Yesterday, we received a news alert that Irving Picard, trustee for the liquidation of Bernard L. Madoff Investment Securities had settled with “more than a dozen domestic and foreign investment funds, their affiliates and a former chief executive associated with Rye, New York-based Tremont Group Holdings, Inc., the multi-billion-dollar money management company and operator of the second-largest Madoff “feeder fund” group, the Rye Select and Tremont families of funds.”

The settlement also includes three co-defendants: Oppenheimer Acquisition Corp. (part of the Oppenheimer group that acquired Tremont in 2001) and MassMutual holding LLC and the Massachusetts Mutual Life Insurance Company, which ultimately own Oppenheimer and Tremont.

Tremont Group Holdings is considered to be the second largest “feeder fund” that funneled money into Madoff’s scheme. And for its involvement in supporting what was later revealed to be one of the greatest investment frauds of the modern age, the defendents in this suit will pay more than $1 billion into the Customer Fund that is reimbursing claimants who in total lost some $17.3 billion in principal when Madoff’s pyramid scheme collapsed in at the end of 2008.

The complaint against Tremont is that the group ignored repeated warnings that Madoff’s operation was a fraud. According to counsel for the Trustee, this settlement, along with similar settlements with other feeder funds such as Fairfield Sentry, Greenwich Sentry and Greenwich Sentry Partner Funds,  is just desserts for any financial services operation that looks the other way when presented with obvious signs of skulduggery.

The reason why this is important – aside from the billion or so green-colored ones – is that a little more than a year ago, Dodd-Frank had not yet been signed into law. And there was some fierce debate going on over the extent of the regulatory package, and what kind of collateral damage it might inflict on financial services companies that did not appear to have anything to do with the failures that had kickstarted the Great Recession. Massachusetts senator Scott Brown gained special notice when last April, he went on Face the Nation to criticize financial services reform.

Brown pointed out that while trying to reel in firms that were taking excessive financial risks, financial services reform would catch insurers such as Liberty Mutual and Mass Mutual in the crossfire. Firms he implied did not merit extra scrutiny because if their history of responsible investment strategy. Brown even went so far as to suggest that what would become Dodd-Frank would cost some 25,000 to 35,000 jobs. A scare tactic, if ever there was one.

While one can appreciate the need to treat banks, investment houses and insurers differently as far as regulations are concerned, the truth is that these enterprises are more closely linked, and blur the lines between themselves, more than anyone seems ready to admit. If nothing else, Mass Mutual’s Madoff settlement proves that even the largest of insurers can get swept up in the large-scale madness that was our pre-2008 financial markets.

Although Dodd-Frank is now law, we still have not seen an end to the federal government’s efforts to expand and reinterpret how financial services should be regulated. The FSOC and the FIO are rising to become powerful voices in insurance regulation (a reservedly welcome development, considering the NAIC’s numerous shortcomings) while annuities are still under fire by securities regulators who, despite the utter (and deserved) failure of 151A, seem hellbent on classifying annuities as some kind of swap.

With this in mind, while insurers have done well in finding allies to make their case for them (as was the case when industry lobbyists sought an exemption from the Volcker rule), they would be wise to find better friends than the likes of Scott Brown. It was only six months after his full court press about reform gutting the financial services industry that Mass Mutual found itself on the receiving end of what has become a billion-dollar group settlement. While memories are short in Washington, they are not that short. And the next time when the industry must try to hold the line against encoracing regulation, developments like these will invariably be brought up.

A copy of the motion to settle will be available on the Trustee’s website (www.madofftrustee.com) or via the Bankruptcy Court docket found on the Court website (www.nysb.uscourts.gov); Case No.10-05310 (BRL).