Thirty contestants; £100,000 up for grabs. To the young hopefuls who jacked in everything for the chance to take part in a reality show, it sounded perfect. But there was no show, no production company, and the man behind it left an army of potentially destitute people in his wake. Welcome to the moment reality TV came off the rails

Truth, we all know, is stranger than fiction, and so it stands to reason that the truth about reality TV is the strangest of the lot. Here's a story so ridiculous, so horribly satirical, that you couldn't make it up. Thirty willing wannabes, lured by the promise of easy fame and £100,000 prize money, gave up their homes, jobs and loved ones in order to take part in a 12-month reality TV project that would eventually be broadcast on Channel 4.

Hypnotised by the Byronic charms of self-styled producer Nikita Russian, they underwent gruelling auditions (complete with "psychological tests"), signed silly contracts and turned up in London, penniless, to await Dame Fortune. But reality bit in an altogether unexpected way. Nik Russian was a fantasist/conman, there was no commission from Channel 4, no prize money, nowhere to live, nothing to eat - in short, no show.

Thirty very disappointed people returned home (those who still had homes, anyway), and that might have been the end of the story - had it not been for a twist in the tail, the kind of chance encounter that TV producers dream of. Debbie Driver, one of the thwarted 30, called up Christmas Television, a small independent producer, and suggested that she might have a bit of a story for them. Six months later the full, breathtakingly bizarre story has found its way to the screen.

"Debbie had seen a programme we made earlier this year about school reunions," says Christmas's Caz Gorham, "and so she knew that we were real, genuine producers. She was in a bad state; she'd just realised, along with all the other contestants, that she'd been taken for a ride, and she was looking for a way of making sense of it all. Over the next few months, we pieced the story together, we managed to tell these people what had happened to them. And of course, in the end, we've put them on TV. I'd like to think we've given them a happy ending."

The project started so well: professional auditions in a posh banqueting suite on a private island on the Thames near Surbiton, the promise of a unique adventure, riches, fame etc. Nik Russian was easy to fall for - a tall, beautiful young man with floppy hair and a leather coat, the very image of a television producer. The headed notepaper looked good, there was talk of sales teams and marketing guys, and the contestants fell for it hook, line and sinker. Alarm bells rang when, on the launch day in June, they were given their challenge: three teams of 10 would compete to be the first to raise £1m. First of all they had to find food and shelter, then get cracking...

But surely something was wrong? Hadn't the contracts spoken of subsistence allowances, housing, food? "The contracts were ridiculous," says Debbie Driver, a 29-year-old care worker from Essex, who'd given up her job and her flat to take part in the show. "We were meant to put our money into bank accounts which Nik would have access to. Looking back, the whole thing was dodgy. But he was very convincing, and nobody wants to believe that their dream is going to come to an end. For two months I'd been floating on a cloud, believing that the £100,000 would enable me to get back into education, buy a house, live my dreams. I was very unwilling to let that go."

By this time the three teams were separated, variously crashing on friends' floors, unable to compare notes. Nik Russian stopped answering the phone. Some of the contestants left immediately, realising that the whole thing was a fantasy; others clung to their dreams and believed that something good could come of it. Then Russian did something very strange. Instead of keeping the lie afloat, he turned up at a team house in Dalston looking bereft and haunted, confessed to his stunned victims that there was no commission, and proceeded to play the "poor little me" card. The contestants responded by locking him in the house and calling up a local TV news team.

Buoyed up by a tiny taste of fame (they were recognised by market traders in Dalston the next morning), the contestants decided that maybe, after all, they could turn their reverses into telly. But the scent went cold. Russian disappeared, and the camera crew - all of them trainees who had given their services and equipment for free - realised they would never get paid. Hungry and depressed, the group dispersed.

By this time, however, Christmas Television were on board, filming the reactions of the housemates to their cruel deception. "The contestants were understandably suspicious of us," says Caz Gorham. "We had to gain their trust. We were very open with them about the whole process of pitching it to Channel 4; they'd heard all this before. Daniel, one of the contestants, said he wasn't sure that we were for real until we turned up with a proper big camera." Channel 4 (who had never heard of the project until now) reacted quickly with a commission, and suddenly the tables were turned. Russian's dupes went on the warpath, determined to track their man down and get some answers.

Many of them had lost heavily from the experience; expecting to be away for 12 months, they'd given up homes, sold goods and ended relationships. Big leaving parties had been thrown, only for the would-be stars to slink home, their dreams shattered. Understandably, they wanted blood.

Christmas spent months tracking down Nik Russian who, they discovered, was in fact one Keith Gillard from Farnham in Surrey, a former English student and shop assistant with absolutely no television experience. "When I discovered that things were going wrong for Nik, I was sympathetic at first," says Debbie Driver. "I thought he'd had this wonderful dream of being a TV producer, and it had all fallen apart for him. I actually felt sorry for him. But now I've pieced the story together, I realise he was a conman. He had this fantasy of making something happen, and he abused a lot of people along the way. It's fine that he put his own life on the line, but it's unforgivable that he hurt so many other people. It was awful losing that dream. I got very depressed. I wish I'd never known what it felt like."

Finally, Christmas cameras got the money shot: Nik Russian, still in his leather coat, slinking out of a flat in Richmond to face the music.

Russian's self-absorbed, self-pitying apologies, his evasion of questions and his ability not to blush on camera is a deeply rewarding bit of footage.

And so the wounds wrought by television are cured by television. The contestants, although jaded and out of pocket, have been vindicated - and have, after all, found themselves the stars of a reality TV show. The cameramen who gave their time for free have put their material to good use. Nikita Russian has been put to shame, although it would surprise nobody if he pops up again in another outrageous disguise and somehow parlays his disgrace into a television career.

So what, if anything, can we learn from The Great Reality TV Swindle? It would be easy to censure the contestants, those stooges whose greed for fame betrayed them into the hands of an unscrupulous fantasist. Certainly, it's a timely reminder that the kind of fame that's based only on exposure, rather than actual talent, is a house built on sand. But these are not stupid people. In archive footage from the fake show, they look like any other post-Big-Brother buffoons; but in the sombre, reflective interviews after the event they come across as likable, wounded individuals.

"I think it's a fantastic wake-up call for reality TV," says Caz Gorham. "I came at this story from a position of hating the genre because it's so shallow, and then I became very angry on behalf of the people who get eaten by it. It's heartbreaking to see these young, attractive people becoming so cynical. Some of them had already planned to buy cars and houses on their winnings, and now they're back living with their parents. It's very true, as one of the contestants said to Nik Russian, that he did a bad thing by playing with people's dreams. I would just add that, when it comes to television, you should be very careful what you wish for, because things can come true in a way that you could never imagine."

· The Great Reality TV Swindle will be shown on Channel 4 on December 3. Rupert Smith's novel Fly on the Wall, a comic satire of reality TV, is published this week by GMP, price £9.99