This is what I have learned from what I have read. (Check out Vanity Fair. I think their articles on Madoff are online.)
Part of the business was legit. The illegal stuff was run on a separate floor with little to no interaction between the legit investment banking and the scam operation.
As for the regulators, the SEC are traffic cops, not CSI. As long as all the paperwork was filled out correctly, no red flags would have gone up. Having been through an audit I will say that if any company actually has all the paperwork for their trades filled out neatly and legibly they are probably running a scam. A lot of this stuff is done on the fly and not everything makes it to the proper file. I don't think there's any way that could happen if you are actually running a real trading floor.
That said, there was a guy who tipped off the SEC and they didn't really do a very thorough job so he could have been caught earlier. I suspect this is about like the health department inspections. Of course everything isn't thoroughly inspected because there aren't nearly enough inspectors to do that thorough a job. I doubt that's going to change either.
What you do have to wonder is how so many people could convince themselves that they were legitimately getting 8% when everyone else's funds lost money and it was all a big secret where the money came from and sometimes the numbers were exactly the same for two consecutive quarters. I'm not saying that this justified what Mr Madoff did, but a little less greed and a little bit more skepticism and people wouldn't have allowed themselves to be conned like this.
Houndentenor
"Get the trash off the street and back on the stage where it belongs." -- Bette Midler
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