Just what the financial markets don't need: another scandal.

With confidence already shaky, sophisticated investors ranging from suave Spanish bankers to Palm Beach retirees have lost billions of dollars in what is one of the biggest scandal to ever rock the investment world.

Law enforcement officials are still trying to figure out what happened to some $50 billion run by Bernard Madoff, who was arrested last week. It appears he was operating an old-fashioned Ponzi scheme, one of those arrangements where new investors finance returns to the old investors. But no matter what investigators turn up, the scandal represents another cloud over Wall Street and its watchdog agency, the Securities and Exchange Commission.

"The main impact from a systemic point of view is that it undermines the already fragile levels of confidence," says Peyton Young, a senior fellow at the Brookings Institution in Washington.

Overseas, where there were major bank losses, newspaper headlines and radio reports practically screamed warnings about the US markets. In Britain, the Daily Mail wrote, "You'll pay, families warned after British firms are taken for a £3.5bn [$5.3 billion] ride."

Nicola Horlick, one of the best-known female fund managers in the City, London's financial district, told the BBC that she viewed the scandal as a failure of US regulatory oversight.

"I think now it is very difficult for people to invest in things that are meant to be regulated in America, because they have fallen down on the job," said Ms. Horlick, whose firm had 9.5 percent of its assets invested with Mr. Madoff.

Among the other investors were the Royal Bank of Scotland and a major insurance firm, Axa, as was Santander, the largest Spanish bank, which recently bought the British financial institutions Abbey, Alliance & Leicester, and Bradford & Bingley.

British fund managers were particularly upset that a competitor of Madoff's had reportedly written to the SEC in 1999 arguing for an investigation.

"It would appear as early as 1999 a man ... was writing to the SEC telling them that 'Madoff Securities is the world's largest Ponzi scheme,' so the SEC did remarkably well to avoid spotting it," says Jon Moulton of Alchemy Partners, one of Britain's largest venture-capital funds, in a BBC interview.

Even though Madoff had registered with the SEC two years ago, "it would appear they have never even visited his premises," Mr. Moulton says.

However, the SEC gets complaints all the time, says Tom Peisch, a white-collar crime lawyer and partner at Boston-based Conn Kavanaugh Rosenthal Peisch & Ford. But "if it is true they received substantive complaints and blew them off, they will face some heavy sledding."

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