Here’s how investors can spot the next Bernie Madoff

Bernie Madoff was perhaps the strongest reminder that financial advisors can be deceitful – and when they do, people can lose a lot of money.

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

Madoff, who died in prison on Wednesday at the age of 82, was the mastermind of the largest investment fraud in US history. His Ponzi scheme has defrauded tens of thousands of people worth up to $ 65 billion in four decades.

He had served a 150-year sentence after pleading guilty in 2009.

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Madoff’s death, reportedly of natural causes, is a sobering reminder of the investor protection deficits that continue more than a decade after his fraud came to light, investor advocates said.

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

Regulators have tightened their controls on advisers and brokers to detect investment fraud, experts said.

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

Matthew Piercey, a broker from Palo Cedro, California who pleaded guilty to co-running a $ 35 million Ponzi scheme, attempted to flee the FBI in November by using a submarine to hide underwater.

Some have even gone so far as to try to falsify their own deaths. About a decade ago, Marcus Schrenker, an Indiana adviser and pilot, did that by crashing a plane in Florida after being brought to safety and then rushing off on a motorcycle to avoid prosecution for stealing $ 1. 5 million of customers.

“What [the Madoff scandal] taught us that the limitation is of a system that relies on investors to protect themselves, ”said Barbara Roper, director of Investor Protection at the Consumer Federation of America.

Most of its investors were institutions and high net worth individuals – clients who, in the eyes of regulators, are considered sophisticated, Roper said.

There are some surefire red flags for consumers that their money manager has broken badly.

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

The Securities and Exchange Commission has one, the Investment Adviser Public Disclosure website, for financial advisers. The Financial Industry Regulatory Authority resource, BrokerCheck, lists brokers. (A person can appear in both.)

First, check whether the person is in either system and whether they are licensed or registered with a company. This means they have met a minimum level of credentials and background to work in the industry, Stoltmann said.

“If not, it could be a guy calling unsolicited from his mom’s basement,” he said.

It also makes sense to google the advisor’s or broker’s name to see if any news articles about past indiscretions or lawsuits appear.

The regulatory databases will also list any disclosures, complaints, arbitrations, or settlements involving the individual.

“If you have one or two complaints, there are probably dozens of other times when the advisor has been dealing with chicanery but not caught,” said Stoltmann.

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

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

Finding a fiduciary investment advisor can also help clients who want long-term financial planning to mitigate financial conflicts of interest that may be present in the advisor’s business model, she said.

However, the fact that these red flags are not initially present does not mean that consumers should be on their guard.

Madoff is the perfect example.

“You could have done all those things with Madoff and it wouldn’t have protected you,” Roper said. “He was like the darling of the financial world [before his con was exposed]

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

That makes it much more difficult for an advisor to steal money or take advantage of a client because the assets are not kept in-house, he said. Clients issue checks to a third party, not the consultancy.

Think of this as a firewall like two-factor authentication – the depository company has certain procedures for withdrawing funds, which often require contact with the customer, Stoltmann said.

“Where you kept your belongings was just not a topic that anyone had really thought about until the bomb hit Madoff,” said Stoltmann. “If that had happened, the scam couldn’t have spread.”

Customers can consult their regular account statements for this information. They can also call the custodian or log in to a custodian’s website for verification.

Investment promises or guarantees are another telltale fraud signal.

For example, the SEC accused Woodbridge Group of Companies and owner Robert Shapiro in 2017 of running a “grand” Ponzi scheme. The $ 1.3 billion fraud cost more than 7,000 people, mostly seniors, luring them on real estate investments with promised returns of 5% to 10% per year.

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 gain to charter planes, pay club fees, and buy luxury vehicles and jewelry.

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

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

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

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

But according to George Friedman, an adjunct professor at Fordham University School of Law and a former FINRA official, it could be a bad sign for an investor’s portfolio to stay well below the usual stock and bond benchmarks.

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

Hyper-trading activity, as outlined in an investor’s statement, is another telltale sign. Such an account churn generates fees and commissions for advisors, but hurts the client financially.

Own investments – for example, owning a mutual fund managed by your brokerage firm – isn’t necessarily a fraud signal, but can be a sign that an adviser or company is making money at your expense, Friedman said.

“I would check account statements every month,” he said. “If you see anything funny or unusual, it’s a flag.”

Of course, investor statements can be garbled to conceal such information.

Unsatisfactory or delayed responses to customer inquiries should prompt customers to escalate their case to the company’s compliance department.

Being asked to communicate outside of a consulting firm’s official channels, such as corporate email, is also a major red flag, Roper said.

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

“If you don’t understand, that’s a bad sign,” Roper said. “If it [investment] prospectus seems to confuse rather than clarify, it is a bad sign. “

“People want to believe that there is a great investment opportunity that they have been lucky enough to have,” she added. “It’s as old as time, the convincing con man who can persuade anyone to buy the panacea elixir.”