It had been expected that Madoff in order to evade the auditors and SEC maintained some sort of real trading operation so that the profitable trades could be pointed to a evidence this was not a Ponzi scheme.
It turns out the Madoff did not attempt to cover his tracks in this way. A Ponzi scheme is a fraud where the early investors make a profit on their investment -- their reported success is the fuel for subsequent investors and in the process of this the promoter withdraws a large part of the investment.
What's necessary for the scheme to work is some plausible reason why the scheme:
The first Ponzi scheme was based on international money orders denominated in foreign currecy.
Madoff claimed that he could make money in the stock market with something called a "split strike conversion" (you can google that term). As everyone else has written this is a strategy that generates small returns and has some protection if the market dives -- it's not a strategy that generates consistently profits as Madoff subscribed.
If this was a true Ponzi scheme, why did all his employees need to go to work for? Were they all duped into thinking they were making decisions what to buy and sell with the investors capital?
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