Here’s how investors can see the next Bernie Madoff

Bernie Madoff was perhaps the strongest reminder that financial advisers can be cunning – and if they do, people lose a lot of money.

Fortunately, there are steps investors can take to limit their risk.

Madoff, who died in prison on Wednesday at the age of 82, was the mastermind of the biggest investment fraud in American history. His Ponzi scheme has defrauded tens of thousands of people worth as much as $ 65 billion over four decades.

He served 150 years in prison after pleading guilty in 2009.

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Madoff’s death, reportedly due to natural causes, is a sobering reminder of the lack of investor protection that investors have advocated for more than a decade after his fraud was exposed.

“No one is immune from fraud,” said Andrew Stoltmann, a Chicago attorney who represents consumers in fraud cases. “If Bernie Madoff can do it, anyone can do it.”

Regulators have stepped up their investigation into advisers and brokers to identify investment fraud, experts said.

But every now and then a crook slips through the cracks – sometimes in a brilliant way.

Matthew Piercey, a broker from Palo Cedro, California, who pleaded guilty to co-managing a $ 35 million Ponzi scheme, tried to flee the FBI in November by using a submersible pump to to hide the water.

Some have gone so far as to try to falsify their own death. About a decade ago, Marcus Schrenker, an advisor and pilot from Indiana, did this by dropping a plane in Florida after jumping into a paratrooper army and then riding away on a motorcycle to avoid prosecution because he allegedly stole $ 1.5 million from customers.

“What [the Madoff scandal] what we have learned is the restriction of a system that depends on investors to protect themselves, “said Barbara Roper, director of investor protection at the Consumer Federation of America.

The majority of its investors were institutions and wealthy individuals – clients who are considered advanced in the eyes of regulators, Roper said.

There are some sure red flags for consumers who have badly broken their money manager.

Financial regulators have online databases that consumers can refer to for background information on specific individuals and businesses.

The Securities and Exchange Commission has a website for investment advisers for public advisers. BrokerCheck’s Financial Industry Regulatory Resource contains a list of brokers. (A person can appear in both.)

First check if the person appears in one of the two systems and that they are licensed or registered with a firm. That means they have a minimum level of credentials and background to work in the industry, Stoltmann said.

“If that’s not the case, it could be a guy from his mother’s basement,” he said.

It also makes sense to Google the name of the advisor or broker to see if there are any news reports about previous discretions or lawsuits.

The regulatory databases also contain a list of disclosures, complaints, arbitrations or settlements in which the individual is involved.

“If you have one or two complaints, there are probably dozens of other times the consultant has been involved in cooking but not caught,” Stoltmann said.

Check for bad financial behavior such as sales abuse practices, inappropriate recommendations and excessive or unauthorized trading, Roper said.

“There are a lot of people out there who don’t have a problem,” she said. “Then why not be safe and avoid those who do?”

Finding an investment advisor for trust can also help clients who want long-term financial planning to reduce financial conflicts of interest that may occur in the advisor’s business model.

However, just because these red flags do not initially appear does not mean that consumers should be vigilant.

Madoff is the perfect example.

“With Madoff, you could do all these things and it would not protect you,” Roper said. ‘He was like the darling of the financial world [before his con was exposed]. “

One of the lessons from Madoff’s multimillion-dollar fraud was to ensure that your money was kept with a reputable, third-party custodian such as Fidelity or Charles Schwab (that is), Stoltmann said.

This makes it much more difficult for an adviser to steal money or exploit a client as the assets are not held internally, he said. Clients write checks to a third party, not to the consulting firm.

Consider it a firewall like two-factor authentication – the security firm has certain procedures to withdraw money, which often involves contact with the customer, Stoltmann said.

“Where you keep your assets, it was simply not a topic that anyone really considered, until the Madoff bomb hit,” Stoltmann said. “If that had happened, the scam would not have increased.”

Customers can check their regular account statements for this information. They can also call the custodian or sign up for a custodian’s website.

Investment promises or guarantees are another significant fraud signal.

The SEC, for example, charged the Woodbridge Group of Companies and owner Robert Shapiro in 2017 with running a ‘massive’ Ponzi scheme. The $ 1.3 billion fraud has left more than 7,000 people, mostly the elderly, seducing them with promised returns of 5 to 10% a year on real estate investments.

Shapiro pleaded guilty in 2019 and was sentenced to 25 years in prison. The SEC claims to have used at least $ 21 million to its own advantage to rent planes, pay out-of-town club fees and buy luxury vehicles and jewelry.

“The promise is the red flag,” Stoltmann said.

Steady returns for investments other than government bonds, for example, are another lesson from the Madoff scandal, he added.

“I don’t care if it’s a 3% return or a 10% return,” Stoltmann said. “The lack of deviation is a [big] red flag. “

Losing money is not necessarily a red flag in itself, especially if it occurs in a lower market.

According to George Friedman, an associate professor at Fordham University of Law and a former FINRA official, it can be a bad sign if an investor’s portfolio follows well below normal equities and bond standards.

“At some point, you start asking questions,” he said.

Hyper trading activity, as outlined in an investor statement, is another sign. Such account delivery generates fees and commissions for advisers, but harms the client financially.

Real estate investing – for example, owning a mutual fund managed by your brokerage firm – is not necessarily a scam, but it could be a sign that an adviser or firm is making money on your costs, Friedman said.

“I will review account statements every month,” he said. “If you see something funny or unusual, it’s a flag.”

Of course, investor statements can be doctored to hide such information.

Unsatisfactory or delayed responses to client questions should cause clients to escalate their case to the firm’s compliance department.

Being asked to communicate outside the official channels of a consulting firm, such as emailing the business, is also an important red flag, Roper said.

And, importantly, understand your investments and put your money only with reputable money managers, she said.

“If you can not understand it, it’s a bad sign,” Roper said. “If the [investment] prospectus seems to be designed to confuse rather than clarify, this is a bad sign. ‘

“People want to believe that there is a huge investment opportunity out there that they were just lucky for,” she added. “It’s as old as time, the compelling deceiver who can talk anyone into buying the drug elixir.”