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Here’s how investors can spot the next Bernie Madoff


Bernie Madoff exits federal court March 10, 2009, in New York.

Mario Tama | Getty Images News | Getty Images

Bernie Madoff was perhaps the starkest reminder that financial advisors can go rogue — and, when they do, people stand to lose a lot of money.

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

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

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

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Madoff’s death, reportedly of natural causes, is a sobering reminder of the investor-protection shortfalls that persist more than a decade after his fraud was exposed, according to investor advocates.

“Nobody is immune from fraud,” said Andrew Stoltmann, a Chicago-based attorney who represents consumers in fraud cases. “If Bernie Madoff can do it, anybody can do it.”

Limitations

Some have gone so far as trying 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 safety and then speeding away on a motorcycle to avoid prosecution for allegedly stealing $1.5 million from clients.

“What [the Madoff scandal] taught us is the limitation of a system that relies on investors to protect themselves,” said Barbara Roper, director of investor protection at the Consumer Federation of America.

The bulk of his investors were institutions and wealthy individuals — clients who, in the eyes of regulators, are thought to be sophisticated, Roper said.

Bad actors

Saul Loeb | AFP | Getty Images

First, check to see that the person appears in either system and that they are licensed or registered with a firm. This means they have met a minimum level of credentials and background to work in the industry, Stoltmann said.

“If not, it could be some guy cold-calling from his mom’s basement,” he said.

It also makes sense to Google the advisor or broker’s name to see if any news articles about past indiscretions or lawsuits appear.

The regulatory databases will also list any disclosures, complaints, arbitrations or settlements involving the individual.

“If you have one or two complaints, there are likely dozens of other times the advisor has engaged in chicanery but hasn’t gotten caught,” Stoltmann said.

Check for nefarious financial behavior like sales abuse practices, unsuitable recommendations, and excessive or unauthorized trading, Roper said.

“There are plenty of people out there who don’t have a problem,” she said. “So why not be safe and avoid those who do?”

Finding a fiduciary 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, she said.

Lessons from the ‘Madoff bomb’

Red flags

Investment promises or guarantees are another telltale fraud signal.

For example, the SEC charged the Woodbridge Group of Companies and owner Robert Shapiro in 2017 for running a “massive” Ponzi scheme. The $1.3 billion fraud bilked more than 7,000 people, mostly seniors, and enticed them with promised returns of 5% to 10% a year on real-estate investments.

Shapiro pled guilty in 2019 and was sentenced to 25 years in prison. The SEC alleged that he’d used at least $21 million for his own benefit, to charter planes, pay country club fees, and buy luxury vehicles and jewelry.

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

Consistently stable returns for investments other than, say, government bonds are also another lesson of the Madoff scandal, he added.

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

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