Investors today scrambled to assess potential losses from an alleged $50 billion fraud by prominent Wall Street trader Bernard Madoff.
Prosecutors and regulators accused the 70-year-old, who was chairman of the Nasdaq Stock Market in the early 1990s, of masterminding a fraud of epic proportions through his investment advisory business, which managed at least one hedge fund.
Hundreds of people, investing with him through the firm's clients, entrusted Mr Madoff with billions of dollars, industry experts said.
Federal agents arrested Mr Madoff at his apartment on Thursday after prosecutors said he told senior employees that his money management operations were "all just one big lie" and "basically, a giant Ponzi scheme."
A Ponzi scheme is an illegal investment vehicle that pays off old investors with money from new ones, and is dependent on a constant stream of new investment.
Because the invested capital is not earning a sufficient return on its own, such schemes eventually collapse under their own weight. Dublin-based Pioneer Alternative Investments is among the victims the fraud.
Mr Madoff is the founder of Bernard L. Madoff Investment Securities LLC, a market-making firm he launched in 1960. His separate investment advisory business had $17.1 billion of assets under management.
About a dozen angry investors gathered yesterday in the lobby of the Lipstick Building in midtown Manhattan, where the market-making firm and advisory business are headquartered, demanding to know the fate of their money.
One woman said that when she called the firm's offices on Thursday she was told it was "business as usual." Another investor groused, "Business as usual? Of course it's business as usual. We're getting screwed left and right." Police later evicted the small group from the building.
Individual investors were feeling the squeeze elsewhere.
"I expect to get back zero," said Floridian Susan Leavitt, who invested through Mr Madoff. "When he tells the feds he has $200 million to $300 million left out of billions, what can you expect?" Two law firms, Milberg LLP and Seeger Weiss LLP, said Friday they had been retained by "dozens of individual investors" in Madoff Securities.
The two most prominent hedge funds that invested with Mr Madoff were the $7.3 billion Fairfield Sentry Ltd, run by Walter Noel's Fairfield Greenwich Group, and the $2.8 billion Kingate Global Fund Ltd, run by Kingate Management Ltd.
Fairfield Greenwich Group said it was trying to determine the extent of potential losses and vowed to pursue recovery of any lost assets. The firm said it had been working with Mr Madoff for nearly 20 years.
Fairfield Sentry and Kingate Global were among a small group of hedge funds to report positive returns for 2008; the average hedge fund was down 18 per cent, according to data from Hedge Fund Research.
"People who came to us for portfolio construction were often already invested with Bernie Madoff. He had hundreds of clients," said Charles Gradante, who invests in hedge funds as a principal at Hennessee Group LLC. "Now his whole legacy is destroyed. He was God to people."
Prior to Mr Madoff's arrest, investors had wondered how he was able to generate annual returns in the low double digits in a variety of market environments. Many questioned how US regulators were able to ignore numerous red flags with regard to Mr Madoff's operations.