Madoff's returns aroused doubts

NEW YORK — For years, the investment funds run by Wall Street legend Bernard L. Madoff turned in such consistently strong results that they seemed unbelievable.

It turns out that they were, federal authorities say.

As details of one of the largest alleged frauds ever to rock Wall Street began trickling out Friday, it became clear that warning signs about Madoff's funds had abounded for years.

But many investors, in a bull-market rush to get in on the action, either ignored the red flags or didn't bother to look for them.

"We felt it was too good to be true," Charles Gradante, co-founder of hedge-fund research firm Hennessee Group, said of Madoff's investment performance. "You can't go 10 or 15 years with only three or four down months. It's just impossible."

But some of Gradante's clients dismissed his admonitions and invested with Madoff anyway.

"They said, 'He's much smarter than you are,' " Gradante recalled.

The 70-year-old Madoff was arrested Thursday on charges of running what amounted to an old-fashioned Ponzi scheme: reporting illusory profits and paying off one set of investors with cash raised from others.

According to authorities, Madoff admitted wrongdoing and estimated that his scheme had cost investors $50 billion.

That would make it the country's largest-ever Ponzi scheme and the second-biggest worldwide, said Tamar Frankel, a Boston University law professor who is writing a book on the subject.

"It's on such a massive scale, it's mind-boggling," said Peter Turecek, a fraud expert at consulting firm Kroll Inc. "Fifty million would be a large fraud. Fifty billion is absolutely frightening."

On Wednesday, Madoff told two senior executives at his firm -- reportedly his sons, who helped run Bernard L. Madoff Investment Securities -- that he wanted to pay bonuses to key employees immediately rather than in February, as was customary, according to a civil complaint filed by the Securities and Exchange Commission.

Madoff eventually divulged that his funds were almost out of money and that the operation was "all one big lie," the complaint said.

The alleged scheme dated to at least 2005, according to authorities, and appears to have unraveled as investors asked for their money back during the bear market that began 14 months ago.

The case is another blow to the public perception of a financial industry that many Americans blame for the country's current economic problems.