He misrepresented the performance of his investments, causing his investors to think that the money they had placed with them was growing, when in fact it was vanishing. If you had invested $1 million with Madoff, you would have received periodic statements indicating that your money had grown by such and such a percentage, and this during a time when most investments were losing money. You would have been thrilled to leave your money in there and keep seeing those increases. Meanwhile new investors are clamoring to get in on the action. But in reality, your money was vanishing (no one yet knows where). Of 10’s of billions entrusted to Madoff, only about 250 million was left when he was busted. This wouldn’t have become a problem for Madoff as long as very few people tried to pull out of the scheme. When the occasional guy wanted to check out, Madoff could pay him out of the new money coming in, but all of a sudden people lost faith in the legitimacy of his operation and he had to come up with $7 billion that he didn’t have. The game was over. A bank never has enough cash on hand to reimburse all of its depositors at once, true. But it will always have enough assets, including collectible outstanding loans, to account for all of that money. It could, given enough time, reel all of that money in and pay off all its depositors. Madoff could never even have come close to reimbursing his investors because the money was simply gone. But he made it appear to the investors that it was all still there, and growing.