Could You Spot a Ponzi Scheme? Bernie Madoff Speaks.

Personal Finance
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Bernie Madoff was arrested in December, 2008 after authorities uncovered that his firm had perpetrated the largest financial fraud in U.S. history. Today, Fox Business Network’s Adam Shapiro will be conducting an exclusive interview with Madoff, to try and uncover some of the motivations behind his scheme, as well as any other players who may have known about the fraud but remained silent over many years.

Among the many reasons that this fraud was able to go for as many years as it did, is the fact that nobody had taken the time to look closely at Madoff’s registrations and custodial relationships. One would have noticed that he had not registered with the SEC until 2006 and had never used a third party custodian to oversee client assets. NerdWallet built its ‘Ask an Advisor’ platform to uncover these exact kind of issues before you start working with a financial advisor, and ensure that you have full information before handing your money over for management and safekeeping.

We had a chance to speak with Adam before his interview with Madoff, and he answered a few questions about the importance of continuing to follow this story, and how investors can avoid falling prey to this sort of scheme in the future.

NerdWallet: Why did you feel it was important to talk to Bernie Madoff now? What has changed in the years since he was sentenced?

Adam: Some of Madoff’s employees are scheduled to stand trial this fall.  Right now only two people are in jail, Bernie and his brother Peter, with two others still engaged in legal proceedings. The actual dollar amount of the crime was $65 Billion on paper (based on Madoff’s fraudulent returns) and $17 Billion in actual capital. Madoff says most of his clients’ original investment capital has been recovered, but this is not true.  Tens of thousands of investors invested money through the feeder funds that allowed him to keep the Ponzi Scheme alive, and it is doubtful those investors will get anything back.  Average middle class investors were wiped out because of this and they still seek justice.

NerdWallet: You’ve been following the Madoff case since the beginning – what do you think should have been the single biggest red flag to Madoff’s clients that his activities were fraudulent?

Adam: Madoff had several different kinds of clients. The average investors had no real way of determining if Madoff was a fraud.  Their account statements were all fraudulent. The only thing that may have raised a red flag for those average investors was the month after month positive returns their accounts posted even when markets were down.  The financially skilled investors, the hedge funds and the people who ran those funds, should have known.  In some cases it appears they did know something was wrong.  For instance, JP Morgan Chase is accused in the trustee’s multi-billion dollar suit against the bank of knowing that some kind of fraud existed at Madoff, but failed to take appropriate steps to warn the US government or bank clients to whom it was selling investments linked to Madoff. The bank actually pulled all of its private Madoff investments, around $270 million dollars, in the fall of 2008 and reported a possible fraud to authorities in the United Kingdom.  JP Morgan, however, never put a freeze on Madoff’s account at the bank in which money flowed in and out despite the fraud warning.

NerdWallet: How can investors spot a Ponzi scheme? Do you think that there are other investment advisors today who are actively running Ponzi schemes on the scale of Madoff?

Adam: Spotting a Ponzi scheme is not easy, but when working with a financial advisor, you can ask a few questions that may help.  First, what kind of returns has the advisor shown over several quarters?  Were those returns too good to be true? Meaning, did they out perform comparable investment funds or advisors?  Secondly, will the investment advisor explain clearly so that you understand how your money is being invested?  Bernie never gave a clear or easy to understand answer.  If the advisor is trading in securities, you can ask who are the counter parties with whom the I-A is transacting and who is the custodian of the securities.  Ask the advisor who is clearing transactions and if they say that they are self-clearing, that should raise a big red flag.  Another very easy thing to do is ask the investment advisor who audits their books.  Is it a nationally recognized firm? Finally, call the SEC and find out if the firm or the advisor is actually registered with them. Madoff did not register with the SEC until 2006.

NerdWallet: What are you anticipating to come out of your upcoming conversation with Madoff? What type of questions do you plan to ask him?

Adam: I will be talking with Madoff about what he says is the complicity of various banks.  He claims that officers at several banks were aware he was a fraud, but he has never explained exactly how those officers or banks were complicit in his crime.  Perhaps he will name some names.  I plan to ask several questions about one bank in particular, but since my discussions with Madoff regarding that bank have been off record, I am reluctant to share my questions with you at this time. Stay tuned!

Do you think you could spot a Ponzi Scheme? Let us know in the comments what questions you would want to ask Bernie. And when you’re ready to ask questions of and work with a financial advisor you can trust, visit our ‘Ask an Advisor’ Platform.

 

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