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Facing a growing chorus of angry investors, disgraced financier Bernard Madoff lost his right to leave his home Friday and was ordered to hire private around-the-clock security guards to protect him. U.S. Magistrate Judge Theodore H. Katz approved the revised bail conditions after prosecutors sent a letter requesting them earlier in the day. The letter, signed by Assistant U.S. Attorney Marc O. Litt, did not explain why the bail conditions needed to be tightened.

Madoff, 70, a former Nasdaq stock market chairman, has become one of the most vilified people in America since word broke last week that he allegedly plundered $50 billion from investors.

The changes eliminated a curfew established this week that allowed Madoff to leave his Manhattan apartment during the day. Now, he will be confined to his apartment at all times, except for court appearances.

The order calls for Madoff's wife to pay for a security firm to provide 24-hour video monitoring of Madoff's apartment doors. It also requires communications devices and services enabling the firm to send a direct signal from an observation post to the FBI if there is an "appearance of harm or flight."

"The security firm will provide additional guards available on request if necessary to prevent harm or flight," the order said.

Madoff's lawyer, Ira Lee Sorkin, said the order "speaks for itself."

About his client's safety, Sorkin said: "We are always concerned about the health and well-being of high-profile clients and we take whatever measures are appropriate."

Madoff's bail conditions have been gradually increased as angry investors who lost billions seek information about what happened to money they thought was safely invested with someone who was widely respected on Wall Street for nearly half a century. A week ago, he was released on $10 million bail only on the signature of he and his wife. When he could not get a total of five signatures on his bail package to vouch for him, a curfew was imposed.

The bail development occurred a day after Madoff was ordered to provide a written list by year-end of his assets and liabilities, a key step in finding what is left for investors.

U.S. District Judge Louis L. Stanton signed an order late Thursday requiring Madoff to provide a verified accounting of all his assets, liabilities and property to the Securities and Exchange Commission.

The court filings came as investigators spent another day trying to untangle Madoff's operation. Investigators have started serving grand jury subpoenas requiring witnesses to testify and seeking documents, according to an official familiar with the case. The official, who spoke on condition of anonymity because the investigation is ongoing, declined to identify who was served or specify what documents were wanted.

Also Friday, Tufts University became the latest group to come forward as a Madoff victim, saying it lost $20 million, or about 2 percent of the school's endowment.

The school invested the money with an investment firm called Ascot Partners LP, managed by the chairman of GMAC Financial Services, J. Ezra Merkin. Other universities also lost a bundle with Ascot through the Madoff connection, including New York Law School.

The judge's order, agreed to by Madoff, demanded details of all assets, funds or property held by Madoff and the names and locations of entities, bank accounts, brokerage accounts, investments or assets held by his business, Bernard L. Madoff Investment Securities LLC.

The order also puts control of all of his artwork, property, cars, jewelry and other items in the hands of a court-appointed receiver.

The order also requires that the receiver, lawyer Lee Richards, prevent the disposal of any of the assets of Madoff Securities International Ltd. and determine to what extent funds were comingled between Madoff's U.S. operations and any businesses overseas.

Madoff and his family essentially turned him in to authorities last week, blowing the whistle on what authorities said he confessed was a "giant Ponzi scheme."

Authorities say Madoff confessed to family members that he had for years been paying returns to certain investors out of the principal received from others until he had only $200 million to $300 million remaining.

The charge against Madoff carries a potential penalty of up to 20 years in prison. Other charges could be added as the case is presented to a grand jury.

The trustee in charge of the Madoff liquidation has hired Lazard Freres & Co. LLC to assist in the sale of the trading operations of Bernard L. Madoff Investment Securities LLC., the global financial advisory and asset management firms.

Associated Press Writer Tom Hays contributed to this report.

The multibillion-dollar Madoff mess proves one thing: Even the most sophisticated of investors are susceptible to fraud. It also proves that relying on highly paid financial advisers or the Securities and Exchange Commission won't protect you from getting ripped off.

Madoff's alleged $50 billion Ponzi scheme had the appearance of being a legitimate operation. Until recently, Madoff was paying dividends, sending out monthly statements and fulfilling withdrawal requests. It wasn't until early December when he admitted to having requests from clients for approximately $7 billion in redemptions that the Ponzi scheme started to collapse. Madoff simply didn't have the funds to meet those obligations. The jig was up.

In the case of Madoff, investors turned a blind eye to due diligence that could have been done. "Sometimes the bigger someone is, the less vetting people do," says fraud expert S. Gregory Hays, managing principal, Hays Financial Consulting. "Investors sometimes assume that someone else did their homework." And in the case of Madoff's scheme, the multitude of seemingly sophisticated investors and accomplished business people--from Mortimer Zuckerman to HSBC (nyse: HBC - news - people ) and Groupo Santander--no doubt lent credibility as Madoff expanded his ponzi.

For most investors the best way to keep a Ponzi out of your portfolio is to follow the common sense rule of "if something sounds too good to be true, it probably is." It also is best to ask lots of questions and beware of any potential investment or adviser that is overly secretive in terms of explaining investment strategy.

In Pictures: 10 Fraud Red Flags

In the case of Madoff, it was difficult to rely on publicly available information to discover that a fraud might have been taking place, since little was available. "There were no lawsuits or claims that he was defrauding people," says Kenneth S. Springer, former special agent of the Federal Bureau of Investigation who is now a certified fraud examiner and president and founder of New York-based Corporate Resolutions.

The one red flag that might have raised suspicions was the fact that Madoff used a tiny accounting firm in New City, N.Y., Friehling &

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Horowitz, to do his accounting. "Someone who claims to have billions in assets under management would normally use a bigger accounting firm like Ernst & Young, PricewaterhouseCoopers, Deloitte Touche or Grant Thornton," says Springer.

Of course the best way to discover a sophisticated scheme would be to hire someone to do on-site financial due diligence. Sometimes, large, institutional investors are even allowed to do surprise audits. "You would want to look at the trading and see what kind of transparency was there to see where the money was really being invested, too," says Springer. "Had people done that, many wouldn't have been satisfied with what they would have found out, and they would have walked away." Investors could have also hired an investigator to examine and interview the prime broker and administrators, he adds.

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In a stunning rebuke, the Securities and Exchange Commission chairman blames his career regulators for a decade-long failure to investigate Wall Street money manager Bernard L. Madoff, now accused of running one of the largest Ponzi schemes ever.

On Tuesday night, SEC Chairman Christopher Cox ordered an internal investigation of what went wrong and offered a scathing critique of the conduct of his staff attorneys. He said they never bothered to seek a formal commission-approved investigation that would have forced Madoff to surrender vital information under subpoena. Instead, the staff relied on information voluntarily produced by Madoff and his firm.

Credible and specific allegations regarding Madoff's financial wrongdoing going back to at least 1999 were repeatedly brought to the attention of SEC staff, said Cox.

A former SEC attorney, Eric Swanson, married Madoff's niece, Shana, last year, The Wall Street Journal reported. The SEC's compliance office issued a statement Wednesday saying that Swanson was part of a team that looked into Madoff's securities brokerage operation in 1999 and 2004. The SEC cited its "strict rules" prohibiting employees from participating in cases involving firms where they have a personal interest.

The SEC's inspector general, David Kotz, told the Journal that he intends to examine the relationship between Madoff's niece and Swanson.

Madoff remains free on $10 million bail. A hearing is scheduled in federal court in New York on Wednesday afternoon to iron out the terms of his bail package.

Shock waves from the Madoff affair have radiated around the globe as a growing number of prestigious charitable foundations, big international banks and individual investors acknowledge falling victim to an unprecedented fraud.

As the world recoiled at the size and simplicity of Bernard Madoff's fraud, banks in Europe were one by one admitting to potentially being on the hook for millions through their exposure to the Wall Street money manager's scheme.

HSBC (nyse: HBC - news - people ), Royal Bank of Scotland (nyse: RBS - news - people ) and Banco Santander are some of the most exposed lenders, in some cases having indirectly invested in Madoff's funds through hedge funds, or directly through a private banking arm. Since news of his fraud broke last Thursday, banks have been scrambling to calculate their exposure to his firm and are now waiting for receivers to provide further information on the total value of assets in Madoff's portfolio.

Unfortunately, there appears to be little hope that banks who invested in Bernard Madoff Investment Securities will see much or any of their money again. Madoff was arrested on Thursday after reportedly confessing to running a "giant Ponzi scheme" in which he lost $50.0 billion of his investors' money. His two sons contacted authorities on the evening of Dec.10 after their father admitted to the fraud. (See "Madoff's Money.")

RBS said Monday that it could lose as much as 400.0 million pounds ($599.4 million) because of "trading and collateralized lending to funds of hedge funds that invested with [Madoff's] firm," the bank said, without giving further details. British hedge fund Man Group said it had approximately $360.0 million invested in two funds that were "directly or indirectly sub-advised by Madoff Securities," representing about 0.5% of its funds under management. Reports say that HSBC could lose as much as $1.0 billion through its exposure.

Banco Santander (nyse: STD - news - people ), one of Europe's most well-regarded banks for having largely avoided investing in the American subprime mortgage market, said on Sunday that one of its investment funds had exposure of 2.3 billion euros ($3.1 billion) to Madoff Securities. Most of this was invested directly by the bank's investment fund, Optimal, on behalf of Santander's overseas institutional investors and private banking clients. Spain's Banco Bilbao Vizcaya Argentaria (nyse: BBV - news - people ) had approximately 500.0 million euros ($673.3 million) of exposure to funds run by Madoff.

Investment bank Natixis (other-otc: NTXFF - news - people ) appears to be one of the worst hit so far in France, after it said Monday that it had exposure of up to 450.0 million euros ($600.3 million), while BNP Paribas (other-otc: BNPQY - news - people ) said its clients could lose up to 350.0 million euros ($471.3 million). Societe Generale (other-otc: SCGLY - news - people ) said Monday that it had less than 10.0 million euros ($13.5 million) in exposure to Madoff. Credit Agricole (other-otc: CRARF - news - people ) was scheduled to release details of its exposure to the fraud later on Monday, but this was expected to be negligible.

The Madoff case is a clear setback for European banks that have been pining for the end of billions of dollars worth of write-downs and losses that followed the the subprime mortgage crisis. Some, like Bramdean Alternatives, run by London-based fund manager Nicola Horlick, have criticized American regulators for not catching Madoff's fraud sooner. Horlick, who had 10.0% of her holdings exposed to Madoff, reportedly said that the regulators had "fallen down on the job."

For years, Bernie Madoff, all-around nice guy, pulled billions of dollars of foreign and domestic money into his investment fund. His lure? He promised the implausible combination of good returns and low risk—and people believed him.

Painfully, the allegations of fraud surrounding the Madoff affair are also exposing the fundamental fallacy of the global economy. Like Madoff's trusting investors, the rest of the world was willing to assume that the U.S. economy as a whole was a low-risk, good-return investment. This belief drove the entire structure of global trade and finance for the past 10 years. And when the subprime crisis showed this assumption of low risk to be false, the financial crisis resulted.

Consider this: Since the Asian financial crisis of 1997-98, the rest of the world has been willing to lend money to finance the U.S.'s huge and growing trade deficit. Not just small amounts of cash either: over the past decade, the U.S. borrowed a cumulative total of $5 trillion from foreigners at relatively low interest rates.

Why were foreigners so generous?

Without this flow of easy money into the U.S., globalization in its current form would not have been possible. The U.S. was the consumer of last resort, absorbing cars from Germany and Japan, electronics from Taiwan and Korea, and clothes and furniture from China. The earth was flat, and why not? Pluck a laptop from Taiwan and pay for it with a home equity loan, which—if you trace back the connections—was at least partly funded with foreign money, too.

The big unanswered question, for years, was why this money flow persisted. Why the heck were foreign investors willing to lend the U.S. such large amounts of money on such good terms? Economists and journalists spun out hypothesis after hypothesis (we'll see more below), but there was no agreement on why.

Now we see what happened. Wall Street firms—big operators like Lehman and relatively small fish like Madoff—told foreign investors they could put their money into the U.S.—the world's safest economy—and still make decent returns. Madoff, of course, appears to have lied. He allegedly ran an investment scam that has resulted in billions of dollars of losses reported around the world, including $4 billion in Switzerland and $3 billion in Spain.

exporting 'low risk' Derivatives

But it wasn't simply Madoff. The Wall Street boom of recent years was built, as far as I can figure out, on selling the low-risk story to foreign investors. In fact, most of the financial innovations of recent years were about making investments in the U.S. 'safer' for foreign investors. The enormous growth of foreign exchange derivatives enabled those abroad to protect their U.S. investments from exchange-rate fluctuations. The sudden increase in credit default swaps could be used to protect foreign bond investors from problems with individual countries. And collateralized debt obligations, which could be divided into high-risk and low-risk pieces, increased the supply of low-risk investments to be sold outside the U.S.

This low-risk, good-return story attracted investors from around the world. One example: Lehman sold $2 billion in 'mini-bonds' to Hong Kong investors, including many retirees.

However, the low-risk, good-return story simply wasn't true, for two key reasons: First, the U.S. economy was supposed to be on the cutting edge of innovation. Innovation through technological change, by nature, is a very risky activity. Sometimes it pays off and sometimes it doesn't. If the investment in innovation pays off, the economy booms, as it did during the second half of the 1990s.

U.S. Regulation Failed

But innovation has fallen short in recent years. Biotech and nanotech still have not come to fruition, and alternative energy is moving slowly. As a result, the U.S. economy has fallen short of expectations. The income isn't there, and the debt just piles up.

The second reason why the low-risk, good-return story wasn't true: the breakdown of regulation. And that's where we come back to the alleged Madoff scam. His was no complicated global securitization, based on black-box rocket science. Instead, it appears to be a good old-fashioned Ponzi scheme, enabled by a lack of government supervision.

What comes next? The fallacy is punctured. Globalization will be seen as what it is—a game with risks that can't be wished away. And U.S. prosperity will depend on the success or failure of its ability to innovate—not its ability to tell an implausible story to foreign investors.

For years there were whispers on Wall Street about Bernard Madoff’s hedge fund. The cynics said the returns were too good, too steady and Madoff’s operation always looked too slim for the tens of billions of dollars it was managing. But given Madoff’s more than four-decades of experience as trader and past service as chairman of the Nasdaq Stock Market the wealthy kept giving him their money.

Well, it looks like those concerns were right all along now that federal prosecutors have charged the 70-year-old Madoff with securities fraud, in what could amount to one of the biggest Wall Street scams ever. Securities regulators, in a civil complaint, say Madoff’s scheme may have cost investors up to $50 billion—although that figure appears to be based on Madoff’s own bravado. At a minimum, it appears the $17 billion Madoff was managing earlier this year may be gone.

The allegations against Madoff describe a classic Ponzi scheme, in which money is taken in from new investors to pay out money to earlier investors. Madoff, authorities allege, even told his sons earlier this week that the hedge fund was nothing more than “a giant Ponzi scheme.’’

It didn’t take long for investors in Madoff’s fund to begin crying foul. Hours after the news of Madoff’s arrest broke, investors were contacting lawyers to determine how they can get their money back—assuming there is any money left over. The Securities and Exchange Commission is moving to appoint a receiver to take control of the Madoff fund to protect whatever assets remain. Scott Berman, a lawyer who represents a number of Madoff investors, says the fear in a case like this is that the investors will be left “fighting over the crumbs.”

It’s way to soon to know how long the alleged scheme had been going on, although authorities allege it began years ago, after Madoff tried to cover up for past losses. But it appears Madoff ultimately was unmasked by the worst financial crisis since the Great Depression. Just like many hedge fund operators, Madoff received a wave of redemption notices in recent months, from investors looking to preserve cash. Authorities say investors sought to pull-out some $7 billion from the fund—money Madoff apparently did not have.

In the end, most Ponzi schemes collapse when too many investors seek to pull their money out at the same time, and the operator doesn’t have the cash on hand. Many a scheme has failed when the markets turn south. One potential red flag that investors failed to notice along the way is that the hedge fund was being audited by a small outfit in Rockland County, NY—not one of the large accounting firms.

But the financial crisis appears to be hastening the unwinding process of potential scams, as it has dried-up all sources of liquidity. Banks are unwilling to lend and investors are fleeing hedge funds, stocks, bonds, commodities and other asset classes for the safety of cash.

In September, another alleged Ponzi scheme collapsed, when federal prosecutors arrested Minnesota businessman Tom Petters. Federal prosecutors allege that much of Petters’ empire, which consisted of buying up distressed businesses, was based on a series of lies. He’s been charged with bilking some six-dozen hedge funds out of $3 billion. Petters’ alleged scheme came undone when some of the hedge funds that lent him money had gotten redemption requests from their investors and began asking Petters to pay-off his debt. Just like Madoff, Petters apparently couldn’t come up with the cash. Several of the hedge funds that lent money to Petters are in tatters, and some are shutting down.

A lack of liquidity may have been behind the bizarre scheme involving New York attorney Marc Dreier. Earlier this week, federal prosecutors charged the high-profile attorney with allegedly scamming several hedge funds into giving him up to $100 million by selling shares in what appears to be a fraudulent real estate venture. It appears Dreier’s 250-lawyer firm was running low on cash and had failed to make payments on a bank loan.

As the financial crisis deepens, don’t be surprised if other scams get flushed out in the coming weeks and months.