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One of the big questions about the Bernard Madoff scandal is why the Securities and Exchange Commission never figured out the Ponzi scheme. The agency had received tips for years and the SEC had investigated Madoff five times. Today, senators quizzed officials from the SEC about the failure. The real insight today though came not on Capitol Hill but from the release of a 2005 tape recording of Madoff. In it, he coaches another investment advisor on how to fool the SEC. NPR's Robert Smith reports.

ROBERT SMITH: We knew Madoff was a brilliant con man but who figured he was such a good teacher. And he didn't even want to take credit for it.

Mr. BERNARD L. MADOFF (Former Chairman, Investment Securities LLC): Obviously, first of all, this conversation never took place, okay.

Mr. VJ: Yeah, of course.

SMITH: And yet the conversation did take place for an hour and it was recorded by someone. The tape was released by Massachusetts Secretary of State William Galvin. In it, Madoff walks an employee of Fairfield Greenwich Advisors, referred to in the transcript as Mr. VJ, through his tips for beating the SEC. Tip number one: Don't write anything down.

Mr. MADOFF: The best thing to do is not get involved with, as you said, written instructions if possible because anytime you say you have something in writing, they ask for it.

Mr. VJ: Okay.

SMITH: In a recently released report from the SEC, you can see how successful this tip was. Madoff claimed to investigators that he traded using his gut feelings. The SEC didn't pursue it any further. Madoff in the phone call is contemptuous of investigators, and with cause. Madoff said you don't have to be brilliant to beat them.

Mr. MADOFF: No one pays attention, you know, to these types of things of who calls, who does it, or who remembers.

SMITH: Madoff never admits on the tape that he's faking his numbers and executing this giant Ponzi scheme, but he does sound pretty shady. He refuses to talk about his specific strategies, which he calls his intellectual property. And he says to the investment people on the other end of the line, the less you know, the better. But there should have been some tip-offs. For one thing, Madoff keeps answering his own phone.

Mr. MADOFF: Hold on because I'm the only one here, okay.

Mr. VJ: Yes, all right.

Mr. MADOFF: Hi, I'm sorry. Any more solicitations for charity, I can kill myself.

SMITH: If you didn't hear that he said if he gets any more solicitations for charity, he's going to kill himself. The recording may have legal implications for the guys on the other end of the phone line and their collaboration with Madoff, but the phone call is most damning to the SEC itself. Madoff had no fear, zero of regulators. He mocks them.

Mr. MADOFF: You know, we run through this all the time. The guys come in to do a books and records examination, and they - what you would call it, you know, they ask you a zillion different questions. And we look at them sometimes and we laugh, and we say are you guys writing a book?

(Soundbite of laughter)

SMITH: And in fact, in the SEC's report on what went wrong, they admit that they were cowed by Madoff. He would regale the investigators with stories, then all of the sudden start yelling at them, veins popping out of his neck. He understood what the SEC is only realizing now. The investigators they hired were young and inexperienced and basically wanted to go work for the firms they were supposed to be regulating.

Mr. MADOFF: These guys, they work for five years at the commission, and then they become a compliance manager at a hedge fund now, or they go work for proprietary trading debt. Nobody wants to stay there forever.

SMITH: This is the real Bernie Madoff, not the contrite one we saw during his trial and sentencing to 150 years in prison. He used to be brash, he knew the flaws in the system and he laughed at them until he got caught.

Robert Smith, NPR News, New York.

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