This week, while investors focused on the government bailout of AIG (AIG), Citigroup (C) and General Motors (GM), the post-Madoff crackdown on investment fraud continued.

From FBI Fraud Probe Aims at Westgate: Reports:

James Nicholson, who heads investment firm Westgate Capital Management, was arrested by Federal Bureau of Investigation agents on charges of alleged securities fraud stemming back to 2004. Separately, Paul Greenwood of Greenwich, Conn.-based WG Trading Co. and Stephen Walsh, of Santa Barbara, Calif.-based Westridge Capital Management, were also arrested for what could be a $550 million financial fraud. Mark Bloom, a former associate of Greenwood and Walsh, was arrested in another separate case, according to the FBI.

Nicholson apparently told investors he had $600 million to $900 million in assets under management, while the actual amount was closer to $100 million, according to a complaint by the Department of Justice. While he marketed his funds as having returns that were almost always positive, the actual results were much lower, the Justice Department alleges.

Nicholson's alleged scheme unraveled after the Bernard Madoff scandal came to light and several investors made redemption requests, authorities said. About two dozen received checks for a total of $5 million, but all of them bounced, the Justice Department said. Others attempted to redeem over $10 million without success.

The Justice Department arrested Nicholson, 42, at his home in New Jersey on Wednesday and charged him with securities fraud and bank fraud.

Greenwood, 61, of North Salem, N.Y., and Walsh, 64, of Sands Point, N.Y., were charged with conspiracy, securities fraud and wire fraud. The FBI alleges that from at least 1996, the duo ran a "fraudulent commodities trading and investment advisory scheme," which secured investor funds by marketing a "conservative trading strategy" that had outperformed the S&P 500 Index for more than a decade.

Read the full story.

This FBI probe follows the Securities and Exchange Commission's recent charges of alleged "massive" fraud by R. Allen Stanford.

Get Up to Speed on the Alleged Stanford Fraud

  • Feb. 12: Stanford Financial's CDs Probed: Report
  • Feb. 17: Stanford Financial Accused of 'Massive' Fraud
  • Feb. 18: SEC Charges Allen Stanford With Fraud (Video)
  • Feb. 19: Stanford Bank Seized by Venezuela, FBI Serves Civil Papers on Stanford, Photo Gallery: Stanford Scandal
  • Feb. 20: Questioning Stanford's Returns Could Get You Fired
  • Feb. 27: Stanford Financial Exec Arrested by FBI
  • With Madoff ( Photo Gallery), Stanford and now Westgate, how much do you know about protecting yourself from investment fraud?

    Here are several insights from TheStreet.com.

    From Protect Yourself in Post-Madoff Investing World:

    In the case of Madoff, the investment returns he reported weren't so outrageous as to trigger inquiry -- just a small percentage every 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.

    Read the full version of Protect Yourself in Post-Madoff Investing World

    From Five Ways to Avoid Getting Madoffed :

    Ask the advisor how often and by what means you can obtain an independent and verifiable statement of your investments. Here's why: If the investment advisor is also responsible for preparing and issuing customer statements and reports, then that should raise a warning flag.

    Read the full version of Five Ways to Avoid Getting Madoffed

    From Madoff Investors Missed Red Flag:

    Investors may have missed one major red flag that could have tipped them off that something was amiss at Bernard Madoff's now-infamous hedge fund: He acted as his own prime broker.

    Nearly all hedge funds use prime brokers, which provide critical back office functions, such as settling trades. Run by large banks, the prime brokers also frequently lend to the hedge funds and, if they start posting heavy losses, the prime broker may require them to post additional collateral. "There could not be a bigger red flag," says Gary Shugrue head of Ascendant Capital Partners, a fund of hedge funds based in Radnor, Penn. "The prime broker really acts as the custodian would at a traditional asset manager. It's where the money is."

    Read the full version of Madoff Investors Missed Red Flag.

    From Opinion: Madoff Implosion Is No 'Tragedy':

    Madoff was making 1% per month, year after year with no losses and nobody else on Wall Street or anywhere could explain his returns. Even Madoff didn't explain it.

    Plenty of people openly told the SEC and the media that he had to be either running a Ponzi scheme or doing something else illegally. Nevertheless, so many of these "sophisticated" investors piled their money into his fund. Many of them invested a huge percentage of their personal net worth, charitable trust, inheritance or future bequests to their heirs. What were they thinking?

    Many were just following their friends. Many were lazy. Many were stupid. Many were greedy. None of them stopped to think that Madoff's returns were literally impossible unless he was doing something illegal.

    Read the full version of Opinion: Madoff Implosion Is No 'Tragedy'.

    From Kass: Madoff Was Made Up:

    About three years ago, an investor of mine, who already was an investor with Madoff, came to me and asked my advice as to whether he should add to that investment. I requested and received his monthly brokerage statements. Now, I am very good with math, but after hours of analysis over a weekend, I could not understand how he generated his returns and suggested that he should withdraw his capital. (The investor discarded my advice and decided to add materially to his investment.)

    Read the full version of Kass: Madoff Was Made Up.

    More on MainStreet

    From Scam Busters: The 7 Greatest Ponzi Schemes:

    7. Charles Ponzi

    While Madoff has a punnier name (because he "made off" with his victims' money) this charismatic Italian immigrant gave the scheme its moniker. In 1920 he promised investors a 50% return in 45 days. Ponzi's plan was to buy postal reply coupons cheap from Europe and then exchange them for more than twice as much in the U.S. Instead, he paid his investors off with the new money that came in, about $15 million in nine months. Ponzi was exposed by a former Boston Post reporter he had hired for public relations. He was convicted of mail fraud and after being released from prison, was deported back to Italy in 1934.

    The Loot: $15 million (about $154 million in today's dollars)

    Read the full version of Scam Busters: The 7 Greatest Ponzi Schemes (on MainStreet).

    From Cramer: On Golden Ponzi: Madoff Scheme Akin to Social Security:

    Like Madoff's investors, Social Security's balance sheet is basically off the books, and Congress, playing the Madoff role, is using the Social Security fund as an ATM to fund pet projects, pay for earmarks, and cash in on boondoggles. And like Madoff, the last in will be among the first out of luck with Social Security. With more recipients and fewer contributors, Social Security is a Ponzi scheme that is headed for the same fate that has leveled Madoff investors. The Social Security's own 2007 trustee's report says that the fund could run out of money by 2042, and maybe sooner.

    Read the full version of Cramer: On Golden Ponzi: Madoff Scheme Akin to Social Security (on MainStreet).

    From Your Investment Fraud Questions Answered:

    Q: What regulations exist to protect investors?

    A: Securities laws guard against anyone making false representations to investors in connection with a stock sale. Criminal laws prohibit fraud. Investors also can file civil suits. Once an investor gets to this point, though, the battle may already have been lost.

    "Ultimately the best protection is to scrutinize any (investment) offer, because if it seems to be too good to be true it usually is," said Michael Budwick, an attorney with Meland Russin & Budwick in Miami. "Most of the protections come in after the investor has lost all his money."

    Read the full version of Your Investment Fraud Questions Answered (on MainStreet).

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    This article was written by a staff member of TheStreet.com.

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