Another Letter from Madoff Hits ‘Worst Kept Secrets’ of Wall Street

Bernard Madoff
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Bernard Madoff

The perpetrator of the largest investment fraud in U.S. history is once again weighing in on the excesses of Wall Street.

Bernie Madoff, writing to me from the federal prison in North Carolina where he is serving a 150-year prison sentence, says the only thing that has changed since he left Wall Street four years ago is "the decision of the SEC to prosecute Wall Street's worst kept secrets"—chief among them insider trading.

"Insider trading is nothing new," Madoff says, echoing a message he sent me on Christmas Eve.

In the latest message, he says insider trading comes into play when firms practice "merger arbitrage," trading the stock of a takeover target against that of an acquirer. He says that is why he never did that kind of trading.

"Merger arbitrage could only be executed successfully by having the inside information as to whether there was going to be board of director approval of the pending merger. As well as having access to the (government) anti-trust rulings."

Madoff says he did not have access to that information, but others did.

(Read More: Madoff's Younger Brother Sentenced to 10 Years)

"Most of the firms practicing merger arb were the major banking firms that sat on the boards of the target companies."

Madoff also weighs in on broker compensation on Wall Street, which he says is adding to the pressure to generate higher returns. Last week, the Financial Industry Regulatory Authority (FINRA)—the industry's self-regulatory body—proposed requiring firms to disclose signing bonuses of $50,000 or more. But Madoff says the signing bonuses, which are used by Wall Street firms to lure top performers away from competitors, are just a symptom.

"The real problem with the signing bonuses is that pressure that the new firms put on their bonus babies to generate large commissions by promoting special products of the new firm to pay off those bonus costs. This problem dates back some thirty years and lead to the demise of Bache & Co. selling their oil and gas (limited) partnerships. As hard as the (Securities Industry Association) federal regulation committee, on which I served, tried to stop this practice, we never could," Madoff writes.

Madoff also takes on high-frequency trading, and the CEO of Knight Trading, Tom Joyce—who last week wrote a letter to the Wall Street Journal defending the practice.

"HFT firms often provide essential liquidity to all market participants," Joyce wrote.

"I find fault with his letter in WSJ," Madoff writes.

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In addition to the investment advisory business at the heart of Madoff's Ponzi scheme, he also ran one of the largest market-making business on Wall Street—a business that, to this day, Madoff claims was legitimate.

"While both Madoff and Knight both (sic) provided liquidity and lower trading costs to retail investors, this was due to their strict obligations as registered market makers and their willingness to provide deep quotes. This is very different than the FLICKERING quotes that are provided by the high frequency trading firms," Madoff writes.

Madoff's Christmas Eve letter drew plenty of criticism from readers and viewers, since Madoff, after all, is a convicted fraudster of the highest order. He acknowledges that in his latest message.

"You are free to quote me at your risk of being abused for giving me a voice," Madoff writes.

—By CNBC's Scott Cohn; Follow him on Twitter: @ScottCohnCNBC