ON DECEMBER 11, 2008, 8,000 INVESTORS—FORMERLY HAPPY to be receiving reports of their year-in–year-out returns of 10 percent or better on a secretive “inside the market” operation they had been privately let in on by well-connected friends—found they had actually been victims of a giant Ponzi scheme run by Bernard L. Madoff.

Madoff said that he specialized in “split-strike conversion” strategies using derivatives to minimize risk, which he made clear were so proprietary that he would not discuss them in any detail for fear others would copy his technique and ruin everything for everyone. He claimed to buy stocks and sell put and call options on them. (Selling the calls would mean not participating in a price increase ...

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