Mrs. Madoff's role?

Ruth Madoff is being investigated over whether she helped her husband Bernie maintain secret records used in the alleged $50 billion Ponzi scheme, Bloomberg is reporting. The SEC apparently is finding evidence that she might have helped track payments (also, her name is on a bunch of transactions). Authorities haven’t accused Ruth Madoff of wrongdoing, but a federal judge ordered her to surrender her passport.

Ruth Madoff, who also has a master’s of science degree in nutrition from New York University, co-edited a cookbook in 1996 called “The Great Chefs of America Cook Kosher.” The book contains recipes for kosher dishes by well-known chefs, such as Daniel Boulud and Wolfgang Puck. The legal developments came after SEC Chairman Christopher Cox said yesterday the agency failed to act on “credible, specific” allegations about Bernard Madoff dating back to 1999. The Madoff affair will be at the center of planned congressional hearings on the reform of the SEC, said a senior Senate official, speaking on condition of anonymity.

Meanwhile, Paul Kedrosky, who runs the popular blog Infectious Greed, theorizes on the Daily Beast that many of Madoff's big institutional clients knew what was happening all along - and didn't much care. Well, until last week.

They were smart enough to know he couldn't produce these returns from "split-strike conversion," and they probably thought it was hilarious that he kept saying it and that some people even believed it. Hoo-hoo! So, far from assuming Madoff was clean, in other words, they likely assumed that Madoff was running a different game than he talked publicly. Perhaps by piggy-backing on his securities firm's order flow he was front-running trades, or maybe he was using bid-ask spreads from market-making in some clever way that was, ahem, not entirely above board. But smart investors didn't care. They didn't care as long as Madoff kept posting solid numbers with low volatility.

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And that is where irony kicks in, of course. Because the wise guys were right. According to the SEC, Bernie Madoff was running a fraud, just as they probably suspected, and not some nutty option strategy that they knew couldn't work anyway. The trouble is, it wasn't the fraud that wise-guy Madoff investors thought they had invested in (whatever that was, because they were careful not to ask). This particular fraud was a Ponzi scheme, and it took the cynics and wise guys down with it.