Red flag of Danger

I recently had a meeting with a few new clients working on a retirement plan and they had the same concerns that most people today have, a “Madoff” incident. This is a very reasonable and credible threat. This article will teach you all about the “Madoff” incident (originally called a “Ponzi scheme” which was named after the late Ponzi who made off with millions in the 1920’s), how to detect it, and what should you do if you spot one. It is actually very easy to avoid once you know how it works.

What is a “Madoff/Ponzi scheme”?:

A “Ponzi Scheme” is a way to trick clients into taking investable assets to almost non-existing
Investment packages (Madoff used this in a form of hedge funds). It first began with Charles Ponzi back in the early 1920’s. He enticed investors by investment fraud attorney offering returns that no other investment can do (which at the time were coupon stamps, NOT the stock market). How it is financed is rather simple, the schemers pay investors from their own money or money paid up by other investors. The scheme pays itself and the schemers. This gave Madoff an excellent opportunity with hedge funds.

Hedge funds are registered thanks to “Blue sky” laws (a law that all investment that someone in the public can put assets in must be registered by the government). However, Madoff used hedge funds because how it is regulated. As of this writing (and what most people do not know), hedge funds are NOT regulated like normal investments. In fact there are only regulated in the sense that it has to be just registered and apply by the trading rules, THAT’S IT! However, the SEC has stepped in to say they will regulate the hedge funds which lead to massive closing of many hedge funds which can only leave you guessing why…

How they usually get caught:

1) The one selling the products disappear taking investment money with them (this is the obvious one)
2) Schemer fails to validate claims
3) Market panics such as the crash of 2008 (when everyone wanted out of their investments). This is the obvious one since if someone like Madoff “invested” your money and he doesn’t seem to have it when you ask for it, this is a red flag.
4) Self collapse. This is usually caused by self liquidity or simple laziness.

Red Flags you should be aware of:

1) When give discretionary authority and when the investment adviser gives their own version of the statements rather than a broker/dealer or custodian account, a lot can go wrong and fast. Madoff had this combination.

2) If you can’t research it, buy it from someplace else, or see the quotes on a entirely different service (ie:,, etc.) then be concerned!

What to do if you expect something:

First and foremost follow the golden rule “if it sounds too good to be true, it is”. Any investment that is correlated in the markets has (to some extent) volatility, even bonds! So, like Madoff, if some adviser shows an unbelievable track record that is consistent, investors beware! The few track records that have consistency are CD’s and fixed/multi-year annuities (or index annuities with a guaranteed minimum) because that is how these products are made. Treasuries and Municipal bonds are relatively safe due to the full-faith and taxing power but it’s not a guaranteed made consistent product mentioned before, it’s still volatile. If it’s a hedge fund or a mutual fund that an adviser is practically guaranteeing, investors beware.

NOTE: It is also illegal in general for an adviser to promise results in the markets. If they do, report them to the state attorney general/FINRA/SEC.

Look up the product. Investments such as hedge have a notorious reputation of being sneaky within the adviser community (don’t get me wrong, there are a lot of reputable hedge funds with great results that I have personally recommended but there are many schemers within that community).

So the next time you invest with someone that is promising you the world, do your homework.