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5 Yrs On, Madoff Lessons Still Apply

Your Money: 5 years after, the lessons from Madoff

Published in the Philadelphia Inquirer (Inquirer.com paywall) December 11, 2013, 2:01 AM

Wednesday marks a five-year anniversary in the biggest financial fraud in American history – the day Bernie Madoff, a Wall Street icon who cowed regulators and investors alike, was arrested for stealing $65 billion.Madoff, now serving a 150-year prison term, maintains he perpetrated the decades-long fraud by himself. However, he’s a pathological liar and what I like to call a “financial serial killer,” who was still defrauding investors just days before his arrest.

For the last month, Madoff’s former right-hand man Frank DiPascali has been testifying in a federal trial against colleagues who worked for Madoff, unraveling how they enriched themselves by creating false financial statements dating back to the 1970s.

When the Securities and Exchange Commission did come calling in 2005, Madoff panicked, and even searched through one of the government investigator’s briefcases when he wasn’t around. And, according to the New York Post’s coverage of DiPascali’s testimony, Madoff “freaked out after discovering a copy of a Barron’s article( Don’t Ask, Don’t Tell_ Bernie Madoff Attracts Skeptics in 2001” questioning how the billion-dollar fund made money.

I wrote that 2001 Barron’s article, which quoted skeptics about Madoff’s secretive investment advisory business, which on Dec. 11, 2008, was revealed as an epic $65 billion fraud. Madoff turned himself in then only because the financial crisis had hit, and his investors were rushing to redeem at the same time. The truth was, Madoff never invested a single dollar in the market – the assets were all languishing in a checking account at JPMorgan Chase.

I didn’t expose Madoff fully – I wish I had – but his hedge fund was allegedly returning 10 percent or 11 percent a year consistently even when the stock market was crashing in the 2001 dot.com bust. Red flag!

What are the lessons for investors? Ask yourself:

Does an investment sound too good to be true? Are the returns too high or too consistent? If so, don’t invest.

When you ask questions do you get answers? When clients queried Madoff about his returns, holdings, and investment style, he refused to answer. Red flag! Don’t invest.

Do you have all your money at one firm? Many victims maintained most of their liquid net worth with Madoff. Diversify; don’t invest all assets in one place.

Does the money manager custody assets with a third party? If not, don’t invest. Madoff “self-custodied,” meaning he had his hands on client money.

Does your financial adviser use a major accounting firm to audit results, or a family member or close friend? If the latter, they could be persuaded to doctor the statements. Don’t invest.


6 responses

  1. Richard M Friedman

    Thank you Erin. You and Harry M. both deserve much credit for what you did. I also am aware of the pain that both of you felt being unable to stop Madoff. Chalk that up to a system where Wall Street (banks and brokerage, SEC and Congress) rules, and the public be damned.

    You and I met a couple of years ago at a luncheon, where we signed each others’ books (mine being a contributor to “The Club No One Wanted to Join”). You were very gracious.

    December 11, 2013 at 5:58 pm

    • Richard– I remember you, thank you for writing to me. That luncheon was bittersweet, it was a milestone for victims of Madoff but also a time for a lot of heartache. I also remember reading your story! What’s the update with you 5 years on?

      December 11, 2013 at 6:06 pm

  2. Hey Erin. This is Jeremy Brenn. Great article! Ever since the Madoff situation we get questions from prospective clients as to how we arrange custody of their assets, which is, of course, an excellent thing for people to be aware of. As you know, the advisor should never have the ability to draw the clients’ money.

    I’d love to get a signed copy of your book on Madoff. What’s the best way for me to do that?

    December 11, 2013 at 7:22 pm

    • thanks Jeremy! Nice to hear from you. let’s meet up sometime in Center City!

      December 11, 2013 at 7:37 pm

  3. emma

    I think of you as a friend—-remember our interview with you at my home. We ate coconut cake I had just made. Mike and I felt like family due to the way you spoke to us and put us at ease with our first interview. You attended Mike’s class and everyone commented on
    the way you came across since you were so qualified.

    December 12, 2013 at 2:42 pm

    • Emma– you flatter me! I was honored to speak at your son’s class. is he still teaching?

      December 12, 2013 at 3:12 pm

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