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Madoff case shows warning clearly bears repeating

Bernard Madoff chairman Madoff Investment Securities returns his Manhattan apartment after making court appearance Wednesday New York. The judge Madoff’s

Bernard Madoff, chairman of Madoff Investment Securities, returns to his Manhattan apartment after making a court appearance Wednesday in New York. The judge in Madoff’s fraud case has set new conditions for his bail, including a curfew and ankle-monitoring bracelet for the disgraced investor.

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Updated: May 3, 2013 12:14PM

There is a certain fascination in watching the growing list of sophisticated investors who were taken in by the $50 billion investment fraud perpetrated by Bernie Madoff.

Those scammed range from Steven Spielberg and Jeffrey Katzenberg, of Hollywood fame, to some of the world's largest banks, like HSBC and Banco Santander. And it also includes hundreds of retirees and many charitable foundations, as well as the country club set in Palm Beach and New York.

How could so many wealthy, sophisticated investors (and investment advisers) have missed the now-apparent red flags? And, more importantly, if they could fall victim, how can you, the ordinary investor, make sure you don't get involved in a scam.

The answer: If something is too good to be true, it can't be true!

You've heard that many times. In fact, many of you write to me asking about various propositions, ranging from investment proposals to debt-reduction programs, and all sorts of "get rich faster" schemes. The fact that you have doubts in your mind is the first tipoff.

In the case of Madoff, the investment returns he reported weren't so outrageous as to trigger inquiry -- just a small percentage every month. But that consistency, in itself, should have been a warning. Even Madoff's proclaimed strategy of option-writing doesn't give that consistent a result. And now it has been revealed that, given the size of his investment funds, it would have been impossible to execute all of those options trades in a relatively limited marketplace.

Sure, hindsight is 20/20. But complacency and greed are the enemies of investment success. No one is smarter than the market every single moment. That is, no one except scam artists.

It might not be easy to prove your doubts. But just because you can't "put your finger" on the worry doesn't mean you should get involved. Yet that's just what many people do: ignore their own doubts and figure they're not "smart enough" to understand this great deal. In fact, that's what con artists rely upon.

And by the time the fraud unravels, there may be little in the way of assets to recover, as the Madoff investors are learning to their dismay. The Securities Investor Protection Corp. might cover some losses (up to $500,000) because of theft from brokerage accounts. But that insurance might not apply to all of the Madoff accounts. And certainly billions of dollars are down the drain.

Fraud, greed or 'unsuitability'?

Sometimes investment losses aren't produced by fraud, but they are accelerated by greed and ignorance. People want to believe they can outperform the market. And some newsletter writers, brokers and advisers are only too happy to make money off that desire. Then who is to blame?

Chicago attorney Andrew Stoltmann ( specializes in representing investors in lawsuits. He notes that investors who haven't been fraud victims also might have legitimate claims. Older investors who have lost a significant portion of their assets might be able to claim their advisers sold them funds or investments that were not "suitable" for their situation.

Says Stoltmann: "Advisers are often breathtakingly irresponsible in either concentrating a client's account all in equities, or in a handful of individual securities. It's one thing for a 25-year-old to be invested entirely in equities, but quite another for a 75-year-old retiree to be exclusively in stocks." Investors could recover losses -- and attorney's fees -- if they can show that an adviser failed to appropriately allocate and diversify investments.

He points out that most investors waived their right to sue and agreed to arbitration when they signed the papers to open their accounts. While arbitration is theoretically a place where investors can represent themselves, a good attorney can help when large sums of money are involved.

Check before writing a check

It's far wiser to be sure than to sue later. So here are some ways you can check the records of the people who might ask for your money for an investment opportunity.

** This is the self-regulatory body of the securities industry. A tool called "BrokerCheck" allows you to look up a securities firm or individual broker, and check for securities violations in the past.

** Since investment advisers do not necessarily have to be registered as brokers, you'll also want to check out the SEC's Web site for any registered investment adviser's background. Don't give your money to anyone who isn't registered with the SEC.

**Google: This is the simple way to start checking someone out. Just Google the name or the company name. You might find postings alleging fraud or mismanagement. That's just word-of-mouth, but it is a warning that should trigger further investigation.

But even as you do a checkup, keep in mind that not all brokers and advisers are registered, and not all activities are revealed in these registrations. In other words, trust your instincts. Don't follow the crowd over the cliff, just because "everyone else is doing it." Your mother taught you that in third grade. She was right! And that's the Savage Truth.

Terry Savage is a registered investment adviser. Distributed by Creators Syndicate. Copyright Terry Savage Productions Ltd. Visit terrysavage .com and

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