At a time Wall Street is facing a crisis of confidence unseen in the last five decades, it faced a further blow to its credibility with the arrest of legendary trader and former NASDAQ stock market chairman Bernard L Madoff yesterday on charges of securities fraud. Madoff, a one-time lifeguard who prospered in the trading trade for four decades, has been accused by federal agents of running a multibillion-dollar fraud scheme - perhaps the largest in Wall Street's history.

Regulators have not yet verified the scale of the fraud. But the criminal complaint filed against Madoff on Thursday in federal court in Manhattan reports that he estimated the losses at $50 billion. ''We are alleging a massive fraud - both in terms of scope and duration,'' said Linda Chatman Thomsen, director of the enforcement division at the Securities and Exchange Commission (SEC). ''We are moving quickly and decisively to stop the fraud and protect remaining assets for investors.''

Andrew M Calamari, an associate director for enforcement in the SEC's regional office in New York, said the case involved ''a stunning fraud that appears to be of epic proportions.'' The aforementioned complaint accused him of having "deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars."

Shortly after leaving law school, Madoff founded his firm in 1960. It was one of five broker-dealers most closely involved in developing the NASDAQ Stock Market, where he served as a member of the board of governors in the 1980s and as chairman of the board of directors.

Madoff's firm is known as securities broker dealer, but he also runs a separate investment advisory business which had more than $17 billion in assets under management, federal authorities said, citing two unidentified employees and a SEC filing. Madoff counted several large hedge fund investment firms as clients, along with some European banks, so if his firm has lost more than $50 billion, the impact could be widespread.

The Madoff funds attracted investors with the promise of high returns and low fees. One of Madoff's more prominent funds, the Fairfield Sentry fund, reported having $7.3 billion in assets in October and claimed to have paid more than 11 per cent interest each year through its 15-year track record.

Initial estimates of hedge funds' losses surpass $10 billion. The biggest loser may be Walter Noel's Fairfield Greenwich Group, whose $7.3 billion Fairfield Sentry Ltd. invested with Madoff's eponymous firm, three people familiar with the matter said. Another client was Kingate Management Ltd., whose $2.8 billion Kingate Global Fund Ltd. invested with Madoff, they said.

Another client was Fix Asset Management, which had an account worth at least $400 million with Madoff Investments. The firm said it's checking with lawyers about the holdings. ''We are very shocked,'' John Fix, the son of founder Charles Fix. ''We put in redemptions in the past few months and got our money back no problem. We are just so surprised about all this.''

Investors, ranging from hedge funds that depend on outside managers to wealthy individuals, entrusted their money with Madoff, who told employees before his arrest yesterday that his firm was ''one big lie'' and may have cost clients as much as $50 billion. His confession comes with hedge- fund assets poised to fall as low as $1.1 trillion by 1 January from $1.9 trillion in June, reflecting market losses and customer redemptions, analysts at Morgan Stanley estimate.

Madoff told the employees he was "finished," that he had "absolutely nothing," that "it's all just one big lie" and it was "basically, a giant Ponzi scheme," according to the complaint filed in court. The employees understood Madoff's admission to mean "he had for years been paying returns to certain investors out of the principal received from other, different, investors," said the complaint, which did not identify the investors impacted by the scheme.

A Ponzi scheme is a fraudulent investment operation that involves promising or paying abnormally high returns ("profits") to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. The perpetuation of the high returns that a Ponzi scheme advertises (and pays) requires an ever-increasing flow of money from investors in order to keep the scheme going. It is named after Charles Ponzi. A Ponzi scheme has similarities with a pyramid scheme though the two types of fraud are different.

The system is destined to collapse because there are little or no underlying earnings from the money received by the promoter. However, legal authorities often interrupt the scheme before it collapses, because a Ponzi scheme is suspected and/or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.

After his arrest yesterday from his Manhattan home, Madoff was released on $10 million bail secured by his signature and that of his wife. He declined to comment as he walked out of US District Court in Manhattan. ''Bernie Madoff is a longstanding leader in the financial services industry,'' said Daniel Horwitz, one of his lawyers. ''He will fight to get through this unfortunate set of events.''