Madoff-style scheme reported in UK - how to avoid fraudulent investments
Brian Dennehy
Earlier this week the UK media reported an £80m Madoff-style Ponzi* scheme (full story), involving more than 800 investors. There are always fraudsters out to dupe investors, and here are some pointers on how to spot a Ponzi scheme or other investment scam - no one pointer is full proof, all should be considered:
Beware of promises of unrealistic returns. If anyone appears to be offering returns much higher than the building society, say 5% and above, and suggests such returns are secure or guaranteed, be very wary. If it appears too good to be true, it probably is.
Don't rely on word of mouth. It is often said that a personal recommendation is preferred. The reality is that a plausible conman is highly effective at building trust and encouraging juts such recommendations.
Don't rely on longevity or reputation. The Madoff organization was founded in 1960, and US investigators apparently found evidence of misconduct as far back as the 1970s. He was so successful in covering his tracks that apparently even the likes of HSBC and Banco Santander suffered losses.
If you don't understand, don't invest. You must ask detailed questions and expect clear answers. When Madoff was asked by prospective investors how he achieved his remarkably steady returns he said it was a secret. If you don’t understand an investment, and it can’t be adequately explained to you, walk away.
Who are the auditors. It is the job of auditors to certify financial statements. Find out who are the auditors for the fund manager or scheme, and ask them directly when an audit was last carried out and whether it was satisfactory. Although Madoff “managed” over $50bn in funds, the auditor was unknown, hard to locate, and only had three employees.
Check with the regulators. Last but not least, is the business regulated? Check the FSA register on their website, www.fsa.gov.uk, or ring 0300 500 5000. In particular ask who cheques would be payable to, and do your homework on the FSA website.
Beyond that you must must must diversify, through a range of asset classes and fund managers. At least if you only invested 5% into a scheme that turned out to be fraudulent, and all was lost, it is not the end of the world.
Who is likely to be duped? A surprisingly wide range of investors. Sometimes it is the idle rich and those that have more money than sense – greed is a powerful motivator. Sometimes, as with Madoff, wealthy but busy individuals relied on advisers who were themselves duped. Occasionally those that are desperate will be seduced by the promised returns. Sadly, many investors into such schemes are naïve, have little knowledge of investment matters, and are too inclined to trust. A healthy level of skepticism will never go amiss.
*It is named after the 1920s con artist Charles Ponzi. The money of recent investors is used to pay healthy interest to earlier investors, thereby building trust. But in reality there are few if any underlying assets, as these have been stolen, and the scheme eventually collapses when there is not enough money left to pay the promised returns or pay those that wish to withdraw.
Date: 22.07.2009