By John Drachman
Earlier this year, investment fraudster Bernie Madoff was refused compassionate release due to illness after serving 11 years of his 150-year sentence.
Yet, even with the passage of time, the simplicity and brazenness of Madoff’s Ponzi scheme more than a decade ago still has the capacity to shock and amaze. After all, Madoff had confessed to running a $65 billion financial fraud, the largest in U.S. history. Without investing a penny of his own money, he had convinced thousands of trusting clients to invest their savings with him for promises of outlandishly large pay-outs using funds from more recent investors. And so it went until the day his particular pyramid collapsed.
As the scheme’s namesake, Charles Ponzi noted, after investors would give a small amount “as a lark” and received the returns promptly they threw caution to the wind and gave him all their money. In the words of one court: “The effect of such prompt payment, of course, was to convert every investor into a missionary spreading the word of the enormous profits which could be speedily attained with no discernible risk of loss.”
If someone offers you a guaranteed return “with absolutely no risk,” that would probably be a dead giveaway that some scheme was afoot. Other signs of trickery though may be harder to see and just as destructive. Here are some of the other tells that an investment claim is ringing hollow.
- Too consistent returns. Every investment return fluctuates with market conditions over time, especially if the underlying security is pegged to an index. Foreign-domiciled investments for example that generate above average yields may be subject to certain tax and filing consequences that haven’t been disclosed to you. Conclusion: Beware.
- So-called “secret sauces.” Hidden or complex strategies that cannot be explained may be inexplicable for a good reason: The investment is crooked. As a rule of thumb, avoid investment ideas that lack the documentation required to provide you with a clear understanding as to how the investment actually works.
- Shoddy paperwork. Account statement errors can signal your money isn’t being invested as promised. You may also find that other accounts have been opened in your name without your authorization. If your product seller provides lots of excuses as to why you can’t review information about the investment, you’re better off taking a pass.
- Missing payments. Difficulty cashing out your investment can be a problem, especially if you were told it was readily liquid. Some fraudsters may even encourage participants to “roll over” their payments instead to obtain ever higher “returns.”
The Bottom Line
If you suspect investment fraud, bring your concerns to a professional who can help you determine the proper course of action. However, getting off on the right foot with an investment advisor from the beginning is relatively simple. The Financial Industry Regulatory Authority, Inc. (FINRA) offers a free tool to prospective investors called BrokerCheck that provides you with the background and experience of financial brokers, advisers and firms before you even have to make an investment decision.
John Drachman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.