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Lessons learned from Madoff scandal
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By Douglas J. Guth
Senior Staff Reporter
A number of organizations and individuals from around the world were caught in the avalanche of Wall Street financier Bernard Madoff’s fraudulent investment schemes. Several unfortunate foundations, completely wiped out by the scandal, had to shut down operations permanently.
The full global impact of Madoff’s alleged bilking of over $50 billion is still to be determined. However, the lessons learned by the investment community must sink in immediately to ensure a fraud of this magnitude never happens again, maintain local experts.
David Millet, 36, a Cleveland-based private financial planner, attorney and investment adviser, believes the fallout of the scandal will place a spotlight on a part of the investment industry that has heretofore avoided government scrutiny.
The longevity of Madoff’s fraud (his “Ponzi” scheme lasted for decades) points to “a breakdown in regulators doing their jobs,” explains Millet.
While Madoff was registered with the U.S. Securities and Exchange Commission, notes Millet, the investment advisers funneling their customers’ money to him were not tied to any form of control.
Madoff, the founder of Bernard L. Madoff Investment Securities LLC, was arrested Dec. 11 after admitting to his board that the fund he ran was essentially a $50 billion Ponzi scheme, whereby later investors’ funds are used to pay returns to earlier investors.
According to The New York Times, several inconclusive regulatory investigations centered around the remarkable returns his investments garnered.
Those “red flags” were especially evident in the early part of the decade, notes Millet, when Madoff’s investments provided huge returns in a bear market. The well-heeled financier allegedly wooed many investors by promising consistent returns regardless of market activity.
In light of his arrest, the SEC in Washington, D.C., has ordered an internal investigation to determine how the agency could have missed so many obvious signs and ignored so many complaints over the years.
Increased regulation in the market is almost a certainty now, contends Millet. National experts have referred to the scandal as the “Enron moment” for hedge funds. A year after allegations of accounting fraud at defunct energy-trading firm Enron Corp., they explain, Congress passed the Sarbanes-Oxley Act, which set tighter corporate accountability rules for publicly traded companies.
However, it’s the “ultimate responsibility” of individual investors to keep tabs on their money, adds the financial expert. “There is some level of trust” in the business, “but people need to perform their own validation process.”
Madoff was known as a well-connected former NASDAQ chairman in the highly competitive world of hedge fund management, says Kris Putnam-Walkerly, founder and president of Putnam Community Investment Consulting, Inc.
“He was respected, so it was easy for people to believe that their funds were invested wisely,” remarks the Cleveland-based money manager. Most people who trusted Madoff may have conducted some level of diligence, she admits, but investors must do more than rely on word of mouth or interviews with their fund manager to ensure the safety of their money.
For example, it would have been simple for investors to verify their account statements beyond what Madoff was giving them, remarks Millet. “It’s easy to go online and keep track of your account.”
Clevelanders, he notes, should remember the case of Frank Gruttadauria, the Gates Mills broker who pled guilty in 2002 to siphoning tens of millions of dollars from his clients’ accounts.
“Gruttadauria was sending out sham statements” to his clients, says Millet. “Nobody bothered checking up.”
Put simply, reputation and referrals are not good enough, Putnam-Walkerly contends: Potential investors can check their fund manager’s credentials and verify certification with the Financial Industry Regulatory Authority (FINRA), which issues licenses for financial advisers. FINRA also has background information on approximately 680,000 currently registered brokers and 5,100 currently registered securities firms.
Investors should also look for potential conflicts of interest, insists Putnam-Walkerly. Madoff, she points out, served as treasurer of the board of trustees at Yeshiva University, which lost $110 million in Madoff-advised investments.
“There’s a conflict if your organization’s treasurer is also managing your fund,” she concludes. “This (situation) is just a huge lesson to be learned.”
With reports from The New York Times
dguth@cjn.org
Tips to protect your money
• Be wary of guaranteed returns: If a speedy return on your money sounds too good to be true, it most likely is.
• Reputation and referrals aren’t enough: Seek out other information, too. Information on both the SEC and FINRA sites are available at no cost to the public.
• Demand transparency: Ask questions about your allocation and your money manager’s past performance.
• Get it in writing: Make sure that both your investments and their explanations are spelled out.
• Report fraud: The SEC has a tip and complaint form on its website sec.gov/complaint.shtml.
Source: Wall Street Journal
The full global impact of Madoff’s alleged bilking of over $50 billion is still to be determined. However, the lessons learned by the investment community must sink in immediately to ensure a fraud of this magnitude never happens again, maintain local experts.
David Millet, 36, a Cleveland-based private financial planner, attorney and investment adviser, believes the fallout of the scandal will place a spotlight on a part of the investment industry that has heretofore avoided government scrutiny.
The longevity of Madoff’s fraud (his “Ponzi” scheme lasted for decades) points to “a breakdown in regulators doing their jobs,” explains Millet.
While Madoff was registered with the U.S. Securities and Exchange Commission, notes Millet, the investment advisers funneling their customers’ money to him were not tied to any form of control.
Madoff, the founder of Bernard L. Madoff Investment Securities LLC, was arrested Dec. 11 after admitting to his board that the fund he ran was essentially a $50 billion Ponzi scheme, whereby later investors’ funds are used to pay returns to earlier investors.
According to The New York Times, several inconclusive regulatory investigations centered around the remarkable returns his investments garnered.
Those “red flags” were especially evident in the early part of the decade, notes Millet, when Madoff’s investments provided huge returns in a bear market. The well-heeled financier allegedly wooed many investors by promising consistent returns regardless of market activity.
In light of his arrest, the SEC in Washington, D.C., has ordered an internal investigation to determine how the agency could have missed so many obvious signs and ignored so many complaints over the years.
Increased regulation in the market is almost a certainty now, contends Millet. National experts have referred to the scandal as the “Enron moment” for hedge funds. A year after allegations of accounting fraud at defunct energy-trading firm Enron Corp., they explain, Congress passed the Sarbanes-Oxley Act, which set tighter corporate accountability rules for publicly traded companies.
It’s the “ultimate responsibility” of individual investors to keep tabs on their money.
David Millet, financial expert
New rules for regulating hedge funds could include strengthening whistleblower programs and imposing capital requirements similar to those for mutual funds. Such regulation would restore confidence in the market, Millet believes.David Millet, financial expert
However, it’s the “ultimate responsibility” of individual investors to keep tabs on their money, adds the financial expert. “There is some level of trust” in the business, “but people need to perform their own validation process.”
Madoff was known as a well-connected former NASDAQ chairman in the highly competitive world of hedge fund management, says Kris Putnam-Walkerly, founder and president of Putnam Community Investment Consulting, Inc.
“He was respected, so it was easy for people to believe that their funds were invested wisely,” remarks the Cleveland-based money manager. Most people who trusted Madoff may have conducted some level of diligence, she admits, but investors must do more than rely on word of mouth or interviews with their fund manager to ensure the safety of their money.
For example, it would have been simple for investors to verify their account statements beyond what Madoff was giving them, remarks Millet. “It’s easy to go online and keep track of your account.”
Clevelanders, he notes, should remember the case of Frank Gruttadauria, the Gates Mills broker who pled guilty in 2002 to siphoning tens of millions of dollars from his clients’ accounts.
“Gruttadauria was sending out sham statements” to his clients, says Millet. “Nobody bothered checking up.”
Put simply, reputation and referrals are not good enough, Putnam-Walkerly contends: Potential investors can check their fund manager’s credentials and verify certification with the Financial Industry Regulatory Authority (FINRA), which issues licenses for financial advisers. FINRA also has background information on approximately 680,000 currently registered brokers and 5,100 currently registered securities firms.
Investors should also look for potential conflicts of interest, insists Putnam-Walkerly. Madoff, she points out, served as treasurer of the board of trustees at Yeshiva University, which lost $110 million in Madoff-advised investments.
“There’s a conflict if your organization’s treasurer is also managing your fund,” she concludes. “This (situation) is just a huge lesson to be learned.”
With reports from The New York Times
dguth@cjn.org
Tips to protect your money
• Be wary of guaranteed returns: If a speedy return on your money sounds too good to be true, it most likely is.
• Reputation and referrals aren’t enough: Seek out other information, too. Information on both the SEC and FINRA sites are available at no cost to the public.
• Demand transparency: Ask questions about your allocation and your money manager’s past performance.
• Get it in writing: Make sure that both your investments and their explanations are spelled out.
• Report fraud: The SEC has a tip and complaint form on its website sec.gov/complaint.shtml.
Source: Wall Street Journal
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