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Number Cruncher Saw Madoff Scam Early

It had been ten years since Daniel Dibartolomeo first thought about Bernie Madoff.

That's how long ago the president of Northfield Information Services added up the vital statistics of Madoff's ill-fated hedge fund -- at the request of a Boston fund manager -- only to find that they didn't add up.

"The only information that I and my staff had was the information that the Madoff organization itself was circulating to prospective investors," Dibartolomeo told CNBC. "Based on that information, (we) came to the conclusion that it was simply extremely unlikely that the returns being reported had arisen from the strategy which was being described." (See his full comments in the video)

So what was behind the scam?

"There were three possible explanations that we identified as early as 1999," he said. "One was that there were undisclosed aspects to the strategy, just in the way that a great chef might not give you every ingredient to a recipe; there was the potential for something like front-running (of course, front-running is illegal); and the third possibility was that the returns which had been reported had simply been falsified."

[Investopedia.com defines front-running as "the unethical practice of a broker trading an equity based on information from the analyst department before his or her clients have been given the information; for example, analysts and brokers...buy up shares in a company just before the brokerage is about to recommend the stock as a strong buy."]

So why didn't regulators jump on Madoff long ago?

Dibartolomeo speculates that, since the person who commissioned him to probe Madoff was a potential competitor of Madoff's, he was thought to be "a disgruntled competitor" and was thus given less credibility by the authorities.