Madoff scam saps confidence in Wall Street

However, the SEC gets complaints all the time, says Tom Peisch, a white-collar crime lawyer and partner at Boston-based Conn Kavanaugh Rosenthal Peisch & Ford. But "if it is true they received substantive complaints and blew them off, they will face some heavy sledding."

The agency treats every inquiry as a "legitimate complaint," says Thomas Weirich, a professor of accounting at Central Michigan University and a former academic fellow at the SEC. But "the SEC has a limited staff."

The SEC, in a Dec. 11 news release, said it was seeking emergency relief for investors, including an asset freeze. The agency, in its complaint filed with the federal court in Manhattan, said Madoff had told two senior officials of his firm that his business was "basically, just a giant Ponzi scheme."

The SEC is likely to come under fire if Congress holds hearings. "I have no doubt we will see hearings," says Mr. Young. "But I can't guess if we will have legislation."

He points out that financial organizations that deal with so-called sophisticated investors are often exempt from oversight. "At some level investment partnerships are between consenting adults," he says. "You can argue if things go badly, they should not have given them the money."

However, he also notes that just because someone is wealthy does not mean they should not be protected. "When people get hurt, including rich people ... they seek redress from the government."

The potential losses may also affect the private-wealth management business, one of the profitable areas for banks. According to the magazine Euromoney, some $7.6 trillion was under management in 2007, up 120 percent over the prior year.

"My sense is that this [the Madoff affair] is very damaging to private-wealth management," says Brian Bethune, chief US financial economist at IHS Global Insight in Lexington, Mass. "Whether it's hedge funds or otherwise, people are going to ask, 'Do I really trust these advisers?' "

He notes that the disclosure requirement for hedge funds and the private-wealth management business is very limited. "It's kind of the backroom kind of thing, like the old Swiss private bankers where everything takes place behind large walnut doors and no one knows what is going on."

That appears to be the case for some of the Madoff investors. On Tuesday on CNBC, an irate Mort Zuckerman, owner of US News & World Report, described how his charitable foundation gave $30 million to a money manager at Ascot Partners, which he said had invested almost all its assets with Madoff. Mr. Zuckerman said he had no idea that's where the money went.

Zuckerman says Ascot had as much as $1.8 billion invested with Madoff. A significant portion of it came from wealthy Jewish families or their philanthropies. Now, lawyers will begin the process of trying to see how much can be recovered.

•Correspondent Ben Quinn in London contributed to this report.

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