Scam of the day – January 18, 2014 – Investment advice from Bernie Madoff

Convicted Ponzi schemer Bernie Madoff who stole 50 billion dollars from unsuspecting victims may be the last person from whom you would accept investing advice, but in fact, his advice, as contained in a recent jailhouse interview Madoff gave to the Wall Street Journal does have good advice for people hoping to avoid the fate of Madoff’s many victims.  As you may remember, Madoff did not invest any of the money he received from investors who gave him money.  Instead, he used the money for his own purposes and paid off older investors with money received from newer investors.  Ultimately, this house of cards came toppling down, as it does with all Ponzi schemes when too many people ask for their money and the fraud becomes exposed.

TIPS

With great “chutzpah,” in the interview, Madoff blamed his victims for their losses.  He said that his investors were “sophisticated people” who should have known better.  “People asked me all the time, how did I do it.  And I refused to tell them, and they still invested.  Things have to make sense to you.  You should ask good questions.”  And about this he is correct. No one should ever invest in anything that they do not totally understand.  In Madoff’s situation, with 20/20 hindsight we can see that his investment strategy was impossible, but investors should not have relied on him.  They should have tried to understand the strategy and if they could not understand it, which no one would have been able to do, they should not have invested.  In addition to Madoff’s advice, I would also warn you against ever investing with an investment adviser such as Madoff who both makes the investment decisions and also holds the assets.  These activities should be divided between an investment adviser and a separate broker-dealer who actually holds the investments.  Had this elemental rule been followed by Madoff investors, they would have immediately known that there were no investments.

Scam of the day – December 30, 2012 – Former LA police officer charged in investment scam

Two weeks ago a former Los Angeles police officer was arrested on investment fraud in regard to a phony real estate investment scam.  Among the victims were thirteen present Los Angeles police department employees including four detectives who should have known better.  This scam is a good example of what is called affinity fraud where people put undeserved trust in someone offering an investment opportunity because that person is “someone like me.”  Affinity fraud works because people trust other people who may share a common bond.  Bernie Madoff preyed upon Jewish charities and individuals who trusted them because he shared their religion.  Brad Bleidt, another Ponzi schemer, scammed investors who trusted him because, like him, many of his investors were Masons.  The list goes on and on.  Scammers take advantage of every connection they can make with their victims to gain their trust and then steal their money.

TIPS

Merely because someone may share a common bond with you, whether it is race, religion or membership in a fraternal organization, you cannot trust that person when it comes to investing your money.  Remember my motto, “trust me, you can’t trust anyone.”  Before investing in anything, you should confirm that the investment and the investment advisor are legitimate.   You also should make sure that you truly understand the investment.  Bernie Madoff’s victims did not understand the type of investing strategy he employed.  If they did, they would have seen that it was flawed.  You can find detailed information about how to evaluate investments and investment advisors in my book “The Truth About Avoiding Scams.”

Scam of the day – September 24, 2012 – Bernie Madoff update

Bernie Madoff, the foremost Ponzi schemer in history is now serving the third year of his 150 year sentence in a federal prison in North Carolina.  His victims, many of whom lost their entire life savings have continued to feel the pain of his criminal acts  However, quietly and often out of the news, Irving Picard, the trustee appointed to liquidate Bernard L. Madoff Investment Securities and to attempt to recover funds on behalf of the victims of Madoff has been having some success.  Recently, Picard sent partial reimbursement checks ranging from $1,784 to $526.9 million dollars and totalling 2.48 billion dollars to 1,230 former customers and victims of Madoff.  The average payout of this distribution was 2.02 million dollars.  This brings the total amount recovered from various sources including insurance and settlements to 3.63 billion dollars.  It is expected that 44% of the victims with valid claims will end up totally compensated for their losses, which is amazing for scam victims

TIPS

The best way to not be swindled is to not be taken in the first place.  Madoff’s scam epitomized two common scam dangers.  The first is affinity fraud.  People tend to trust people who are “like them” without questioning what is being proposed to them.  Someone “like us” would never steal from us is how the victims think.  The truth is that scam artists, the only criminals we call artist,s make it a point to play up whatever they have in common with their victims, such as race, religion or ethnicity to get their victims to trust them instead of doing the kind of due diligence you should do before getting involved in any investment.  The second scam danger prominent in Madoff’s Ponzi scheme was that people who invested in it did not understand how the investment worked.  You should never invest in anything that you do not fully understand.  No one understood what Madoff was doing because, frankly, if they did, they would understand that it couldn’t work.  You may miss out on some good investments by limiting your investments to things you understand, but you won’t be a victim of a scam.