But some neighbors say the real shocker came when they saw one of the bank's top executives spending weekends in the $12-million beach house and hosting eye-catching parties there. What's more, Wells Fargo spurned offers to show the property to prospective buyers, a real estate agent said.
"It's outrageous to take over a property like that, not make it available and then put someone from the bank in it," said Phillip Roman, an 18-year Colony resident who lives a few homes away from the property.
Residents identified the house's occupant as Cheronda Guyton, a Wells Fargo senior vice president who is responsible for foreclosed commercial properties.
Guyton could not be reached at her downtown Los Angeles office. Wells Fargo declined to discuss Guyton, saying in a statement that representatives "don't discuss specific team member situations/issues for privacy reasons." But the bank said it would "conduct a thorough investigation of the allegations" by neighbors.
The bank also said its ethics code wouldn't allow employees to make personal use of property that had been surrendered to satisfy debts.
Such conduct would pose a conflict of interest, said W. Michael Hoffman, executive director of the Center for Business Ethics at Bentley University in Waltham, Mass.
"For a business to allow this to happen in today's ethically charged climate is quite suicidal," he said. And because Madoff's fraud was the root cause of the situation, he added, "it's like rubbing salt into the wounds of a national tragedy."
The home's former owners, Lawrence and Linda Elins, didn't respond to requests for an interview.
Their real estate agent, Irene Dazzan-Palmer, said she had tried to lease the home for the couple last spring after they were "devastated" by Madoff losses. But before she could find a renter, the couple signed over the property to Wells Fargo to help satisfy a larger debt, she said.
Wells Fargo subsequently denied requests to show the house to prospective buyers, said Dazzan-Palmer, a Coldwell Banker specialist in Malibu Colony properties.
"I found it amazing at first when the bank wouldn't show the house to some friends of ours who were interested in buying it," said Roman, the neighbor.
Residents of the gated Malibu Colony said they obtained Guyton's name from the community's guards, who had issued her a homeowner's parking pass.
In written responses to questions from The Times, Wells Fargo said this week that its agreement with the prior owner required it to keep the home off the market "for a period of time" but declined to elaborate. The company said it now planned to list the property for sale "in the near future." The bank also confirmed that Guyton headed its foreclosed commercial property operation.
Malibu Colony stretches three-quarters of a mile along the beach in the heart of Malibu. Its residents include actor Tom Hanks, former Univision Chairman A. Jerrold Perenchio, and high-profile investment banker Michael E. Tennenbaum.
The home the Elinses occupied is a sleekly modern, 3,800-square-foot, two-story structure built in the early 1990s by clothing designer Nancy Heller. Its huge glass windows look out on a patio, deck and the Pacific. On the street side is a wall of mostly beige tile and metal.
Colony residents said the woman they believe to be Guyton, along with her husband and two children, took up occupancy in home No. 106 in Malibu Colony shortly after Lawrence Elins turned it over to Wells Fargo Bank on May 13.
The residents said the family spent long weekends at the home and had guests over, including a large party the last weekend of August that featured a waterborne arrival.
"A yacht pulled up offshore, with one of those inflatable dinghies to take people back and forth to the shore," said Roman's wife, Elaine Johnson. "About 20 people got taken over in the dinghy."
Malibu Colony employees who were not authorized to speak publicly said the community association at the start of the summer had issued Guyton a parking permit of the type given to Colony homeowners.
Residents also gave The Times the license plate number of a 2007 Volvo sport-utility vehicle that they say they had seen parked in the garage at No. 106. A check of motor vehicle license plates conducted by The Times found that vehicle to be registered to Guyton.
When a Times reporter used the buzzer at the home's steel gate on Labor Day, a woman answered the intercom but declined to identify herself or come to the gate.
Asked whether the home had been foreclosed on, she said: "It's not foreclosed. It's owned by Collin Equities" -- a Wells Fargo unit that liquidates foreclosure properties.
The woman on the intercom denied that she was living at the house or had been using it periodically over the summer. Asked whether she could say why she was at the home, she answered, "No, I cannot."
On the website for a lenders conference next month in San Diego, a biography says Guyton, 39, obtained an MBA from USC, worked in the state controller's office during the administration of former Gov. Gray Davis and now manages a team of foreclosed-property managers and a separate team that restructures troubled commercial loans.
Property records show she has owned a home in the Fairfax District of Los Angeles since 2004.
Elins, the previous owner of the Malibu Colony home, is identified in Securities and Exchange Commission filings as the former president of Applause Inc., a toy and gift manufacturer, who since 1988 has headed Elins Enterprises, a financial and real estate firm in Sherman Oaks.
They bought the Malibu Colony home in 1996 and refinanced it for $3 million with Wells Fargo Bank in December 2007, property records show. The home's value was recorded at $12 million when the property was transferred in May to Wells Fargo.
In January, Wells Fargo said it had written off $294 million of loans that had been secured by customers' investments with Madoff, whose Ponzi scheme collapsed late last year.
Dazzan-Palmer, the real estate agent, said she quickly found a person who was prepared to make "a very big offer in cash" to buy the property, but she wasn't able to show the house to any potential buyers. The bank said it was considering offers from other agents, she said, "and then someone moved in."
"We thought maybe it had been sold," she added. "It was a big mystery. All we knew was that Larry had lost the house and that someone was living there."
Because Dazzan-Palmer had the listing to lease the property, other agents have contacted her about the home, she said. She has a website with photos of the home at www.106malibucolony.com "> www.106malibucolony.com .
"I've had calls from about 20 agents saying they've got buyers and 'When can you get us in?' " she said. "And I say, 'My client doesn't own it anymore. I brought the bank an offer myself, they didn't respond, and that's all I know.' "