>>Does the SEC actually regulate hedge funds?<<
Not really, except indirectly, through their trades in public markets (monitoring for illegal activity, manipulation, etc.) but not internals, audits or trading systems. Not the case with Madoff’s fund operations, though he did run his own ECM and even paid for “order flow” which could have alerted SEC that it's a potential front running operation - which is illegal and ECNs, like all exchanges, are under purview of SEC. So they could start investigating him from that side of “the Street”. Though ECNs didn't come into the picture until late 1990s, he still had run a trading operation - whether before he started Ponzi scheme or after remains to be learned.
Mary Shapiro, who is coming in as head of SEC, has been CEO of (NGO) FINRA, which has can do more vigilance and “oversight” of hedge funds than SEC.
>>Also, I suspect the SEC receives hundreds of “hot tip” memos like this each month. ... I suspect most of those “hot tip” memos are written by people who hope to win a SEC bounty, or by people with an ax to grind, or by people who are mentally deranged.<<
Also, often short sellers send letters for SEC to investigate the company where they have built a short interest in, hoping that investigation or the notice of complaint itself will help their short position, whether there really is something wrong with the company or not.
>>I suspect a low level staffer read through the Markopolis memo, made some phone calls, heard that “Madoff is OK,” <<
That's what really needs to be investigated - the trail of the document to particular bureaucrat(s) that reviewed the letter(s) and what, if any, involvement of high ranking Democrats friendly or with financial ties to Madoff. I assume that, just like in most other government agencies and Departments, most bureaucrats and staffers are Democrats.
>>I also have begun to doubt the $50 billion price tag on this fraud. ... It's been two weeks now, and the disclosed investments are still under $25 billion.<<
Well, more seems to be coming from Europe every week, and the approximately $50B figure over 20+ years of operation, may include redemptions which have not been reinvested back, as well as possible “offshoring” of some money from the funds, whether for Madoff himself or on behalf of some investors.
>>Suddenly, he tells the exact truth about how much money he lost? ... Maybe.<<
He might not know exactly, himself. But it's a good round number, and probably close enough to the truth, give or take a few billion dollars.
I hadn't thought about the the short selling motive for whistle blowers.
And, I hadn't thought at all about the political calculus, namely, Madoff’s long and lucrative support of the Democratic Party. Very good catch. Completely missed it.
Re: Total Losses.....
Looks like you may be correct about that, too.
Bloomberg has apparently increased its estimate to $36 billion, but I can't find the story at their website.
However, some of that “loss” may be balanced by Madoff’s regular dividend.
Consider....the SP 500 is down 35% over the last decade, and QQQ is down more than 40%.
For those who were “lucky” enough to pull in Madoff’s 1% per month for an extended period of time, they might actually get close to break even, although their principal is now probably zero.
And, no doubt Madoff enticed many risk averse investors, people who would not have invested in equities, so your heart has to go out especially to that group, most of whom are probably elderly and have no way to recover.