What type of fraud did Bernard Madoff operate, according to investigators?

Bernard Madoff operated a Ponzi scheme, according to investigators and court records.

In a Ponzi scheme, an organizer pays supposed returns to earlier participants using money supplied by newer participants, rather than profits from a legitimate business or investment. Madoff’s advisory operation used fabricated account statements and fictional trades to make clients believe their money was being invested successfully.

The arrangement required a continuing flow of new money. When the 2008 financial crisis caused many investors to request withdrawals at once, the system could no longer function. Madoff confessed to his sons, who contacted federal authorities, leading to his arrest.

A Ponzi scheme differs from a pyramid scheme. A Ponzi scheme is controlled by a central operator who claims to invest funds, while a pyramid scheme usually depends on participants recruiting additional participants. Madoff’s case became a major warning about trusting reputation, unusually consistent returns, and inadequate independent custody of client assets.