On Dec. 11, 2008, Bernie Madoff confessed to basically a giant Ponzi scheme involving, in Madoff’s own estimation, $50 billion. He was promptly arrested and charged with 11 criminal counts, including securities fraud, wire fraud, mail fraud, money laundering and perjury.
Madoff’s Victims (a few among the thousands)
• The man who considered Bernie Madoff the son he never had. He lost approximately $500 million and is probably the largest single Madoff victim.
• Madoff’s best friend and mentor of more than 40 years (Madoff delivered the eulogy at his funeral in 2005).
• The Wunderkinder Foundation, a Steven Spielberg charity.
• A 60-year-old widow who invested everything she had with Madoff.
The basic tips on how to avoid being taken in by an investment scam haven’t changed in more than a century (Charles Ponzi began his fraud in 1920) and they apply to all investors, the rich and the notso- rich, the smart and the not-so-smart, the connected and the not-so-connected.
1. If it sounds too good to be true, it probably is. Be alert for promises like “guaranteed return,” and “can’t lose.” Legitimate investment professionals do not promise sure things. (Bernie Madoff did.)
2. If a salesperson mentions religion or drops names of prominent people who have invested, show them the door. An investment should be able to stand on its own merits, not on who owns it. (Who wouldn’t want to invest with Madoff, the man handling investments for Steven Spielberg’s foundation? Today — no one.)
3. Friends can and will scam you. (Just ask Madoff’s best friend of 40 years, Fred Wilpon, who had hundreds of millions invested with Madoff. Wilpon is reported to have said that he is not sure if he feels worse that he lost all of his money or that it was his friend who did it to him.)
4. High returns almost always mean high risk. Consider it a red flag if a salesperson promises you a 40 percent return with virtually no risk. (It is almost impossible to have the returns that Madoff reported.)
5. Don’t be rushed into investing your money. No legitimate investment adviser will force you to make an investment decision on the spot. Take time to check it out. (Many who sought to invest with Madoff were told to write a check on the spot with no questions asked.)
6. If you don’t understand the investment, don’t invest. Investment strategies and financial products should be clear and understandable. (Most Madoff investors could not tell you what, exactly, they were investing in or what Madoff’s investment strategy was.)
7. Don’t put all of your eggs in one basket. Diversification is one of the most fundamental investment principles. (Stories abound of people who invested their life’s savings with Madoff and lost everything.)
8. Monitor your investments and ask tough questions. Insist on regular written reports and then check them. (Madoff reportedly told a potential investor who asked too many questions, “I don’t need your money, and I don’t discuss my investments.” When pushed, Madoff told another potential investor about his auditing firm — two people in a 13-by-18-foot office. Madoff said he was trying to save his investors a few pennies.)
You may be saying to yourself, “Nothing new here, I have heard all of these tips before.” You have. So had all of the people who invested with Bernie Madoff. If they had been smart enough to follow them, they could have avoided being part of the largest Ponzi fraud in history.
Laurie S. Hart is a shareholder with the law firm of Callister Nebeker and McCullough in Salt Lake City. Her practice focuses on business transactions and estate planning. Visit her on the Web at www.cnmlaw.com.
Please note: The preceding article is offered for informational purposes only, and should not be construed as legal advice or as pertaining to specific factual situations. Consult an attorney concerning your own needs and circumstances and to obtain any legal advice with respect to the topics discussed in the article.
Featured in the July/August 2009 issue of Zions Bank’s Community magazine.