As news of the world’s greatest investment fraud continues to unravel this week, one of several important warning flags is worth heeding for new and existing investors in mutual funds, hedge funds and other investment products.

Bernie Madoff was arrested by the FBI last Thursday after admitting to his sons that his hedge fund business was a “total lie.” One of his boys, an investor in the Ponzi scheme, immediately went to the FBI in New York following his father’s shocking admission and tipped off the authorities. Madoff subsequently posted $10 million dollar bail.

It’s estimated that global investors lost over $50 billion dollars with Madoff in his several offshore phantom hedge funds. This is truly a staggering figure. For more than 15 years, Madoff claimed to have earned over 10% per annum with very few losing months invested in a strategy tied to low volatility split-strike option arbitrage. If you don’t know how this strategy works, you’re not alone.

But here’s a point worth heeding if you’re an existing investor in a collective investment vehicle or considering taking a punt in a hedge fund: Bernie Madoff issued in-house statements to clients reflecting the value of their investments in the now defunct firm. That’s not kosher conduct.

Mutual funds and hedge funds must use a third-party custodian to conduct monthly net asset value prices, shareholder services and other fund administrative functions. But Madoff didn’t use a custodian and instead issued his own statements (Madoff Securities) to clients reflecting the value of their investments at any given time. That’s a major red flag. An advisor should not use a subsidiary to conduct client valuations and issue statements.

Another warning was Madoff’s audit firm, a single person operation located in up-state New York. It seems pretty odd to have a $50 billion dollar operation audited by a tiny opaque one man show somewhere out in the sticks.

Did Madoff’s investors consider these points? Did some of the big institutions invested in his funds ever visit the auditor?

The list of the super rich and high net worth investors, including European private banks and Israeli foundations tied to Madoff, is impressive. What’s even more astonishing is that these and other investors failed to conduct proper due diligence.

Tremont Advisors, one of the leading hedge fund investment and research firms in the United States is reported to have lost half of its total assets in Madoff’s hedge funds. Another unit invested everything with Madoff.

In hindsight it’s easy to point blame after a high profile hedge fund failure shows the laundry list of failed compliance directives by private banks, foundations and other investors. Yet it’s truly amazing that considering the level of sophistication and assets under management that these companies so blatantly failed to acknowledge and investigate these and other red flags.

The real winners in this scandal, unfortunately, won’t be investors. Instead, the lawyers involved in this fiasco will earn millions as it takes years to unravel Madoff’s intricate web of lies.