Fund manager hit with civil charge in Madoff fraud

New York's attorney general filed civil fraud charges Monday against a hedge fund manager who funneled $2.4 billion to Wall Street swindler Bernard Madoff without telling clients where their money was going.

The complaint accuses J. Ezra Merkin, the former chairman of GMAC Financial Services, of concealing his links to Madoff and lying to investors about what he was doing with their money, telling most he was personally investing their cash in things like distressed debt.

Over the years, Merkin collected $470 million in fees and performance bonuses from his clients, the suit said. It said many of those customers, which included several large charities and colleges, had no idea where their money really was until December, when Madoff was arrested.

"Merkin duped individual investors, non-profits, and charities into believing he was responsibly managing their investments, when in actuality he was dumping them into history's largest Ponzi scheme," Attorney General Andrew Cuomo said in a statement.

The complaint also accused Merkin of mingling his personal funds with the accounts of his management company, Gabriel Capital Group, and using some of the company's funds for personal purchases, including $91 million worth of artwork for his apartment.

Merkin's attorney, Andrew Levander, called the lawsuit "hasty," "ill-conceived" and "without merit, and he denied that clients had been kept in the dark.

"Contrary to the attorney general's allegation, investors in the Ascot Funds were well aware that the money was being invested with Madoff," Levander said in a statement. Some of those investors had even met with Madoff personally, he said.

He said Merkin had investigated and analyzed Madoff and his trading strategy before investing.

"Unfortunately," he wrote, "Mr. Merkin's due diligence, just like the detailed investigations performed by countless others, including regulators, was thwarted by the intricate, fraudulent scheme perpetrated by Madoff."

Merkin also lost millions of dollars of his own money in the scheme, although those dollar amounts pale in comparison to the losses of his clients. One of Merkin's funds, Ascot Partners, sunk nearly every penny of its more than $1.7 billion in assets into Madoff's scheme.

Cuomo's suit, filed in state court in Manhattan, demands that Merkin repay all of the fees he collected from his clients over the years, plus damages.

The lawsuit is the second major regulatory action by a state against one of Madoff's so-called "feeder funds," which supplied him with billions of dollars in investor money.

On April 1, Massachusetts Secretary of State William Galvin accused Fairfield Greenwich Group of Connecticut of civil fraud for activities related to investments with Madoff.

Galvin accused the company, which had a $7.2 billion account with Madoff, of failing to disclose concerns about Madoff's operation to investors. Fairfield Greenwich officials have, like Merkin, also professed that they were innocent victims of the scam.

Madoff pleaded guilty in March to swindling thousands of investors out of billions of dollars in what could be the largest Ponzi scheme in history.

Many of those investors came to Madoff indirectly through hedge funds like Fairfield and Ascot.

Some of those investors have also sued. And Merkin was sued Monday in New York by Mortimer Zuckerman, the real estate magnate and publisher of the New York Daily News. Zuckerman said in the suit that he and his charitable trust collectively lost $40 million in the scheme.

Madoff pleads guilty and goes to jail in handcuffs

Saying he was "deeply sorry and ashamed," Bernard Madoff pleaded guilty Thursday to pulling off perhaps the biggest swindle in Wall Street history and was immediately led off to jail in handcuffs to the delight of his seething victims.

U.S. District Judge Denny Chin denied bail for Madoff, 70, and ordered him to jail, noting that he had the means to flee and an incentive to do so because of his age.

Madoff spoke softly but firmly to the judge as he pleaded guilty to 11 charges in his first public comments about his crimes since the scandal broke in early December.

"I am actually grateful for this opportunity to publicly comment about my crimes, for which I am deeply sorry and ashamed," he said.

"As the years went by, I realized my risk and this day would inevitably come. I cannot adequately express how sorry I am for my crimes."

Prosecutors say the disgraced financier, who has spent three months under house arrest in his $7 million Manhattan penthouse, could face a maximum term of 150 years in prison at sentencing June 16.

DeWitt Baker, an investor who attended the hearing and said he lost more than a million dollars with Madoff, called it "fantastic" that Madoff's bail was revoked but belittled the apology.

"I don't think he has a sincere bone in his body," said DeWitt, who added that prison time would be too good for Madoff.

"I'd stone him to death," he said.

Madoff did not look at any of the three investors who spoke at the hearing, even when one turned in his direction and tried to address him.

The fraud, which prosecutors say may have totaled nearly $65 billion, turned a revered money man into an overnight global disgrace whose name became synonymous with the current economic meltdown.

Madoff described his crimes after he entered a guilty plea to all 11 counts he was charged with, including fraud, perjury, theft from an employee benefit plan, and two counts of international money laundering.

He told the judge that he believed the fraud would be short-term and that he could extricate himself. He implicated no one else, though investigators suspect involvement by relatives and top lieutenants who helped run his operation from its midtown Manhattan headquarters.

The plea came three months after the FBI claimed Madoff admitted to his sons that his once-revered investment fund was all a big lie -- a Ponzi scheme that was in the billions of dollars. Since his arrest in December, the scandal has turned the former Nasdaq chairman into a pariah who has worn a bulletproof vest to court.

The scheme evaporated life fortunes, wiped out charities and apparently pushed at least two investors to commit suicide. Victims big and small were swindled by Madoff, from elderly Florida retirees to actors Kevin Bacon and Kyra Sedgwick and Nobel Peace Prize winner Elie Wiesel.

Helicopters circled above the courthouse before the hearing, and federal officers with machine gun-style weapons stood outside as Madoff arrived.

Jilted investors signed in before entering the courtroom on the 24th floor. Richard and Cynthia Friedman turned up to get a glimpse of the man who defrauded them of their life savings of $3 million.

Richard Friedman, an accountant, noticed how well his clients were doing with Madoff and began investing his own money in 1991. He learned it was gone months before he had planned to retire -- a plan now on hold.

"I wanted him to see some of the faces of the people he lied to and destroyed," said Cynthia Friedman, 59, of Jericho, N.Y.

After arguments began on whether Madoff should remain free on bail, his lawyer Ira Sorkin described the bail conditions and how Madoff had, "at his wife's own expense," paid for private security at his penthouse.

Loud laughter then erupted among some of the more than 100 spectators crammed into the large courtroom on the 24th floor of the federal courthouse in lower Manhattan. The judge warned the spectators to remain silent.

George Nierenberg, the first of the three investors to speak, approached the podium glaring at Madoff, then said in the financier's direction: "I don't know if you had a chance to turn around and look at the victims."

At the hint of a confrontation, a marshal sitting behind Madoff stood up, and the judge directed Nierenberg to speak directly to the bench.

The courtroom erupted in applause after the judge announced Madoff would go directly to jail. As he was led out of court, a spectator yelled, "Hey, Bernie," but was shushed by investors in court and backed off.

The plea does not end the Madoff saga: Investigators are still undertaking the daunting task of unraveling how he pulled off the fraud for decades without being caught.

Court papers say Madoff generated or had employees generate "tens of thousands of account statements and other documents through the U.S. Postal Service, operating a massive Ponzi scheme," prosecutors said.

The money was never invested, but was used by Madoff, his business and others, prosecutors said.

Authorities said he confessed to his family that he had carried out a $50 billion fraud. In court documents filed Tuesday, prosecutors raised the size of the fraud to $64.8 billion.

Experts say the actual loss was more likely much less and that higher numbers reflect false profits he promised investors. So far, authorities have located about $1 billion for jilted investors.

In addition to prison time, he said Madoff faces mandatory restitution to victims, forfeiture of ill-gotten gains and criminal fines.

SEC, Madoff agree to settle civil fraud case

The Securities and Exchange Commission on Monday announced an agreement with disgraced money manager Bernard Madoff that could eventually force him to pay a civil fine and return money raised from investors.

The partial judgment, which renders permanent a preliminary injunction that froze Madoff's assets after his arrest in December, must be approved by the judge overseeing the case in federal court in Manhattan.

The civil proceeding is separate from the criminal case against the prominent Wall Street figure, who is accused of bilking $50 billion from investors in what may be the largest Ponzi scheme in history. Madoff was arrested on Dec. 11 after allegedly confessing to his sons that he had stolen from investors for years.

Federal prosecutors have asked a judge to revoke the bail of Madoff, who has been confined to his Manhattan penthouse under house arrest. Madoff, who has not been indicted, is widely expected to eventually enter into a criminal deal with prosecutors in which he would plead guilty in exchange for some form of leniency.

The SEC said Madoff agreed to the partial judgment without admitting or denying the allegations in its civil complaint filed on Dec. 11. However, the agreement says Madoff cannot contest the "facts" of the complaint for the purposes of determining his obligation to pay civil fines and restitution — which will be specified later.

The SEC says the basic facts of the complaint are that Madoff committed a $50 billion fraud and told his sons his investment business was a sham. Madoff told them he had "absolutely nothing," that "it's all just one big lie," and was "basically, a giant Ponzi scheme," according to the complaint.

Madoff's defense attorney, Ira Sorkin, didn't immediately return a telephone call seeking comment Monday.

The fallout from the Madoff affair has been massive and has rocked a Wall Street already churning from the financial crisis. Thousands of victims who lost money investing with Madoff have been identified — including ordinary people and Hollywood celebrities — as well as big hedge funds, international banks and charities in the U.S., Europe and Asia.

The scandal also has brought disgrace to the SEC, which repeatedly ignored credible allegations about Madoff's operations brought to it over the course of decade. Congress and the agency's inspector general are investigating what caused the regulatory failure over Madoff and why SEC inspections of his business failed to detect the improprieties.

Madoff to remain under house arrest

A judge ruled Monday that Bernard Madoff would not be sent to jail pending trial, declining a request by prosecutors to revoke the bail of the financier accused in a $50 billion fraud case.

Madoff has been under house arrest, with electronic monitoring, since posting $10 million bail against his $7 million Manhattan apartment, where he lives with his wife, and against his wife's homes in Montauk, N.Y., and Palm Beach, Fla.

U.S. Magistrate Judge Ronald Ellis of the U.S. District Court of the Southern District of New York added conditions to the bail, including "restrictions of transfer of all property whatsoever, wherever located" belonging to Madoff.

The judge also ruled that Madoff compile an inventory of all "valuable portable items" in his Manhattan home. The judge required that a security company check the inventory every two weeks and inspect outgoing mail.

"The decision speaks for itself and we intend to comply with the judge's order," said Madoff's defense attorney, Ira Lee Sorkin.

Janice Oh, spokeswoman for the prosecution, declined to comment.

Prosecutors have been trying to put Madoff behind bars since last week. That's when the U.S. Department of Justice filed documents to Ellis accusing Madoff of shipping five packages containing more than $1 million worth of diamond-studded jewelry to family and friends, in violation of bail.

Prosecutors said last Wednesday that Madoff was trying to protect these assets - which included 15 watches, four brooches, necklaces and rings - from seizure, preventing alleged victims from recovering their losses.

Last week, defense lawyer Sorkin said Madoff didn't know he violated bail when he mailed these "sentimental" items, and that some of the packages were actually sent by his wife.

Prosecutors on Thursday urged the judge once again to revoke bail, accusing Madoff of planning to transfer up to $300 million worth of assets - including 100 signed and ready-to-send checks found in his office, totaling $173 million.

But on Monday, the judge released a statement saying "the new information provided by the government does not demonstrate either a serious risk of flight or serious risk of obstruction of justice."

Madoff was arrested in December and charged with one count of securities fraud for allegedly stealing up to $50 billion from investors. If convicted, the 70-year-old could face up to 20 years in prison and a $5 million fine.

Madoff's alleged scheme disrupted an already fragile financial system, affecting hedge funds and well-heeled investors from Wall Street, Palm Beach and Europe. Alleged victims included Banco Santander (STD) in Spain and HSBC (HBC) in Britain, as well as director Steven Spielberg and actor Kevin Bacon.

In a Ponzi scheme, money from new investors is used to pay off early investors to create the appearance of legitimate returns.

Regulators probed Madoff eight times over 16 years

Bernard L. Madoff Investment Securities LLC was examined at least eight times in 16 years by the U.S. Securities and Exchange Commission (SEC) and other regulators, who often came armed with suspicions, the Wall Street Journal said.

SEC officials followed up on emails from a New York hedge fund that described Bernard Madoff's business practices as "highly unusual," the paper said.

The Financial Industry Regulatory Authority, the industry-run watchdog for brokerage firms, reported in 2007 that parts of the firm appeared to have no customers, according to the paper.

Madoff was interviewed at least twice by the SEC, the paper said, adding that regulators never came close to uncovering the alleged $50 billion Ponzi scheme that investigators now believe began in the 1970s.

The SEC could not be immediately reached for comment by Reuters.

The serial regulatory failures will be on display on Monday when Congress holds a hearing to probe why the alleged fraud went undetected, according to the Journal.

Among the key witnesses is SEC Inspector General David Kotz, who was asked last month by the agency's chairman, Christopher Cox, to investigate the mess, the paper said.

Madoff investor found dead of possible suicide

The founder of an investment fund that lost millions with Bernard Madoff was found dead Tuesday at his Madison Avenue office of a possible suicide, authorities said.

Authorities found Rene-Thierry Magon de la Villehuchet at 7:50 a.m. with no pulse at his office of Access International Advisors, located on Madison Avenue a couple of blocks from Rockefeller Center.

A French newspaper is reporting that the 65-year-old de la Villehuchet committed suicide. The New York medical examiner spokeswoman says it has not determined the cause of death yet.

Madoff is accused of running a $50 billion Ponzi scheme that wiped out investors around the world, with big funds like de la Villehuchet's being especially hard hit.

His $1.4 billion fund specializes in managing hedged and structured investment portfolios. Access International Advisors was jointly founded by Patrick Littaye and de la Villehuchet. The hedge fund reportedly used intermediaries with links to the cream of Europe's high society and jet set to garner clients.

The former chairman and CEO of Credit Lyonnais Securities USA, de la Villehuchet was known as a keen sailor who regularly participated in regattas.

Mass. investor saw inside Madoff scam

His repeated warnings that Wall Street money manager Bernard Madoff was running a giant Ponzi scheme have cast Harry Markopolos as an unheeded prophet.

But people who know or worked with Markopolos say it wasn't prescience that helped him foresee the collapse of Madoff's alleged $50 billion fraud. Instead, they say diligence and a strong moral sense drove his quixotic, nine-year quest to alert regulators about Madoff.

"He followed through on everything he ever did. He never let up," said his mother, Georgia Markopolos, in an interview Thursday. "Some kids just let it go if it's too hard, but he wouldn't do that."

"He feels very sorry for these people that got taken," she added. "It wouldn't have happened if they would have listened to him long ago."

Markopolos waged a remarkable battle to uncover fraud at Madoff's operation, sounding the alarm back in 1999 and continuing with his warnings all through this decade. The government never acted, Madoff continued his ways, and people lost billions.

Markopolos reached his conclusion with the help of mathematicians like Dan diBartolomeo, whose analysis of the Madoff's methods in 1999 helped fuel Markopolos' suspicions.

"People should have seen the writing on the wall," diBartolomeo said.

Markopolos did not respond to multiple e-mail or phone requests for an interview.

The 52-year-old resident of Whitman, about 20 miles south of Boston, grew up in Erie, Pa., the oldest of three siblings.

His mother said her son was a little nerdy as a child, as well as occasionally mischievous and unfailingly honest. She recalled an incident where he pelted his elementary school with eggs in the middle of winter, but no one saw him. Time passed with no confession from anyone, until Markopolos stepped forward, admitted he did it, and cleaned the school himself.

Markopolos became an adept hunter and fisherman as he grew up, like many from the rural area, but also showed early aptitude at academics, as well as a willingness to question authority.

"He used to challenge the teachers," his mother said with a laugh. "He'd tell them he had the right answers, but they had the wrong questions."

Markopolos graduated from Cathedral Prep in Erie in 1974, then in 1981 from Loyola College in Maryland, which his mother said he paid for on his own. After time in the Army and in the financial services field, he earned a graduate management degree from Boston College in 1997.

By 1999, he was working for Rampart Investment Management Co. and charged with doing competitive research on Bernard L. Madoff Investment Securities, which was using a similar investment strategy as his company, but far outperforming it. Part of Markopolos's research included a visit to diBartolomeo, whom he knew from his professional circle.

"I think he was curious about how his competitor was doing so much better than they were," diBartolomeo recalled.

Researching Madoff's numbers, using data the firm distributed to prospective investors, diBartolomeo concluded within hours that it was impossible for Madoff to get the returns he reported while using the strategy he said he used.

"As the market goes up and down, this strategy should have done a little better or a little worse, just like everybody else," he said. "Instead, it appeared to be indifferent as to whether the market went up or down. They made money all the time."

Markopolos complained to the SEC's Boston office in May 1999, saying it was impossible for the kind of profit Madoff was reporting to have been gained legally.

But Madoff continued to thrive, even as Markopolos continued to pursue the case.

In 2005, he submitted a report to the SEC saying it was "highly likely" that "Madoff Securities is the world's largest Ponzi scheme." In the report, he says he knew his research could ruin people's careers and asked the SEC be discreet about circulating the report and his name.

"I am worried about the personal safety of myself and my family," he wrote.

The report highlights 29 "red flags" about Madoff's business, among them the returns of a third-party hedge fund managed by Madoff's firm which had negative returns in just seven on the 174 months Markopolos analyzed.

"No major league baseball hitter bats .960, no NFL team has ever gone 96 wins and only 4 losses over a 100 game span, and you can bet everything you own that no money manager is up 96% of the months either," he said.

His warnings were heard too late, and he's become a symbol of a botched oversight of Madoff by the SEC. His mother says the father of three boys under 5 has been bombarded by media requests. Now, a man who tried to be heard for years is going to lay low for a bit, she said.

Madoff appears at courthouse, has curfew set

Disgraced investor Bernard Madoff made a surprise appearance at the Manhattan federal courthouse as a judge set new conditions for his bail, including a curfew and monitoring bracelet.

Madoff remains free on bail. He said nothing to reporters as he walked out of the building; it's unclear why he was at the courthouse because his hearing had already been postponed.

Part of Madoff's bail conditions required that he find people to co-sign for him, and his wife and brother had already done so.

Madoff had been required to find two additional co-signers to vouch for him, but with the scandal swirling around him, he was unable to do so. So the judge modified the bail package, and gave lawyers until next Monday to come up with additional paperwork.

Madoff has already surrendered his passport, and now will be required to be at his Manhattan apartment from 7 p.m to 9 a.m. His wife was also required to surrender her passport.

Madoff was arrested on charges that he carried out what prosecutors said he called a $50 billion Ponzi scheme.

Alleged Madoff fraud has worldwide exposure

The 70-year-old Madoff, well respected in the investment community after serving as chairman of the Nasdaq Stock Market, was arrested Thursday in what prosecutors say was a $50 billion scheme to defraud investors. Some investors claim they've been wiped out, while others are still likely to come forward.

The alleged victims who sunk cash into veteran Wall Street money manager Bernard Madoff's investment pool include real estate magnate Mortimer Zuckerman, the foundation of Nobel laureate Elie Wiesel, and a charity of movie director Steven Spielberg, according to The Wall Street Journal.

On Friday, representatives from major U.S. banks -- Bank of America Corp., Citigroup Inc., PNC Financial Services Group Inc. and Merrill Lynch & Co. -- declined to comment on whether they had exposure to Madoff's company. Both BlackRock Inc. and Goldman Sachs Group Inc. said they had no exposure.

Among those overseas confirming exposure on Monday, Banco Santander, the largest bank in the euro zone by market capitalization, said its clients have 2.33 billion euros ($3.07 billion) in exposure with Madoff, mostly through a fund called Optimal Strategic US Equity.

The Wall Street Journal, citing a person familiar with the matter, said Mortimer Zuckerman, the chairman of real estate firm Boston Properties and owner of the New York Daily News and U.S. News & World Report, had significant exposure through a fund that invested substantially all of its assets with Madoff.

Reports from Florida to Minnesota included profiles of ordinary investors who gave Madoff their money. Some had been friends with him for decades, others were able to invest because they were a friend of a friend. They told stories of losing everything from $40,000 to an entire nest egg worth well over $1 million.

Morgan Stanley, Wells Fargo & Co., Comerica Inc. and U.S. Bancorp did not return calls seeking comment.

List of potential victims grows in NY fraud case

Madoff, 70, said in regulatory filings that he only had around 25 clients, but it has become apparent that the list of people who lost money may number in the hundreds or even thousands.

Among those who have acknowledged potential losses so far: Former Philadelphia Eagles owner Norman Braman, New York Mets owner Fred Wilpon and J. Ezra Merkin, the chairman of GMAC Financial Services.

A charity in Massachusetts that supports Jewish programs, the Robert I. Lappin Charitable Foundation, said it had invested its entire $8 million endowment with Madoff. The organization's executive director said she doesn't expect it to survive.

Other institutions that believed they had lost millions included The North Shore-Long Island Jewish Health System and the Texas-based Julian J. Levitt Foundation.

Hedge funds and other investment groups looked like big losers too. The Fairfield Greenwich Group said it had some $7.5 billion in investments linked to Madoff. A private Swiss bank, Banque Benedict Hentsch Fairfield Partners SA, said it had $47.5 million worth of client assets at risk.

The losses may have extended far beyond the coffers of the wealthy and powerful.

The town of Fairfield, Conn., said it placed nearly 15 percent of its retiree pension fund with Madoff. Officials were scrambling to determine how much of the $42 million remained.

Harry Susman, an attorney in Houston, said he represents a group of clients who had unknowingly become entangled in the scandal by investing in a hedge fund managed by Merkin, which then put almost all of its $1.8 billion in capital in Madoff's hands.

"They had no idea they had exposure," Susman said. He said his clients were now dumbfounded as to how the fund came to invest all of its holdings with just one man, especially since concerns had been circulating for years about Madoff's operations.

For decades, Madoff had dual reputations among investors. Many wealthy New Yorkers and Floridians considered him a reliable investment whiz. Others, more skeptical, had questioned whether his returns were real, pointing to the firm's secrecy and lack of a big-name auditor.

But when he met privately with a family member at his firm earlier this month, something clearly was amiss.

First, federal authorities say the 70-year-old Madoff surprised the unidentified family member by saying he wanted to pass out hefty annual bonuses two months earlier than usual, court papers said. Then, when challenged on the idea, he said he "wasn't sure he would be able to hold it together" if they continued the discussion at the office, and invited him to his apartment.

It was the beginning of a stunning meltdown for the former Nasdaq stock market chairman.

Madoff himself described his investment business as an unsophisticated "Ponzi scheme," according to investigators who interviewed him.

Perhaps more startling than the loss was that it apparently caught regulators and investigators off guard, only coming to light last week when Madoff's own family turned him in.

The core of the scheme -- taking investments from one client to pay returns to another -- "has been around since the beginning of time," said Marc Powers, a former Securities and Exchange Commission enforcement chief and head of the securities practice at Baker Hostetler.

The firm somehow pulled off the fraud despite being subject to examination by the SEC, Powers added. "You wonder how these things escaped the normally careful review of these regulatory organizations."

The latest dose of bad news in the world of finance has left Madoff's clients "panicked," said Stephen A. Weiss, a lawyer for several dozen investors. "These people are sorrowful. These people are angry. And many are now destitute."

The wave of ill will -- fuel for inevitable lawsuits -- was aimed at a man who had cultivated an image as a straight-shooter with a personal touch.

The day after his arrest, his company's Web site still boasted that "in an era of faceless organizations ... Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner's name is on the door."

It went on to say "Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."

Madoff's resume was the stuff of Wall Street legend: He founded his company in 1960 with $5,000 he earned in part working as a lifeguard on Long Island beaches while putting himself through Hofstra University Law School. It eventually became one of five broker-dealers that spearheaded the formation of the Nasdaq Stock Market, where he served as a member of the board of governors in the 1980s and as chairman of the board of directors in the early '90s.

By 2001, Madoff's firm was one of the three top market makers in Nasdaq stocks and the third-largest firm matching buyers and sellers of securities on the New York Stock Exchange, according to Baron's.

Investigators say Madoff's crime originated in a separate and secretive investment-advising business.

Madoff apparently kept the loss a secret even from his two sons and other family members who work at the firm until he and two of them retreated to his apartment occupying the entire 12th floor of an Upper East Side building on Dec. 9, according the complaint drawn up by an arresting FBI agent.

"It's all just one big lie," he told his family. He confided he had blown the money in what was "basically, a giant Ponzi scheme," the complaint added.

Several attorneys representing investors, however, have questioned how he could have acted alone, given the size of the alleged fraud and vast holdings of his firm.

According to the court complaint, Madoff told his family he expected to end up behind bars, but wanted to execute his own version of a bailout package by doling out $200 to $300 million he had left to family, friends and employees. After the meeting, a lawyer for the family contacted regulators, who alerted the federal prosecutors and the FBI.

Madoff was in a bathrobe when two FBI agents arrived at his door unannounced at 8:30 a.m. on Dec. 11. He invited them in, then confessed after being asked "if there's an innocent explanation," the complaint said.

Responded Madoff: "There is no innocent explanation."

Bernard Madoff and his $50 billion Ponzi scheme

Shock and panic spread through the country clubs of Palm Beach and Long Island after Bernard Madoff, a trading powerbroker for more than four decades, allegedly confessed to a fraud that will cost his wealthy investors at least $50 billion – perhaps the largest swindle in Wall Street history.

Mr Madoff, 70, a former Nasdaq stock chairman, was apparently turned in by his two sons and arrested on Thursday morning at his Manhattan apartment by the FBI. Andrew Calamari, a senior enforcement official at the US Securities and Exchange Commission, described the scheme as “a stunning fraud that appears to be of epic proportions”.

The FBI’s criminal complaint states that when two federal agents arrived at Mr Madoff’s apartment, he told them: “There is no innocent explanation.” The agents say that he told them “he paid investors with money that wasn’t there”, that he was “broke” and that he expected to go to jail.

Many of his investors came from the enormously wealthy enclaves of Palm Beach, Florida and Long Island, New York, where people had invested billions in Mr Madoff’s firm for decades. He was a fixture on the Palm Beach social scene, and was a member of some of its most exclusive clubs, including the Palm Beach Country Club and Boca Rio Golf Club, where he drummed up much of his business.

The FBI claims that three senior employees of Mr Madoff’s investment firm turned up at his apartment on Wednesday to ask questions about the company’s solvency. Two of them are believed to be his sons, Andrew and Mark, who have worked for their father for two decades.

Mr Madoff told them that he was “finished”, that he had “absolutely nothing”, and that “it’s all just one big lie”. He said the investment arm of his firm was “basically a giant Ponzi scheme”, and that it had been insolvent for years.

A Ponzi scheme, named after the swindler Charles Ponzi, is a fraudulent investment operation that pays abnormally high returns to investors out of money put into the scheme by subsequent investors, rather than from real profits generated by share trading.

The FBI complaint states that Mr Madoff told his sons that he believed the losses from his scheme could exceed $50 billion. If that is the case, his fraud would be far greater than past Ponzi schemes and easily the greatest swindle blamed on a single individual.

There has been scepticism for years on Wall Street over how Mr Madoff managed to pay such consistently high returns. Ponzi schemes inevitably collapse, and Mr Madoff found himself to be no exception. This month, clients asked for $7 billion to be returned, the FBI says.

Mr Madoff ran the scheme separately from his main business and his sons had no involvement in it.

Mr Madoff has been charged with a single count of securities fraud. He declined to enter a plea in Manhattan’s US District Court and was released on $10 million bail. He faces up to 20 years in jail and a $5 million fine if convicted. His lawyer, Dan Horwitz, said that his client was “a person of integrity. He intends to fight to get through this unfortunate event.”

One investor told The Wall Street Journal: “This is going to kill so many people. It’s absolutely awful.” Ira Roth, from New Jersey, said that his family had $1 million invested, and that he was in a state of panic.

Bernard L. Madoff arrested on fraud charge in NYC

Bernard L. Madoff, his silver hair reflecting the lights of a federal courtroom, was released on $10 million bail secured by his signature and that of his wife. He declined to comment as he walked out of U.S. District Court in Manhattan.

Madoff, 70, the founder of Bernard L. Madoff Investment Securities LLC, maintained a separate and secretive investment-advising business that served between 11 and 25 clients and had a total of about $17.1 billion in assets under management, prosecutors said.

Late Thursday, the Securities and Exchange Commission announced a civil securities fraud charge against Madoff and said it was seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm.

Andrew M. Calamari, associate director of enforcement in the SEC's New York office, said the SEC was alleging "a stunning fraud that appears to be of epic proportions."

A criminal complaint signed by FBI Agent Theodore Cacioppi said Madoff told at least three senior employees at his Manhattan apartment Wednesday that the investment adviser business was a fraud and had been insolvent for years, losing at least $50 billion.

Madoff told the employees he was "finished," that he had "absolutely nothing," that "it's all just one big lie" and it was "basically, a giant Ponzi scheme," according to the complaint filed in court.

The employees understood Madoff's admission to mean that "he had for years been paying returns to certain investors out of the principal received from other, different, investors," said the complaint, which did not identify the investors impacted by the scheme.

Cacioppi said one of the employees told him that Madoff was "cryptic" about the firm's investment advisory business and kept its financial statements locked up. The FBI agent said another employee told him that Madoff last week had said clients had asked for about $7 billion in redemptions and he was struggling to meet those obligations but thought he could do so.

Cacioppi said two senior Madoff employees told him that Madoff said during the Wednesday meeting that he planned to surrender to authorities in a week but first wanted to distribute $200 million to $300 million he had left to certain selected employees, family and friends.

Cacioppi said he and another FBI agent arrived Thursday at Madoff's apartment, where Madoff invited them in and acknowledged knowing why they were there.

"After I stated, `We're here to find out if there's an innocent explanation,' Madoff stated, `There is no innocent explanation,'" the agent wrote.

"Madoff stated, in substance, that he had personally traded and lost money for institutional clients, and that it was all his fault," Cacioppi said.

The agent wrote that Madoff said he had "paid investors with money that wasn't there" and that he was broke and insolvent and had decided that "it could not go on" and that he expected to go to jail.

Defense lawyer Dan Horwitz called Madoff "a person of integrity" and said he intends to fight the charge.

If convicted, Madoff could face up to 20 years in prison and a maximum fine of $5 million.

Bernard L. Madoff Investment Securities LLC ranks among the top 1 percent of U.S. securities firms, according to the company's Web site.

In 2001, Barron's reported that Madoff's firm was one of the three top market makers in Nasdaq stocks and the third-largest firm matching buyers and sellers of securities on the New York Stock Exchange.

Shortly after leaving law school, Madoff founded his firm in 1960. It was one of five broker-dealers most closely involved in developing the Nasdaq Stock Market, where he served as a member of the board of governors in the 1980s and as chairman of the board of directors.

Prosecutors noted in a release that the company Web site boasts: "Clients know that Bernard Madoff has a personal interest in maintaining an unblemished record of value, fair-dealing and high ethical standards that has always been the firm's hallmark."