Madoff Scandal: This Could Really Hurt

Updated from Dec. 11

The Thursday arrest of Wall Street investor Bernie Madoff would be great fodder for playwrights Arthur Miller or David Mamet -- the story of a great American schemer driven to desperation to maintain his relevance as the world passes him by -- except it could do real damage when the markets open Friday.

The charges against Madoff are damning. Indeed, the Securities and Exchange Commission characterized the alleged fraud as "stunning" and "epic" in proportion. The former Nasdaq stock market vice chairman allegedly ran an elaborate Ponzi scheme with clients of his firm, Bernard L. Madoff Investment Securities LLC, and did so for years at the loss of some $50 billion.

Bernard  Madoff: photo gallery on the alleged $50 billion Ponzi scheme.

The news could deal another blow to markets already reeling from a series of blowups that began with the unraveling of two Bear Stearns hedge funds last year. "When the tide goes out on Wall Street, all kinds of flotsam and jetsam are revealed in the mud flats," wrote John Coffee, professor at Columbia University School of Law, in an email to TheStreet.com.

According to an SEC complaint, filed in federal court in Manhattan, Madoff allegedly informed two senior employees that the investment advisory business was a fraud and had been insolvent for years. According to the complaint, Madoff told these employees that he was "finished," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme."

How does an alleged multibillion-dollar 'Ponzi scheme' by market maker and money manager Bernie Madoff affect your confidence in the stock market?
	Has no effect. Makes me more nervous than I already was. Not as bad as past scandals I've seen. I've never trusted Wall Street, and I never will.

These senior employees, according to the SEC, "understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors."