Bernard Madoff is charged with running a "giant Ponzi scheme" which lost investors up to £33 billion in what could be one of the largest fraud schemes in Wall Street history.
The former chairman of New York's Nasdaq stock exchange, who presented himself as a champion of transparency and integrity, told his employees that his operations were "all just one big lie", according to court documents.
The criminal investigation will also throw the spotlight on high-profile fraud cases as President George Bush and his aides consider whether to commute the six-and-a-half year sentence of Lord Black of Crossharbour for his role in a multi-million dollar fraud scheme.
A Ponzi scheme is a fraudulent investment vehicle which pays very high returns to existing investors which are paid for by money put into the scheme by newcomers.
Mr Madoff, an influential investor whose self-named securities firm cut a high profile in Wall Street circles, reported gains of roughly 1% a month for two decades in a scheme that sounded too good to be true - and was.
Investors, many of whom were Mr Madoff's friends, neighbours and country club investors, described a word-of-mouth allure with one after another recommending him as a sure thing, someone who took on new clients only reluctantly and as a favour.
They told how they never questioned his strategy as they were part of an exclusive invite-only club, which appeared difficult to join and which kept on posting profits.
Mr Madoff combined this exclusivity with secrecy and a reputation for throwing investors who asked too many questions out of his club - all of which helped him to evade the US federal regulators who will now come under intense scrutiny themselves.
Jake Walthour, a principal at the hedge fund consulting firm Aksia LLC, said his firm was hired to investigate Mr Madoff's business dealings by a potential investor several years ago.
The probe raised several red flags, he said.
Mr Madoff's returns were "abnormally smooth" from month to month and had none of the volatility usually associated with stock investments.
It also seemed impossible to replicate his investment strategy or verify his track record.
Mr Madoff claimed to be moving as much as 13 billion dollars (£8.5 billion) in and out of the market every month but "no one on the street could verify it or even see his footprints," Mr Walthour said.
"That organisation was incredibly secretive.
"We decided there are several scenarios here, one of which is: This could be a Ponzi scheme. None of our clients invested."
Mr Madoff issued only simple paper reports to investors, not detailed electronic data streams that indicate how investments are doing.
There were few if any outsiders involved in his business and his auditor was a tiny accounting firm in Rockland County, New York, that no one had ever heard of before.
Joyce Greenberg, a philanthropist and retired financial adviser in Texas, said her family began investing money with Mr Madoff in the 1970s after being introduced by a stepbrother who knew him from college.
She stayed with him after her husband, the Houston entrepreneur Jacob Greenberg, died in 1987, partly because Mr Madoff had been with them for so long, but mostly because he kept posting profits.
Like other investors, she said she never questioned his strategy.
"I hate computers, and I never tried to figure out what he was doing because the bookkeeping all added up," Ms Greenberg said.
She said she was still trying to figure out how much of her money was gone.
Investor Lawrence Velvel, dean of the Massachusetts School of Law, said he was introduced to Mr Madoff by a friend whose late mother began investing with him decades ago.
"I was told there was a small number of people who practically begged him to let them keep their money with him," Mr Velvel said.
"Older people living off their savings. These kinds of people and others practically begged him."