Most investors at some level fear being the victim of a scam or Ponzi scheme and losing some or all of their investments and retirement security. Bernard Madoff and his multi-billion-dollar Ponzi scheme have put this fear into the modern consciousness. However, if you follow the below steps you can either completely avoid a scam or catch it very quickly. The good news is there are very few people perpetrating these scams so the odds are low you will be a victim, but of course will want to take these steps to avoid being in that unfortunate small group.
Bad Actors
There are two kinds of bad actors who rip people off: Unlicensed “advisors” and licensed financial advisors. More crime is committed by unlicensed advisors, so when you look to invest only use someone who is licensed and regulated by the two primary regulators in the U.S. This article is very helpful to understand how to perform due diligence on a licensed financial advisor. To reiterate, never invest with someone who is not regulated, or if you are considering a private investment directly with a CEO or founder, have a licensed financial advisor and attorney review the deal.
Two Kinds of Scams
There are generally two kinds of scams. First is a Ponzi Scheme, which is a fake investment. It literally does not exist, and this is what made the Madoff case so egregious. He literally did not invest client’s money at all, he used the money for personal use and paying back earlier investors with fake profits and fabricated every single client statement. From the lessons learned from Madoff, this kind of scam is easier to detect.
The second kind of scam is when you invest with someone, generally it is with a licensed financial advisor, and at some point, in the future they somehow divert the money into something you did not authorize. It could be into a legitimate investment and they don’t tell you, which is a crime usually anyway, or it could be into their own pocket, also obviously a crime. This kind of scam is harder to detect, and often can’t be found out until after the fact but can be discovered quickly and stopped from escalating.
Prevention and Do This Every Quarter
To prevent yourself from unwittingly investing in a Ponzi, first make sure there in an independent bank or custodian that holds onto the security or cash in your account, that is separate from the advisor. This did not exist in the Madoff Case. Second, if the investment is a secret or “black box” strategy, make sure a large, well-known public accounting firm is authenticating the investment results. This too was missing from Madoff.
In the case of an advisor diverting your funds without your permission, every quarter independently check with the custodian of your funds to compare your statement to what they tell you over the phone is in your account. This is especially true if you fully delegate investment discretion to your advisor. Use Google to find the headquarters phone number of your custodian and call them. Do not use the phone number provided to you by the advisor or on your statements, as fake statements are how some recent scammers have perpetrated their crime for years. If what the customer service people tell you is in your account does not match what is on your statement, then you likely have a problem.
What to Do if You Think You’ve Been Scammed
If you are the victim of one of these scams, call your attorney immediately. Your attorney will likely tell you to call the local authorities to open an investigation. Make sure you can access all records and statements given to you the scammer as you’ll need to provide them to authorities. It will give you some comfort that authorities have great experience in prosecuting such cases, should you be in this situation.
To reiterate, the number of financial scams being run are small in number and the odds are extremely low you will ever be a victim of one, and even lower if you are using a licensed financial advisor. However, they are perpetrated by both licensed and unlicensed people, so you’ll want to take these easy steps to minimize you being one of the very small percentage of investors taken advantage of.
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