Investors scrambled this afternoon to assess potential losses from the $50 billion fraud allegedly perpetrated by Bernard Madoff, a day after the arrest of the prominent Wall Street trader.
Prosecutors and regulators accused the 70-year-old former chairman of the Nasdaq Stock Market of masterminding a Ponzi scheme of "epic" proportions through a hedge fund he ran.
Investors entrusted Mr Madoff with billions of dollars before federal agents arrested him at his apartment yesterday, after prosecutors said he told senior employees that his money management operations were "all just one big lie" and "basically, a giant Ponzi scheme."
Mr Madoff is the founder of Bernard L. Madoff Investment Securities LLC, a market-making firm he launched in 1960.
Mr Madoff's separate investment advisory business had about $17.1 billion of assets under management. Many investors may have had indirect exposure by investing through the firm's clients.
The two most prominent hedge funds that invested with Mr Madoff were the $7.3 billion Fairfield Sentry, run by Walter Noel's Fairfield Greenwich Group, and the $2.8 billion Kingate Global Fund Ltd, run by Kingate Management.
Both were among a small group of hedge funds to report positive returns for 2008, while the average hedge fund was down 18 per cent, according to data from Hedge Fund Research.
In a Ponzi scheme, the swindler uses money from new investors, who are lured with the promise of high or consistent returns, to pay off earlier investors.
Prior to Mr Madoff's arrest, investors had wondered how Mr Madoff was able to generate annual returns in the low double digits in a variety of market environments.
"Many of us questioned how that strategy could generate those kinds of returns so consistently," said Jon Najarian, an options trader who knows Mr Madoff and is a co-founder of optionmonster.com.
Reuters