Politicians on Capitol Hill yesterday questioned whether America’s main financial regulator has any future as the Securities and Exchange Commission (SEC) came under renewed attack for missing what is believed to be the world’s biggest fraud.

The threat to the survival of the SEC came as it emerged that Bernard Madoff has violated the terms of his bail conditions by posting jewellery worth $1 million (£680,000) to family members and friends while under 24-hour house arrest. The measure constitutes a breach because it is perceived as a possible attempt to hide his remaining assets from liquidators.

During a bail hearing in New York yesterday which Mr Madoff attended, a state prosecutor requested that the 70-year-old be jailed because of the breach which included sending a $200 pair of winter mittens and a $25 set of cufflinks. His lawyer insisted that the items were family heirlooms and that his client and his wife tried to have the items returned once they realised they may have broken bail terms. US Magistrate Judge Ronald Ellis demanded written arguments from both sides and said he would hand down a ruling later.

At the first of a number of Washington hearings, held by the House of Representatives subcommittee on capital markets, senior lawmakers sought to examine how the SEC had failed to detect Mr Madoff’s alleged $50 billion Ponzi scheme and to consider how America’s financial regulatory framework should be redrawn under the Obama administration.

Paul Kanjorski, the chairman of the subcommittee, said that he wanted to know how such an elaborate Ponzi scheme had “fallen through the cracks”, adding that the scandal represented an opportunity to restructure America’s entire regulatory system.

David Kotz, the inspector-general of the SEC, who is leading an inquiry into its role in the Madoff scandal, said that he had seized documents from the office of the chairman of the SEC, Christopher Cox, and had also demanded e-mails from former and current employees to ascertain whether some regulators had suppressed key information about Mr Madoff. Mr Kotz also said that he had issued a preservation notice, which bans any employee from destroying documents or e-mails connected with Mr Madoff.

The testimony by Mr Kotz came after it had emerged that regulators had examined Mr Madoff’s investment business eight times in 16 years but had failed to notice the growing Ponzi scheme that he was allegedly constructing. A Ponzi scheme is an illegal investment scam that uses new client money to pay phoney investment returns to existing customers. It does not invest any capital and survives only if new clients continue to join the scheme.

At the same hearing, Barney Frank, the chairman of the main House of Representatives Financial Services Committee, said the collapse had shown that large investors need protection just as much as small ones. He said: “It is not reasonable to expect them [large investors] to be detectors of fraud.”

It has also emerged that the incoming head of the SEC oversaw a major investigation into Mr Madoff’s investment business and found that large parts of his operations appeared to have no customers. The inquiries into Mr Madoff’s business practices were conducted by the Financial Industry Regulatory Authority (Finra) at least two years before Mr Madoff allegedly admitted the scam to his sons.

Separately, the trustee handling the liquidation of the collapsed firm said that about $830 million of liquid assets had been found.

The Oscar-winning film director Pedro Almodóvar is among the Spaniards said to have lost tens of thousands of euros in the scandal. His production company El Deseo invested in Oyster Investments. Oyster invested in Lux Investment Fund, which was exposed to the Madoff scandal.

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