There is a certain fascination in watching the growing list of sophisticated investors who were taken in by the alleged $50 billion investment fraud perpetrated by Bernie Madoff. It's the kind of weird emotion that makes people stop to gape at the scene of a traffic accident, or follow a fire engine.
The names of those scammed range from Steven Spielberg and Jeffrey Katzenberg of Hollywood fame, to some of the world's largest banks like
. And it also includes hundreds of retirees and many charitable foundations as well as the country-club set in Palm Beach and New York.
How could so many wealthy, sophisticated investors (and investment advisers) have missed the now-apparent red flags? And, more importantly, if they could fall victim, how can
, the ordinary investor, make sure you don't get involved in a scam?
The answer is, in short:
If something is too good to be true, it can't be true
You've heard that saying many times. In fact, many of you write to me asking about various propositions, ranging from investment proposals to debt-reduction programs, and all sorts of "get rich faster" schemes. The very fact that you have doubts in your mind is the first tipoff.
In the case of Madoff, the investment returns he reported weren't so outrageous as to trigger inquiry -- just a small percentage
month. But that consistency, in itself, should have been a warning. Even Madoff's proclaimed strategy of option-writing doesn't give that consistent a result. And now it's been revealed that, given the size of his investment funds, it would have been impossible to execute all those options trades in a relatively limited marketplace.
Sure, hindsight is 20/20. But complacency and greed are the enemies of investment success. No one is smarter than the market every single moment. That is, no one except scam artists.
It may not be easy to prove your doubts. But just because you can't "put your finger" on the worry, doesn't mean you should get involved. Yet that's just what so many people do: ignore their own doubts and figure they're just not "smart enough" to understand this great deal. In fact, that's what con artists rely upon.
And by the time the fraud unravels, there may be little in the way of assets to recover, as the Madoff investors are learning to their dismay. Securities Investor Protection Corporation may cover some losses (up to $500,000) because of theft from brokerage accounts. But that SIPC insurance may not apply to all the Madoff accounts. And certainly billions of dollars are down the drain.
Fraud, Greed or 'Unsuitability'?
Sometimes investment losses aren't produced by fraud, but they are accelerated by both greed and ignorance. People
to believe they can outperform the market. And some newsletter writers, brokers and advisers are only too happy to make money off that desire. Then who is to blame?
specializes in representing investors in lawsuits. He notes that investors who haven't actually been the victims of fraud might also have legitimate claims these days. Older investors who have lost a significant portion their assets might be able to claim their advisers sold them funds or investments that were not "suitable" for their situation.
Says Stolzmann: "Advisers are often breathtakingly irresponsible in either concentrating a client's account all in equities or in a handful of individual securities. It's one thing for a 25-year-old to be invested entirely in equities, but quite another for a 75-year-old retiree to be exclusively in stocks." Investors could recover losses and attorney's fees if they can show that an adviser failed to appropriately allocate and diversify portfolio investments.
He points out a little-known fact that most investors waive their right to sue and agree to arbitration when they sign papers to open their accounts. While arbitration is theoretically a place where investors can represent themselves, a good attorney can help when large sums of money are involved.
Check Before Writing a Check
It's far wiser to be sure than to sue later. So here are some ways you can check the records of the people who might ask for your money for an investment opportunity.
- FINRA.org: This is the self-regulatory body of the securities industry. There's a tool called "BrokerCheck" that allows you to look up a securities firm or individual broker, and check for securities violations in the past.
- AdviserInfo.sec.gov: Since investment advisers do not necessarily have to be registered as brokers, you'll also want to check out the SEC's Web site for any registered investment adviser's background. Don't give your money to anyone who isn't registered with the SEC.
- Google: This is the simple way to start checking someone out. Just Google the name or company name. You may find postings on a complaint board, alleging fraud or mismanagement. That's just word-of-mouth, of course, but it is a warning that should trigger further investigation.
But even as you do a checkup, keep in mind that not all brokers and advisers are registered, and not all activities -- especially those outside the financial-services industry -- are revealed in these registrations. In other words, trust your instincts. Don't follow the crowd over the cliff just because "everyone else is doing it." Your mother taught you that in third grade. She was right! And that's the Savage Truth.
Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated. She was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. Savage currently serves as a director of the Chicago Mercantile Exchange Corp.