By now, everyone has heard about the now infamous Bernie Madoff and his (alleged) $50 Billion Ponzi scheme.

As if the stock market meltdown wasn’t bad enough with investors taking 40% to 50% losses in their portfolio, we have this guy to thank for adding one last dastardly deed.

Investor confidence in Wall Street couldn’t get any worse and you decide to finally come clean now.  Thanks man, nice move!

Fortunately, no one I know has been taken in by this crook, but there are many unfortunate souls who have been.

But the big problem appears to be that we’re running the gambit when it comes to his swindled investors.

Who Lost Money in Madoff’s Ponzi Scheme?

1. Everyday people, not just millionaires – the story of Arther and Joan Sinkin, a retirement age couple who lost their life savings is the most disheartening.  Those people who read their paper statements each quarter thinking they were set for life are now wondering how they will pay next months utility bill.
2. Charities – Mort Zuckerman’s charitable trust, Steven Spielburg’s Wunderkinder Foundation, and the list will probably go on and on.  Some of these charities have already closed their doors because they no longer have the funding to operate
3. Corporations – even some of the most respected names in foreign financial firms got suckered in.  Banco Santander, Royal Bank of Scotland, and Maxam Capital Management are just a few that will post 100 millions of dollars in losses.
4. Politicians – Senator Frank Lautenberg maintains a family charitable trust that also did business with Madoff.  It’s believed the bulk of the trust’s monies were managed by Madoff.

From my research, many of the investors or charities that lost money with Madoff went through a money manager who outsourced the money management responsibilities, or a so called “fund of funds“.  In other words, someone like Mort Zuckerman paid a money manager to maintain a diverse portfolio of other money managers to run his money.  Can anyone say due diligence here?

How Can You Prevent Being a Victim of an Investing Related Ponzi Scheme?

Truth is, there is no 100% guarantee that you won’t.  If the Security and Exchange Commission (SEC) didn’t pick this up on their radar, how could you stand a chance against such a blatant yet meticulously crafted lie?

1. Due Diligence.  If you don’t do you’re own thorough research, you will be get taken to the cleaners.  You might get lucky, just like Madoff’s early investors did when some of them took cash distributions or elected to take a few payouts here and there, but as enough time passes, you will eventually get hit.  Several firms, like JP Morgan, elected not to do business with Madoff because they could not replicate his work based upon his apparently diligently kept records.
2. No one wins every poker hand.  Madoff’s performance record was something like 214 quarters with a positive return with only 2 quarterly losses.  This didn’t raise a warning flag?  If you played poker in Las Vegas against a guy who won 214 out of 216 hands, wouldn’t you be just a tad suspicious?  I think so, and these records are available when doing the background research of a fund manager.
3. Be aware of shady stipulations.  Madoff supposedly would not allow face to face meetings with clients.  Say again?  A money manager who wants nothing to do with you but wants your money?  Next!
4. Stick with name brands unless you’re a professional.  A firm like Vanguard or Fidelity couldn’t stay in business for as long as they have if this was their standard operating procedure.  Someone, somewhere, would have flipped into whistle blower mode to cash in on the scam, or some uber-anal retentive investor (like me) would have found discrepancies in the numbers.
5. If it’s too good to be true, it is.  We’ve heard it over and over again, but it never hurts it to repeat it once more in this type of story.
6. Don’t fall for the nicest guy on the block routine.  Madoff was supposedly one of the nicest and kindest guys out there.  He wooed clients from all areas of the globe on ski trips, country clubs, you name it, and you could probably find him there shaking hands with a smile and a promise.  In fact, many of his clients were recruited from social gatherings where he was viewed as just another socialite with a great resume and a penchant for making people boatloads of money.
7. Diversify, diversify, diversify.  Your parents always told you “never put all your eggs in one basket”.  If this isn’t a prime example of that old adage, I should give up investing altogether.  This is especially true if you’re an older investor who is reliant upon this money for your livelihood, with little to no chance of re-entering the workforce.  I’m certainly no fan of index funds, but I would rather see poor returns than no returns at all.

The inevitable truth is the guys like Bernie Madoff won’t disappear, even after such a blatant disregard for the money management profession.  They’re out there executing new schemes as I write this blog tonight, and even if you come across this advice one year from now, or even a hundred years from now — they’ll still be lurking about trying to make a quick buck by stealing from you.

So please, do your homework so someone like me isn’t writing a blog about you once the house of cards comes tumbling down.

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