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.
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."
"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."
The agency treats every inquiry as a "legitimate complaint," says Thomas Weirich, a professor of accounting at Central Michigan University and a former academic fellow at the SEC. But "the SEC has a limited staff."
The SEC, in a Dec. 11 news release, said it was seeking emergency relief for investors, including an asset freeze. The agency, in its complaint filed with the federal court in Manhattan, said Madoff had told two senior officials of his firm that his business was "basically, just a giant Ponzi scheme."
The SEC is likely to come under fire if Congress holds hearings. "I have no doubt we will see hearings," says Mr. Young. "But I can't guess if we will have legislation."
He points out that financial organizations that deal with so-called sophisticated investors are often exempt from oversight. "At some level investment partnerships are between consenting adults," he says. "You can argue if things go badly, they should not have given them the money."
However, he also notes that just because someone is wealthy does not mean they should not be protected. "When people get hurt, including rich people ... they seek redress from the government."
The potential losses may also affect the private-wealth management business, one of the profitable areas for banks. According to the magazine Euromoney, some $7.6 trillion was under management in 2007, up 120 percent over the prior year.
"My sense is that this [the Madoff affair] is very damaging to private-wealth management," says Brian Bethune, chief US financial economist at IHS Global Insight in Lexington, Mass. "Whether it's hedge funds or otherwise, people are going to ask, 'Do I really trust these advisers?' "
He notes that the disclosure requirement for hedge funds and the private-wealth management business is very limited. "It's kind of the backroom kind of thing, like the old Swiss private bankers where everything takes place behind large walnut doors and no one knows what is going on."
That appears to be the case for some of the Madoff investors. On Tuesday on CNBC, an irate Mort Zuckerman, owner of US News & World Report, described how his charitable foundation gave $30 million to a money manager at Ascot Partners, which he said had invested almost all its assets with Madoff. Mr. Zuckerman said he had no idea that's where the money went.
Zuckerman says Ascot had as much as $1.8 billion invested with Madoff. A significant portion of it came from wealthy Jewish families or their philanthropies. Now, lawyers will begin the process of trying to see how much can be recovered.
•Correspondent Ben Quinn in London contributed to this report.