The $64.8 billion scam

The 64 billion in the title marks the largest Ponzi scheme in history. (A Ponzi Scheme is when an investment manager takes your money and instead of investing it, they give it as a return to an earlier investor.)


And you guessed right – the largest scam in history was run by Bernie Madoff.


He may have been the largest but he was by no means the only one, and the subject I want to talk about today is how to avoid being financially scammed.

The SEC had been investigating Madoff and his securities firm off and on since 1992, yet despite numerous red flags, they never dug very deeply. As Diana Henriques wrote in "The Wizard of Lies: Bernie Madoff and the Death of Trust”: “The lie was simply too large to fit into the agency's limited imagination".

In the end, it was Madoff himself who broke under the pressure in 2008, confessed to his two sons, and was arrested.


So how did his scheme grow too large for the SEC’s “limited” faculties?

Madoff had real investing chops. He an expert in market making and a pioneer in electronic trading.

A couple of emails ago, I recounted the case of Elizabeth Holmes and her use of ‘marquee names’ to lend legitimacy to her big fat lie of a company, Theranos. Madoff didn’t need that: he was his own marquee name.

He cultivated an image of exclusivity, often turning clients away. He created a front of generosity, wooing investors through his charitable work.

He had no scruples, however, to demolish organizations like the Elie Wiesel Foundation for Peace and the global women's charity Hadassah – who both lost most of their funds when Madoff went under.


So, if everyone was fooled, how can I claim that in the space of one short email I’ll teach you how to avoid being scammed?


Because there are real warning signs and all you need to do is heed them.


Here are the main red flags:

1. Is the fund transparent? Can you check it out and cross reference the info you’re given?

2. Does it have an external accountant and is it a known name? BM's fund was notoriously vague about its accounting and used an internal accounting firm (which had exactly three people in it).

3. Does it always deliver positive returns? That in itself is very suspicious.


Most important–and I know I’ve said it in previous emails- even if you do think this fund is legit, don't put all your money in one basket.

DIVERSIFY.

Spread your hard earned dineros with different money managers. Then, in the rare case one of them is a thief (most of them are honest), you won't lose all of it.

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