5 questions to ask to avoid investment fraud

Remember Bernard L. Madoff? He should be as well-known to investors as is Warren Buffett, but for different reasons.

Buffett is known for investment success and philanthropy. Madoff should be remembered as the embodiment of deceitfulness.

Five years ago, on Dec. 11, 2008, Madoff was arrested for running what has been labeled as one of this country’s largest Ponzi schemes. Madoff, who had been a prominent member of the securities industry and the chairman of Nasdaq, has been serving a 150-year prison term for bilking investors out of billions of dollars.

In looking back at how Madoff could con so many people, even other investment professionals, we can learn from the things the investors didn’t do to protect themselves, says securities attorney Andrew Stoltmann, the principal at the Stoltmann Law Offices in Chicago. Stoltmann represents investors in suing brokers and brokerage firms. He sees the mistakes.

Stoltmann is concerned that many investors won’t remember how Madoff’s victims were scammed. He’s worried that the surging stock market may cause some people to let down their guard.

So what lessons should we learn from Madoff? The biggest one is to ask lots of questions.

Where’s my money being kept? Make sure your assets are held with an independent custodian such as large investment firm or insured bank, Stoltmann recommends. Madoff was able to hide his scam for so long because investor funds were only accounted for by his firm. He created the client statements.

How is my money being invested? You need to understand how your investments will generate a return. After Madoff was caught, many of the stories from victims indicated they didn’t really know how their money was invested. They couldn’t explain how he supposedly achieved consistent returns. When people did ask him, Madoff wouldn’t tell them or explain his strategy. If that happens to you, walk away. Fast.

Who is your accountant? Despite allegedly managing billions of dollars, Madoff used a virtually unknown accounting firm. Admittedly, this isn’t a question a regular investor would think to ask. But Stoltmann says you should check to see who is doing the auditing if you aren’t dealing with a large, well-known investment firm.

What’s the investment strategy? Madoff claimed he was using a “split-strike” strategy to make money. It’s a legitimate strategy that involves terms such as “call and put options.” It’s a complex way to earn money and one that the average investor isn’t likely to understand. “Investors need to peel the onion, kick the tires and understand how their money is being invested,” Stoltmann said in an interview. “And if you ask and still don’t understand it, then you should consider other investment alternatives. Confusion and complexity is a scammer’s best friend.”

If you don’t understand how your money will make money, don’t invest. Don’t listen to the promise of returns, no matter how good they sound.

Do you have any history of customer complaints against you? Use the Financial Industry Regulatory Authority’s “BrokerCheck” system to research the backgrounds of current and former FINRA-registered brokerage firms and brokers. But even a check for past customer complaints isn’t a guarantee that you won’t be conned. “We’ve had cases where we’ve sued brokers who had a clean record,” Stoltmann said. “Most people who lose money never come forward and complain.”

I attended an investment seminar at the request of a friend who suspected what she was being offered sounded funky. After the presentation, I began to ask questions. The more questions I asked, the more agitated the investment promoter became. At one point, she tried to stop me by suggesting she take me aside, away from the group. I protested, arguing that perhaps I had questions the others in attendance wouldn’t think to ask or were too scared or intimated to ask. The fact that she wanted to shut me down for asking what I thought were very basic questions about the company’s record and how our money would be invested was a huge red flag.

“Unethical people hate probing questions,” Stoltmann said.

We shouldn’t blame Madoff’s victims for not knowing they were being scammed. After all, Madoff’s Ponzi scheme went undetected for years by the Securities and Exchange Commission. But the anniversary of Madoff’s arrest is worth noting — if nothing else but to point out the importance of checking things out and asking lots of questions about the person and/or firm you are considering hiring to invest your money.

Michelle Singletary: michelle.singletary@washpost.com.

Washington Post Writers Group

More in Herald Business Journal

More than 60 Boeing 737s per month: Can suppliers keep up?

There was lots of talk this week about the prudence and pressures of soaring production rates.

Developer proposes an 18-story building in Lynnwood

It would be the second-tallest in the county and include apartments with retail space.

Even as stock markets shook, many investors held steady

Older investors were buying stocks, but at a lower rate than their younger counterparts.

Snohomish County business licenses

PLEASE NOTE: Business license information is obtained monthly from the Washington Secretary… Continue reading

New Everett mayor speaks out about business in city, region

Q&A: Cassie Franklin on what can be done to get Boeing to build the 797 here and attract new industries.

Aerospace analyst explains how he’ll help state’s Boeing bid

Richard Aboulafia will deliver a report on Washington’s strengths and weaknesses in landing the 797.

Air passenger traffic growing faster than airplane capacity

“Our customers are in a good place,” a Boeing marketing executive says of the airlines.

JC Penney to close store at the Cascade Mall in Burlington

Eight store closures will result in about 480 job cuts, according to CNBC.

Budget: Lockheed gets almost as much as State Department

Boeing is in second place with annual sales of $26.5 billion in 2016.

Most Read