because at some point there are no new investors to pay off the original ones. But before that happens, the promoters are often nabbed by investigators, or they take the investor's money and disappear.

Charles Ponzi died broke in South America.

Since the SEC staff never recommended that the commission open a formal investigation, subpoena power was not used to obtain information and the staff relied on information voluntarily produced by Madoff and his firm.

"I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them," Cox said in a statement.

In a forceful condemnation of the SEC staff, Cox said there had been credible and specific allegations regarding Madoff's financial wrongdoing going back to at least 1999.

The SEC chairman's criticism of his own agency marks only the latest instance in which federal regulators have overlooked clear warning signs of possible fraud.

Its oversight of Wall Street investment houses drew significant criticism. A review by the SEC inspector general determined that the agency's monitoring of the five biggest Wall Street firms, which included Bear Stearns, was lacking.

Cox's statement on Madoff was a stunning declaration in a scandal that has produced a series of dramatic developments.

Shock waves from the Madoff affair have radiated around the globe as the number of prestigious charitable foundations, big international banks and individual investors said to have fallen victim to an allegedly unprecedented fraud has grown. U.S. investigators are labouring to deconstruct the alleged scheme.

The SEC chairman alleged that Madoff kept several sets of books and false documents, and provided false information involving his advisory activities to investors and to regulators.

Cox also ordered the removal from the ongoing investigation of any SEC staff members who have had contact with Madoff or his family.

Madoff remains free on $10 million bail.