This is how investors can spot the next Bernie Madoff

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

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

Madoff, who died in prison Wednesday at the age of 82, was the mastermind of the biggest investor fraud in U.S. history. His Ponzi scheme swindled tens of thousands of people up to $ 65 billion over four decades.

He had been serving a 150-year prison sentence after pleading guilty in 2009.

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According to investor advocates, Madoff’s death, according to reports of natural causes, is reminiscent of investor protection shortcomings that persist more than a decade after his fraud was exposed.

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

Regulators have expanded their control of advisors and brokers to identify investment frauds, experts said.

But from time to time, a thief slips through the cracks, sometimes in a dazzling way.

Matthew Piercey, an agent in Palo Cedro, California, who pleaded guilty to co-directing a $ 35 million Ponzi scheme, tried to flee the FBI in November using a submarine to hide underwater.

Some have even tried to fake their own death. About a decade ago, Marcus Schrenker, an Indiana advisor and pilot, did so by crashing a plane in Florida after parachuting to protect himself and then quickly riding a motorcycle to avoid prosecution for allegedly stealing $ 1.5 million. to customers.

“What [the Madoff scandal] he taught us that it’s the limitation of an investor-dependent system to protect themselves, ”said Barbara Roper, director of investor protection at the Consumer Federation of America.

The bulk of its investors were wealthy institutions and individuals – customers who, in the eyes of regulators, are believed to be sophisticated, Roper said.

There are some infallible red flags for consumers that your money manager has damaged.

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

The Securities and Exchange Commission has one, the Public Disclosure Investment Adviser website, for financial advisors. The resource of the financial industry regulatory authority, BrokerCheck, lists brokers. (One person can appear in both.)

First, make sure the person appears on either system and is licensed or registered with a company. That means they have met a minimum level of credentials and background to work in the industry, Stoltmann said.

“If not, it could be a boy screaming from his mother’s basement,” he said.

It also makes sense for Google to name the advisor or broker to see if news articles about previous indiscretions or lawsuits appear.

Regulatory databases will also list disclosures, complaints, arbitrations, or agreements related to the person.

“If you have one or two complaints, there are likely to be dozens of other times the advisor has engaged in teasing but has not been caught,” Stoltmann said.

Check for harmful financial behaviors, such as abusive sales practices, inappropriate recommendations, and excessive or unauthorized business transactions, Roper said.

“There are a lot of people who have no problem,” he said. “So why not be safe and avoid those who do?”

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

However, the fact that these red flags are not initially present does not mean that consumers have to lower their guard.

Madoff is the perfect example.

“With Madoff, you could have done all these things and he wouldn’t have protected you,” Roper said. “He was like the beloved of the financial world [before his con was exposed]. “

One of the lessons of Madoff’s multimillion-dollar fraud was to make sure his money is kept (that is, retained) in a third-party custody company, such as Fidelity or Charles Schwab, Stoltmann said.

This makes it much harder for an advisor to steal money or take advantage of a client because the assets are not kept at home, he said. Clients write checks to a third party, not the consultant.

Think of this as a firewall as two-factor authentication: the custodian company has certain procedures for withdrawing money, which often involve contact with the customer, Stoltmann said.

“Where he guarded his property was simply not an issue that anyone really considered, until the Madoff bomb came out,” Stoltmann said. “If that had happened, the scam would not have been able to proliferate.”

Customers can view regular account statements for this information. They can also call the guardian or log in to the guardian’s website to verify it.

Investment promises or guarantees are another telltale sign of fraud.

For example, the SEC accused the Woodbridge group of companies and owner Robert Shapiro in 2017 of running a “massive” Ponzi scheme. The $ 1.3 billion fraud landed more than 7,000 people, mostly seniors, and lured 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 alleged that it had used at least $ 21 million for its own benefit, to rent planes, pay country club fees and buy luxury vehicles and jewelry.

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

Steady, stable returns on investments other than, say, government bonds are also another lesson from the Madoff scandal, he added.

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

Loss of money is not necessarily a red flag in itself, especially if it occurs in a low market.

But it could be a bad sign if an investor’s portfolio tracks much lower than usual stock and bond indices, according to George Friedman, an adjunct professor at Fordham University Law School and a former FINRA official.

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

Commercial hyperactivity, as stated in an investor statement, is another telltale sign. This modification of accounts generates commissions and commissions for the advisors, but it harms the client financially.

Proprietary investments (e.g., owning a mutual fund managed by your brokerage firm) are not necessarily a sign of fraud, but they can be a sign that an advisor or company is making money at your expense, Friedman said. .

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

Of course, investors ’statements could be analyzed to hide this information.

Unsatisfactory or delayed responses to customer questions should cause customers to scale their case to the firm’s compliance department.

Roper said he was asked to communicate outside of an advisory firm’s official channels, such as the company’s email.

And, most importantly, understand your investments and just put your money into trusted money managers, he said.

“If you can’t understand it, it’s a bad sign,” Roper said. “If the file [investment] it looks like the brochure is designed to confuse rather than clarify, it’s a bad sign. “

“People want to believe that there is a great investment opportunity for which they have only been lucky,” he added. “It’s as old as time, the persuasive artist who can convince someone to buy the healing elixir.”