Financial world still amazed over Madoff's downfall

He lived well. He has an expansive prewar co-op on Manhattan's Upper East Side, real estate records show. An apartment similar in size to his unit sold for more than $5.7 million in 2006. In addition to his Long Island home, he has a waterfront home in Palm Beach and a 55-foot yacht there named Bull, Florida records show.

He was politically active, donating $25,000 a year to the Democratic Senatorial Campaign Committee as well as recent races by New York Sens. Charles Schumer and Hillary Clinton and New Jersey Gov. Jon Corzine. Madoff has also been an active donor — through the Ruth and Bernard Madoff Foundation — to New York philanthropies including The Doe Fund and Girls Inc.

Many were stunned that someone so prominent could commit such a massive alleged fraud. "It's like you find out the Tooth Fairy died," says Robert Battalio, professor of trading at University of Notre Dame's Mendoza College of Business.

The end came after Wednesday when, according to the SEC complaint, Madoff told two unnamed senior employees that his fund was "all just one big lie" and "finished" with "absolutely nothing." Madoff allegedly said that he still had as much as $200 million that he wanted to distribute to family, friends and employees— for example, paying bonuses two months early — before he turned himself in. The employees alerted authorities.

His arrest was "a shocking development," Fairfield Greenwich Group, a firm that directs investors to hedge funds, said on its website. It added that it's "working with counsel to assess the situation and take all steps necessary and appropriate to protect our investors and the firm."

But others were skeptical. "Bernie's results were just too unbelievable," says David Henry, an executive of a private company that invests in hedge funds. "He rarely had any negative results. It didn't make sense. He had regular returns of about 10% for years. It was like finding the Holy Grail."

Madoff said much of his success was due to a strategy called "split strike conversion" that used a combination of stock options to enhance the upside and limit the downside of a basket of stocks.

But Jeremy Bach, a Philadelphia-based consultant who helps investors evaluate fund managers, says he helped conduct a 2005 analysis of Madoff's results. "We were not able to identify a single factor that was driving the returns," says Bach.

Michael Ocrant wrote a story in 2001 for MARHedge, which covers the hedge fund industry, about how some traders, money managers and financial consultants questioned Madoff's record of 72 winning months in a row. "When I spoke to them about something not being right … they were adamant — there's no way this could be real," says Ocrant, now at Institutional Investor. "There's no one in history with that kind of results." He says Madoff smoothly dismissed the questions when he interviewed him at the time. "You could see why people would trust him, particularly since he'd been running a successful business for years."

Routine regulator questions

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