NEW YORK (MarketWatch) — Securities regulators are grossly underequipped to police financial markets, hedge funds are a danger to the market, and criminals have been scamming investors since the beginning of time and are not going to stop anytime soon.

Those are just a few of the observations made by Bernard Madoff in a recent interview about whether the financial markets are fair and how retail investors can protect themselves from fraudsters like him. In the interview, he described decades of dodging scrutiny from toothless regulators and gullible customers and said retail investors are the least well-informed market participants.

After all those years of racing to remain a step ahead of the authorities, Madoff has a few ideas about how the market can be made more fair for retail investors. Among them: The Securities and Exchange Commission should be beefed up, hedge funds need to be registered and brokerages should have independent custodians.

Madoff, serving 150 years for orchestrating the biggest Ponzi scheme in history, bilked his clients of billions of dollars and fooled regulators for decades before he was caught, tried and sent to prison.

Since his conviction, Madoff has been in Butner Federal Correctional Complex, a medium-security prison in Butner, N.C. After five years behind bars, Madoff, in a meeting with MarketWatch, appeared friendly, relaxed and healthy, despite the prison’s clinical feel.

During the two-hour conversation, Madoff talked about the good old days on Wall Street, hobnobbing with the likes of the former Treasury secretary and CEO of Goldman Sachs, Bob Rubin, and former Securities and Exchange Commission Chairman Arthur Levitt.

In prison, Madoff has no access to the Internet and gets his news from television, to which he has access from 2 p.m. until midnight, sharing with 60 other inmates. The former market highflier now spends his days taking care of the prison phone system and computers and says his fellow prisoners call him “the communications director.”

MarketWatch talked to Madoff about how investors can navigate the pitfalls of Wall Street and avoid getting scammed. Here is an edited version of MarketWatch’s conversation with Madoff.

MarketWatch: You have worked with some of the most elite financial firms on Wall Street. How has it changed since before you started the Ponzi scheme?

Bernard Madoff: The individual investor is the last person that has any information. The average investor is coming up against professional financial firms, hedge funds and the professional trader, and it’s easy to be scared out of the market.

MW: You say the individual investor is facing an unfair market environment, what can be done to level the playing field?

B.M.: The SEC needs more resources to protect investors. It’s grossly undercapitalized and it doesn’t have money to hire the right people. Basically it’s a training ground, by the time people are qualified they leave and work for private firms. They didn’t catch me because the whistleblower, Harry Markopolos, was leading them down the wrong alley. He was an idiot.

MW: Hedge funds are playing a bigger and bigger role in the market, but you point out that they might scare individual investors away.

B.M.: Hedge funds are a danger to the market and need to be registered. A major flaw on Wall Street is exempting hedge funds from being registered if they contain less than $100 million. We didn’t register with the SEC until 2006 as an investment adviser. From 2006 to 2008, when I was caught, I never had an investment adviser inspection by the SEC. They are supposed to do it every two years. If I had an inspection, I would have been caught sooner.

“ ‘If I had had an inspection by the SEC, they would have looked at the custodian accounts and seen the funds on my books did not match the funds in the accounts, and I would have been caught.’ ” — Bernard Madoff

MW: What about the big brokerages and advisers?

B.M.: Brokerages and advisers should have independent custodians and the government should have forced me to have an independent custodian. Client funds should be held by independent custodians. If they had, I would have been caught long ago. If I had had an inspection by the SEC, they would have looked at the custodian accounts and seen the funds on my books did not match the funds in the accounts, and I would have been caught. Brokerages and investment firms should hold money with depository trustees. Depository trusts verify to auditors the funds are being held. Auditors do spot checks and verify with brokerage firms or accountants. That wasn’t done in my case. If that was done, I would have been caught much sooner.

MW: Where do the big accounting firms fit in?

B.M.: Accounting firms should audit other accounting firms. Everyone should require that accounting firms check on their peers, which would make sure audits were done properly. But these firms use the excuse of competition [to avoid supervision]. If accounting firms keep each other in check, a proper audit would uncover most of the fraud that exists — including my own fraud.

MW: Where is the safest place to invest money these days, with the least amount of risk for fraud?

B.M.: The best chance for the average investor is to put money in an index fund. There are lower commission rates and more professional management with these types of firms. It’s the safest and least likely place to get scammed. If you want to hold money with brokerage firms, go with major public firms. Chances are they will go with proper procedures and proper compliance. If regulators were checking my firm, they would have caught me sooner. This way you can avoid the mistake of putting your money at risk. Or, put your money in mutual funds, which are large enough to protect investors.

[Madoff avoided filing disclosures of his funds’ holdings with the SEC by selling them before filing deadlines. Madoff also rejected calls for an outside audit “for reasons of secrecy,” claiming that was the exclusive responsibility of the firm’s compliance officer.]

Madoff: Don't let Wall Street scam you, like I did

If you are risk adverse, you should buy municipal bonds or government bonds. But you get 2.5% interest, lower than the inflation rate. If you are not sure, you should put your money in a savings account; at least it’s better than losing money and safe from fraud.

MW: What if the firm says an investment is too complicated to understand?

B.M.: Wall Street is not that complicated. If you ask an average hedge fund or investment firm how they make their money, they won’t tell you. Most people think it’s too complicated and they can’t understand it. You should ask good questions, and, if you don’t understand something, have your accountant ask questions.

If you don’t understand something, then don’t invest in it. People asked me all the time how did I do it, and I refused to tell them, and they still invested with me. My investors were sophisticated people, smart enough to know what was going on and how money was made — but still invested with me without any explanations. Things have to make sense to you. If you don’t understand the investment, don’t put your money there.

MW: How should an individual investor get to know Wall Street and how it works?

B.M.: Read good books. You have to educate yourself on the market. People are very gullible. Scamming investors has been going on since the beginning of time, and I don’t think it’s going to end. Use a qualified adviser. There used to be registered advisers that were educated and qualified on different financial investments. We don’t have that anymore. The biggest danger is when advisers have incentives to steer investors one way or another to get a bigger paycheck, which can happen.

MW: Your customers were given consistent, good returns for years. No one realized it was a Ponzi scheme until the financial crisis and clients demanded their money back. How can investors detect fraud like that?

B.M.: If it sounds too good to be true, it is. One of the things that allowed me to go on as long as I did is that I had a lot of credibility. I had 11% and 12% returns, which were not that unusual at that time. So no one questioned me, and I was able to continue.

MW: How do you make sure your money is really there?

B.M.: Ask for your money back periodically. What investors should do is periodically ask for your money back, whether it’s at a hedge fund or other investment firm. They will try to stop you by saying you can’t come back if you take it out, but you will likely always be able to go back. Ask for all your money back about every two years to make sure [a firm is] legitimate. If my clients had done this with me, I would have been caught sooner.