9/4/09 Update - Peter Madoff's $9 million loan was apparently used to invest in a real estate project. In May 2008, Bernie transferred $2.8 million to Marion Madoff, Peter's wife, which was probably given to Eric and Shana Madoff Swanson to buy the East Hampton house. More info here.

For example, Kotz is looking into a former SEC official who allegedly had a personal relationship with a Madoff family member. It has been reported that the former SEC employee is Eric Swanson, a compliance lawyer for the SEC who is now married to Shana Madoff, Bernie Madoff's niece. Kotz is investigating whether or not their relationship affected the SEC's regulatory oversight of Madoff's affairs. - 6/3/2009, "SEC Probes Its Own Chummy Ties to Madoff", Faiza Virani, CBS News

The New York papers had fun last week extracting the juicier bits from Vanity Fair's forthcoming article about how the Boo-Hoo Boys, Andrew and Mark Madoff, are faring post-Bernie (here and here). Mark and Andrew's p.r. rep, George Sard, is going with the meme that the "boys" were too weak and spoiled to have participated in Bernie's Ponzi scheme.

The other big Madoff story was about SEC Inspector General David Kotz's internal investigation into how the Madoff swindle escaped detection by the SEC despite seven investigations of BMIS in eleven years. So far, Kotz has interviewed 44 employees and ordered the SEC to turn over emails from 27 employees involved in the investigations.

Curiously, CBS News was the only member of the media to even mention Eric Swanson's possible involvement in the case and it did so carefully.

In December, the New York Times called Swanson an "unlikely player" in the Madoff scandal because he seemed to be a straight arrow from the Midwest. But Swanson had a huge stake in the outcome of the SEC's 2006 investigation, something the NYT downplayed. (I think the Swanson p.r. rep., Eric Starkman, had a lot to do with that.)

If Swanson read the Markopolos complaint when it was first filed, he knew about the allegation of a Ponzi scheme. I don't know if the SEC investigators showed the Markopolos complaint to Bernie but if Swanson knew about it, I'm sure he told Shana Madoff.

The mere mention of a Ponzi scheme would have terrified Bernie and he would have done anything in his power to prevent it from being uncovered.

The other day, I posted about the Swansons buying a $2.8 million East Hampton mansion in May 2008 and how they were all set to buy a $4.2 million Upper East Side condo in December but canceled the deal when Bernie was arrested. In the post, I suggested Peter Madoff borrowed $9 million from Bernie in December 2007 to buy the real estate as a wedding gift for his daughter.

What I didn't consider was the timing of the loan and the conclusion of the SEC investigation.

The investigation officially wrapped up in February 2008 but the SEC closing statement is dated 11/27/2007. The statement effectively ended the investigation since the three investigators, Doris Bachenheimer, Meaghan Cheung and Semona Suh, signed off that they had found no basis to continue it.

Two weeks later, on 12/12/2007, Bernie wired $9 million into Peter Madoff's bank account, calling the transfer a loan.

Was the $9 million "loan" really a bonus for bringing the SEC investigation to a successful conclusion? If so, was part or all of the money intended for the Swansons?

A multi-million dollar sham loan to his compliance officer and her husband, a former SEC investigator, would have been out of the question. I say "sham" because it was unlikely a loan from Bernie would ever be repaid but as long as it was on the books, the borrower didn't have to pay income taxes on the money. I'm sure the IRS is going to take a look at the $32 million Bernie "loaned" to Mark and Andrew between 1998 and 2008.

Did the Swansons finance the East Hampton deal with a "loan" from Peter Madoff? It seems unlikely they used their own money to buy the $2.8 million East Hampton property and still have more than $4 million left over to buy a condo seven months later.

Shana Madoff, of course, may have had money of her own. I couldn't find any evidence that she and her first husband, Scott Skoller, bought real estate during their marriage which makes me wonder if the Madoffs were careful about giving Shana money while she was married to Skoller.

Despite her telling New York Magazine she lived in a Park Ave apartment, Shana Madoff appears to have lived in a rented apartment in the River Tower on E. 54th St. for a number of years. Online records indicate Eric Swanson now lives there with her.

I read somewhere that Shana Madoff's salary was about $500k. Half a million is not a huge salary by NYC standards and Madoff had an expensive lifestyle.

Given that Swanson worked for the SEC for most of his career, he probably did not accumulate much wealth other than the equity in his DC townhouse. (If he did, I'm sure the DOJ is looking into the source.) How much the sale of the property netted him is not clear.

According to DC property records, Swanson bought a 2100 sq. ft. townhouse from the District of Columbia in 1999 for cash. He took out a $160k mortgage with Independence Bank in mid-2000 which he repaid in 2005 after taking out another mortgage which was attributed to high-powered DC real estate attorney, Roy L. Kaufmann. A satisfaction of the mortgage was never filed nor is it evident who the actual lender was.

On 11/27/2006, Wells Fargo filed a mortgage on the property for an unspecified amount. On 12/11/2006, a notice of a deed transfer was filed indicating the property was sold to Prudential Relocation for $915k. On 1/22/2007, Wells Fargo filed a notice of satisfaction of mortgage.

The timing of the sale appears to indicates that Swanson stayed at the SEC until late 2006 but Vanity Fair claimed he resigned four months after he allegedly began his affair with Madoff which translates to September or thereabouts.

What about Swanson's claim that he was not involved with any of the BMIS investigations?

Swanson most certainly was involved with one investigation that directly involved Bernie Madoff. BMIS owned 10% of the National Stock Exchange and Peter Madoff was on the board of directors. The NSX flagrantly violated SEC regulations for years but after a three-year investigation, Swanson gave the NSX a slap on the wrist in September 2005.

The NSX investigation was ongoing when Swanson says he first met Shana Madoff in October 2003.

The opening statement in the Markopolos investigation dated 1/4/2006 refers to an investigation of BMIS earlier in the year during which Bernie lied about his role as an investment advisor (which should have been a five-alarmer, imho.)

During that time, Swanson and Shana Madoff were becoming close even if they weren't sleeping together at that point. (According to the NY Times, they became romantically involved in April 2006 and the WSJ puts it as after Shana's brother, Roger, died on 4/18/2006.)

In 2005, Eric Swanson would have had a very good reason to hide an affair with Shana Madoff. He would have been required to disclose that fact to the SEC as a potential conflict of interest in the NSX investigation.

But Swanson didn't have to participate in a Madoff investigation to influence it. Providing confidential information about an investigation to Shana Madoff would have helped Bernie. As an unofficial go-between, Swanson could help negotiate settlement terms favorable to Bernie. Or maybe Swanson pitched his role as a Madoff insider to the investigators as reassurance that Bernie was on the up and up.

A former Madoff employer told me Eric Swanson was considered to be just as pretentious as Shana Madoff around the BMIS water cooler. If that's true, Swanson must have been thrilled to hobnob with NYC's creme de la creme and the prospect of owning a $2.8 million home in the Hamptons would have been irresistible to the aspiring social climber.

It wouldn't have taken all that much for Swanson to sway the investigators. A word here, a word there and the investigation is dropped. A grateful Bernie gives all of the credit to Swanson and he gets the summer home of his dreams.

Unbelievable? Hardly.