Some of America's wealthiest socialites were facing ruin tonight after the arrest of a Wall Street legend accused of the largest investor swindle ever blamed on a single individual.

Shock and panic spread through the country clubs of Palm Beach and Long Island after Bernard L Madoff, a trading powerbroker for over four decades, allegedly confessed to a massive fraud that will cost his wealthy investors at least $50 billion, perhaps the largest swindle in Wall Street history.

Mr Madoff, 70, a former Nasdaq stock chairman, was apparently turned in by his two sons and arrested on Thursday morning at his Manhattan apartment by the FBI.

Andrew Calamari, a senior enforcement official at New York's Securities and Exchange Commission, described the scheme as "a stunning fraud that appears to be of epic proportions".

The FBI's criminal complaint states that when two federal agents arrived at Mr Madoff's apartment, he told them: "There is no innocent explanation". The agents say that he told them "he paid investors with money that wasn't there," that he was "broke" and that he expected to go to jail.

The FBI claims that three senior employees of Mr Madoff's investment firm - once a towering presence on Wall Street - turned up at his apartment on Wednesday to ask questions about the company's solvency. Two of them are believed to be his sons, Andrew and Mark, who have worked for their father for two decades.

Mr Madoff told them that he was "finished", that he had "absolutely nothing", and that "it's all just one big lie". He said the investment arm of his firm was "basically a giant Ponzi scheme," and that it had been insolvent for years.

A Ponzi scheme, named after the swindler Charles Ponzi, is a fraudulent investment operation that pays abnormally high returns to investors paid from money put into the scheme by subsequent investors, rather from real profits generated by share trading.

The FBI complaint states that Mr Madoff told his sons he believed the losses from his scheme could exceed $50 billion. If that is the case, his fraud would be far greater than past Ponzi schemes and easily the greatest swindle perpetrated by one man.

There has been scepticism for years on Wall Street over how Mr Madoff managed to pay such consistently high returns, in good investor years and bad.

The FBI alleges that he "paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of billions of dollars."

Such schemes inevitably collapse, and Mr Madoff found himself to be no exception. Because of the stricken economy, and growing suspicions about his business, the FBI says that earlier this month Mr Madoff told one of his sons that clients had requested $7 billion in investments to be returned - and that he was struggling to pay them.

Mr Madoff ran the wealthy investment arm of his business, Bernard L Madoff Investment Securities, secretly and separately from the main trading and market-making floor of his offices, with records kept "under lock and key".

His sons had no involvement in it but told federal agents their father had been under "great stress". Mr Madoff founded his firm in 1960 with $5,000 he had made being a lifeguard on Long Island.

Mr Madoff has been charged with a single count of securities fraud. He declined to enter a plea in Manhattan's US District Court and was released on $10 million bail. He faces up to 20 years in jail and a $5 million fine if convicted. His lawyer, Dan Horwitz, said his client was "a person of integrity. He intends to fight to get through this unfortunate event."

Many of his investors came from the enormously wealthy enclaves of Florida's Palm Beach and New York's Long Island, where people had invested billions of dollars in Mr Madoff's firm for decades.

He was a fixture on the Palm Beach social scene, and was a member of some of its most exclusive clubs, including the Palm Beach Country Club and Boca Rio Golf Club, where he drummed up much of his business.

One investor told The Wall Street Journal: "This is going to kill so many people. It's absolutely awful."

Ira Roth, from New Jersey, said his family - including his 86-year-old mother-in-law - had $1 million invested, and that he was "in a state of panic".

Susan Leavitt, from Florida's Tampa Bay, said she had millions invested, and paid in another $500,000 earlier this year. "That was my nest egg for my children, and my future," she said.

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