Bernie Madoff is leaving federal court in New York on March 10, 2009.
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Bernie Madoff was perhaps the worst reminder that financial advisors can become villains – and if they do, people are likely to lose a lot of money.
Fortunately, investors can take steps to limit their risk.
Madoff, who died in prison on Wednesday aged 82, was the head of the biggest investment scam in US history. His Ponzi program has defrauded tens of thousands of people worth up to $ 65 billion in four decades.
He had served a 150-year prison sentence after pleading guilty in 2009.
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Madoff's death, allegedly of natural causes, is a sobering reminder of the investor protection bottlenecks that have persisted more than a decade after his fraud was uncovered, according to investor representatives.
"Nobody is immune to fraud," said Andrew Stoltmann, a Chicago-based attorney who represents consumers in fraud cases. "If Bernie Madoff can do it, anyone can."
According to experts, regulators have tightened their scrutiny over advisors and brokers in order to detect investment fraud.
But occasionally a crook slips through the cracks – sometimes in a dazzling way.
Matthew Piercey, a Palo Cedro, Calif. Realtor who pleaded guilty to running a $ 35 million Ponzi program, tried to escape the FBI in November using a submersible to get himself underwater hide.
Some have even tried to fake their own death. About a decade ago, Indiana consultant and pilot Marcus Schrenker crashed a plane in Florida after being brought to safety and then sped off on a motorcycle to avoid prosecution for allegedly being 1.5 Stole millions of dollars from customers.
"What we (the Madoff scandal) taught us is to constrain a system that relies on investors to protect itself," said Barbara Roper, director of investor protection for the Consumer Federation of America.
The majority of its investors were institutions and high net worth individuals – clients who are considered sophisticated in the eyes of regulators, Roper said.
There are some surefire red flags out there for consumers who broke their money manager badly.
Financial regulators have online databases where consumers can find background information about specific people and companies.
The Securities and Exchange Commission has a website for financial advisers, the Investment Adviser Public Disclosure website. The financial industry regulator's resource, BrokerCheck, lists brokers. (One person can appear in both.)
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First, check whether the person is displayed in one of the two systems and whether they are licensed or registered with a company. This means that they have achieved a minimum level of qualifications and background information to work in the industry, said Stoltmann.
"If not, it could be a guy calling his mother's basement," he said.
It is also useful to check the name of the advisor or broker on Google to see if there are any news articles about previous indiscretions or lawsuits.
The regulatory databases also list any disclosures, complaints, arbitrations or settlements in which the individual is involved.
"If you have a complaint or two, there are likely dozens of other cases where the advisor was harassed but not caught," Stoltmann said.
Check for shameful financial behavior like abuse practices, inappropriate referrals, and excessive or unauthorized trading, Roper said.
"There are a lot of people out there who don't have a problem," she said. "So why not be sure and avoid those who do?"
Finding a fiduciary investment advisor can also help clients looking for long-term financial planning reduce financial conflicts of interest that may be present in the advisor's business model, she said.
Lessons from the & # 39; Madoff bomb & # 39;
Just because those red flags aren't initially there doesn't mean consumers should lose their vigilance.
Madoff is the perfect example.
"You could have done all these things with Madoff and it wouldn't have protected you," said Roper. "He was like the darling of the financial world (before his scam was exposed)."
One of the lessons from Madoff's multi-billion dollar fraud was making sure your money was being held (i.e., custody) with a reputable third-party custody firm like Fidelity or Charles Schwab, Stoltmann said.
That makes it much more difficult for an advisor to steal money or take advantage of a client since the assets are not held in-house, he said. Customers write checks to third parties, not the consultancy.
Bernie Madoff is leaving New York federal court on March 10, 2009.
Jin Lee / Bloomberg via Getty Images
Think of this as a firewall like two-factor authentication – the custodian has certain procedures for withdrawing money that often involve contact with the customer, Stoltmann said.
"Where you kept your assets was just not an issue that anyone really thought about until the Madoff bomb hit," said Stoltmann. "Had that happened, the fraud would not have been able to multiply."
Customers can check their regular bank statements for this information. You can also call the custodian or log on to a custodian website for verification.
Investment promises or guarantees are another telltale sign of fraud.
For example, in 2017 the SEC accused the Woodbridge Group of Companies and owner Robert Shapiro of running a "massive" Ponzi program. The $ 1.3 billion fraud pissed off more than 7,000 people, mostly seniors, with promised returns of 5% to 10% per year for real estate investments.
Shapiro pleaded guilty in 2019 and was sentenced to 25 years in prison. The SEC claimed he used at least $ 21 million for his own benefit to charter planes, pay country club fees, and buy luxury vehicles and jewelry.
"The promise is the red flag," said Stoltmann.
Consistently stable returns on investments other than government bonds are another lesson from the Madoff scandal, he added.
"I don't care whether it's a return of 3% or 10%," said Stoltmann. "The lack of variance is a (big) red flag."
Hyper trade activity
Losing money is not necessarily a red flag in and of itself, especially when it occurs in a downward looking market.
However, according to George Friedman, associate professor at Fordham University School of Law and a former FINRA official, it could be a bad sign if an investor's portfolio is well below standard stock and bond benchmarks.
"At some point you start asking questions," he said.
Hyper-trading activity, as set out in an investor's statement, is another tell-tale sign. Such account churn generates fees and commissions for consultants, but damages the customer financially.
Proprietary investments – for example, owning a mutual fund operated by your brokerage firm – aren't necessarily a sign of fraud, but they can be a sign that a consultant or firm is making money at your expense, Friedman said.
"I would check bank statements every month," he said. "If you see something funny or unusual, it's a flag."
Of course, investor statements could be treated to hide such information.
Unsatisfactory or late responses to customer questions should prompt customers to refer their case to the company's compliance department.
The call to communicate outside the official channels of a consulting firm such as the company's email address is also an important red flag, Roper said.
And, most importantly, understand your investments and only place your money with reputable money managers, she said.
"If you can't understand it, it's a bad sign," said Roper. "If the (investment) prospectus seems confusing rather than clarifying, this is a bad sign."
"People want to believe that there is a great investment opportunity out there that they have just been lucky enough to make," she added. "It is as old as time, the convincing impostor who can convince someone to buy the panacea elixir."