Follow up on the Madoff Fraud

Madoff investors burned by SEC, too
Regulators reviewed the fund and found nothing wrong. Hell-oo?! Plus, five ways to crook-proof your portfolio.

Money manager at center of scandal once advised government on protecting investors from scams

Alleged victims include the family charitable foundation for Sen. Frank Lautenberg, D-N.J.; a trust tied to real estate magnate Mortimer Zuckerman; and a charity of movie director Steven Spielberg. The Wall Street Journal reported that the foundation of Nobel laureate Elie Wiesel also took a hit.

{The name Madoff: (May-doff), as in (made off), with a long a not a short a like in mad.}

The Madoff case is expanding. Here is some sound advice about investing in 'exotic' and not easy to understand funds from a CNN Money and Fortune Magazine editor.

1. Don't invest in something you don't understand. The attraction of Madoff's investing philosophy was that he employed what is known as a "split-conversion" strategy.

OK. Stop right there. I would guess 99 percent of you reading this have no idea what that means. I didn't. I had to call a hedge fund manager who runs a very sophisticated computer-based derivative operation to explain it to me.

"It's not a magic bullet or a secret sauce," he told me. "It's no big deal, but there's no way to get the returns he did doing this strategy." After talking with him for a few minutes I can tell you this stuff is serious gobbledygook. Greek to us mere mortals. You want nothing to do with it. Avoid it like the toxic waste that it is.

2. There is no such thing as a free lunch. The beauty of Madoff funds is that they supposedly returned 1 percent a month, every month. Like clockwork. They consistently provided above-market returns with no volatility. They were just as safe as comparable funds, only with higher returns. Puh-leeze! That is a financial "push-me pull-you." An animal that doesn't exist.

3. Diversify. I know I know; that's Investing 101. Yet my poor neighbor had all of her retirement money in a Madoff fund. All of it. You just can't do that.

4. Don't stand for no or low disclosure. I was looking at my neighbor's "statements" from Madoff and they were ridiculous. Nothing in them. Just "balance at the beginning of period," "balance at the end" kind of stuff. Why bother with all the other numbers? What's the matter, you don't trust us? I did note the fund would only let her take money out twice a year. Nice.

5. Be wary of no-name operations. I'm not saying you couldn't lose your dough in a Fidelity or Vanguard fund or a Merrill brokerage account through fraud. But I will say it is much less likely. By many orders of magnitude. And if your money is in a bank under the FDIC minimum, well then, of course it carries a government guarantee. In the case of Madoff, folks would whisper, "I know this guy who does great. You've never heard of him, but he's better than everyone else." Yeah, right.

So there you have it. Yes, some of this is familiar stuff, but in these times, it bears repeating.

The Ponzi Scheme

Bernard L. Madoff, 'your friendly uncle'

The Ponzi Scheme is simular to a Pyramid Scheme. It's likely to stay around in good and in bad economic times. Investors should be cautious for investments or investment proposals promising very high yielding returns with little risk.

(From Investopedia)
A fraudulent investing scam that promises high rates of return at little risk to investors. The scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors.

Investopedia Says... The Ponzi scam is named after Charles Ponzi, a clerk in Boston who first orchestrated such a scheme in 1919.
A Ponzi scheme is similar to a pyramid scheme in that both are based on using new investors' funds to pay the earlier backers. One difference between the two schemes is that the Ponzi mastermind gathers all relevant funds from new investors and then distributes them. Pyramid schemes, on the other hand, allow each investor to directly benefit depending on how many new investors are recruited. In this case, the person on the top of the pyramid does not at any point have access to all the money in the system.
For both schemes, however, eventually there isn't enough money to go around and the schemes unravel.

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The most recent Ponzi Scheme (still developing). It promises to become the worst in history, an ex-Nasdaq chairman accused of a $ 50 billion dollar Ponzi Scheme.
Ex-Nasdaq chair arrested for securities fraud
Bernard Madoff was arrested Thursday and charged with operating a multibillion-dollar Ponzi scheme from his investment advisory business.

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