NEW YORK (Bloomberg) - Bernard Madoff, before two FBI agents showed up at his Manhattan apartment this week, confessed to two sons that his investment advisory business was "a giant Ponzi scheme" that cost clients $50 billion.

"We're here to find out if there's an innocent explanation," Agent Theodore Cacioppi told Mr. Madoff, who founded Bernard L Madoff Investment Securities LLC and was once chairman of the Nasdaq Stock Market.

"There is no innocent explanation," Mr. Madoff, 70, told the agents, saying he traded and lost money for institutional clients. He said he "paid investors with money that wasn't there" and expected to go to jail. With that, agents arrested Mr. Madoff, according to an FBI complaint that provided a timeline.

The 8.30am arrest on December 11 capped the downfall of Mr. Madoff and businesses bearing his name that specialised in trading securities, making markets, and advising wealthy clients. Many questions remain unanswered in this family drama, including whether his customers lost $50 billion. The complaint and a civil lawsuit by regulators describe a man spinning out of control.

Mr. Madoff's sons, Andrew and Mark, turned him in to US authorities on the night of December 10 after his confession, according to Martin Flumbenbaum, an attorney for the brothers.

"Mark and Andrew Madoff are not involved in the firm's asset management business, and neither had any knowledge of the fraud before their father informed them of it on Wednesday," according to a statement by Flumenbaum of Paul, Weiss, Rifkind, Wharton & Garrison in New York.

Mark Madoff, 42, ran the proprietary trading business and Andrew Madoff, 40, is a director of that unit, according to a person familiar with the matter.

Their father is free on a $10 million bond after appearing on December 11 in federal court in Manhattan, wearing a white-striped shirt and dark-colored pants.

Mr. Madoff's firm had about $17.1 billion in assets under management as of November 17, according to NASD records. At least half of its clients were hedge funds, and others included banks and wealthy individuals, according to the records. The firm was the 23rd-largest market maker on Nasdaq in October, handling an average of about 50 million shares a day, exchange data show.

The biggest loser may be Walter Noel's Fairfield Greenwich Group, whose $7.3 billion Fairfield Sentry Ltd. invested with Mr. Madoff's firm, three people familiar with the matter said. Another was Kingate Management Ltd., whose $2.8 billion Kingate Global Fund Ltd. invested with Mr. Madoff, they said.

Prosecutors joined the Securities and Exchange Commission (SEC), which filed a civil lawsuit, in unraveling the collapse of Mr. Madoff's investment advisory firm. More than a dozen SEC inspectors assembled the day of his arrest at the company, housed in a lipstick-shaped building at 885 Third Ave. A US judge appointed a receiver to oversee the business.

A series of events in early December preceded the firm's demise, according to the arrest complaint and SEC lawsuit. The arrest complaint discusses Senior Employee Nos.1 and 2, which refers to Mr. Madoff's sons, said a person familiar with the matter.

In the first week of December, Mr. Madoff told Senior Employee In the first week of December, Madoff told Senior Employee No. 2 that clients had requested $7 billion in redemptions, he was struggling to find liquidity, and he thought he could do so, according to the FBI and SEC.

Senior employees "previously understood" that the investment advisory business managed from $8 billion to $15 billion in assets, according to the documents.

On December 9, Mr. Madoff told a Senior Employee No.1 that he wanted to pay bonuses in December, or two months earlier than usual. The next day, Mr. Madoff got a visit at his offices from the employees. They said he appeared "under great stress" in prior weeks, according to the documents.

Mr. Madoff told the visitors that "he had recently made profits through business operations, and that now was a good time to distribute it", according to the FBI complaint.

When the workers challenged that explanation, Mr. Madoff said he "wasn't sure he would be able to hold it together" at the office and preferred to meet at his apartment, Senior Employee No.2 told investigators. He ran his investment advisory business from a separate floor of his firm's offices, keeping financial statements "under lock and key", prosecutors said.

At his apartment, Mr. Madoff told the employees that his investment advisory business was a "fraud" and he was "finished", according to the FBI complaint.

He said he had "absolutely nothing," that "it's all just one big lie", and that it was "basically, a giant Ponzi scheme", Agent Cacioppi wrote in the complaint. The senior employees understood Mr. Madoff to be saying he had paid investors for years out of principal from other investors, the agent wrote.

The business had been insolvent for years, said Mr. Madoff, who then estimated losses at more than $50 billion. Mr. Madoff said he had $200 million to $300 million left, and he planned to pay employees, family, and friends.

Mr. Madoff, who had also confessed to a third senior employee, said he planned to surrender to authorities within a week, according to the complaint.

Agent Cacioppi and another agent beat Madoff to the punch.

After saying he had no "innocent explanation", Mr. Madoff confessed "it was all his fault", Agent Cacioppi wrote.

"Madoff also said that he was 'broke' and 'insolvent' and that he had decided that 'it could not go on', and that he expected to go to jail," the agent wrote. "Madoff also stated that he had recently admitted what he had done to Senior Employee Nos. 1, 2, and 3."

Mr. Madoff founded the firm in 1960 after leaving law school, according to the company's website. His brother, Peter, joined the firm in 1970 after graduating from law school, it said.

Bernard Madoff was influential with the Nasdaq Stock Market, serving as chairman of the board of directors in 1990, 1991 and 1993, according to a Nasdaq spokeswoman.

He was chief of the Securities Industry Association's trading committee in the 1990s and earlier this decade.

He represented brokerages in talks with regulators about new stock- market rules as electronic-trading systems and networks grew.

Mr. Madoff won an assignment to manage a $450,000 stock offering for ALS Steel Corp. of Corona, New York, two years later, according to an SEC news digest.

He was an early advocate for electronic trading, joining roundtable discussions with SEC regulators considering trading stocks in penny increments. His firm was among the first to make markets in New York Stock Exchange listed stocks outside of the Big Board, relying instead on Nasdaq.

Mr. Madoff resigned on Friday as a trustee of Yeshiva University, North America's oldest Jewish educational institution.

His firm's website touts its "high ethical standards".

"In an era of faceless organisations owned by other equally faceless organisations, Bernard L Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner's name is on the door. Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."