Richard Breeden, the special master administering the claims of the victims of convicted Ponzi schemer Bernie Madoff who stole 50 billion dollars from his victims has recently indicated that the number of claimants has risen to 51,700 seeking redress from the 4 billion dollars of funds gathered by federal prosecutors through recovery against Madoff related forfeitures. In addition, there is another 9.8 billion dollars of funds recovered by bankruptcy trustee, Irving Picard. available through recoveries and settlements that will be used to compensate victims as this case which goes back to December of 2008 drags on. Although many of the victims will get some funds returned to them, they will, by no means, be made whole for their losses. This is a good time for all investors to look back at the mistakes that were made by Madoff’s victims and learn how to avoid them. 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.
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 to achieve and 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 and that Madoff’s investment strategy was a scam.