Dec. 17 (Bloomberg) -- Bernard Madoff’s alleged $50 billion Ponzi scheme reflects weak oversight by authorities and poor judgment from investors, investor Marc Faber said.

“The problem is really the connection between big business in the United States and the government,” Faber, who manages about $300 million at Marc Faber Ltd. in Hong Kong, said in an interview with Bloomberg Television. “It’s a very clear case of lack of oversight partly because government officials are compromised.”

Madoff, 70, was arrested Dec. 11 after telling his two sons and federal investigators that he’d used money from new investors to pay off old ones in a so-called Ponzi scheme. He said clients of his New York-based investment-advisory firm lost $50 billion.

The case “shows how essentially gullible investors had become,” Faber said.

“Most of the money that went into Madoff’s was funds of funds,” he said, referring to firms that channel cash into asset managers after vetting them for clients. “So what kind of due diligence did those funds perform in the case of Madoff? They never even looked at the auditors.”

Checking out the auditors is one of the first things that investors should do when choosing a fund, Faber said. Madoff’s auditing firm was Friehling & Horowitz, which included one partner in his late 70s, a secretary and one active accountant, according to hedge-fund investment adviser Aksia LLC, which warned clients last year not to invest with Madoff.

‘Utterly Irrelevant’

James Grant, editor of the newsletter Grant’s Interest Rate Observer, said investors have been lulled into a false sense of confidence under the assumption that the Securities and Exchange Commission and other authorities will protect their interests.

“To me, the SEC is utterly irrelevant,” Grant told Bloomberg TV. “The very presence of the SEC reduces the vigilance of individuals who would otherwise be much more attuned to risk in their own lives and their own portfolios.”

Madoff, the president of Bernard L. Madoff Investment Securities LLC, was placed under house arrest and subject to electronic monitoring following his arrest last week.

Madoff, who must now remain in his Manhattan apartment under curfew, met with federal prosecutors yesterday, according to a person familiar with the case. The change in bail conditions was agreed to by prosecutors and defense attorneys.

To contact the reporters on this story: Fabio Alves in New York at falves3@bloomberg.net; Carol Massar in New York at cmassar@bloomberg.net.

Last Updated: December 17, 2008 12:15 EST