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Diversity: Your shield from Madoff-style investment scams - KOAM TV 7

Diversity: Your shield from Madoff-style investment scams

Updated: Feb 25, 2014 05:38 PM
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By Jon Friedman


For the financial victims of Bernard Madoff's historic Ponzi scheme, the feelings of frustration and anguish just grow. Sadly, a situation where ripped-off investors are left to feel victimized is the rule and not the exception.

The victims of Madoff's fraudulent investment scheme, as well as schemes perpetrated by others, have no cut-and-dried system for determining how much money victims are entitled to receive when a fraud is discovered, says Helen Chaitman, a partner with the law firm of Becker & Poliakoff. Chaitman has been working since 2009 in behalf of investors in Bernard L. Madoff Investment Securities LLC, lobbying Congress for statutory changes to assure Madoff investors of the protections of the Security Investor Protection Act.

For any ripped-off investor, it's difficult to determine whether to sue individually or wait for a class-action suit to take place. "It depends on the circumstances of each case," Chaitman says. Lawsuits can be expensive, especially if the target individual or company has the funds to drag out legal proceedings. "If you have to litigate, it can be a very expensive process," she says. Attorneys routinely charge their clients hundreds of dollars per hour for their services.

Diversify Advisors

If nothing else, the Madoff case should teach investors that "prevention is the best cure" to avoid getting stung by a modern-day Ponzi scheme, says Chaitman. One way to do this is to diversify not just your portfolio, but the people who handle your investments.

Madoff investors were blinded by the false profits they thought they were receiving. They seemed to be reaping much higher returns than they were getting in other investments, so, human nature took over. They began to "double down" – and increase their investments with Madoff.

Wasn't there a clear danger in putting so much of one's nest egg with one individual? Of course! But Madoff presented himself as a pillar of Wall Street, so his investors couldn't fathom that someone of Madoff's considerable reputation could be dishonest.

The Madoff case jumped back into the headlines in early January when JPMorgan Chase (NYSE:JPM) agreed to an approximately $2 billion criminal and civil settlement with United States authorities. According to the New York Times, the bank "ignored signs" of the massive fraud that Madoff perpetuated on a plethora of victims before his arrest in 2008 and subsequent conviction (he is now in jail). Madoff victims filed a class-action suit in 2011 seeking to recover $19 billion from JPMorgan, claiming the bank willfully ignored signs of fraud, according to Reuters. About $220 million in the settlement of the class action suit is awaiting court approval.

Trustee Decides

While the JPMorgan payout is intended to go to the victims, the sum may not be enough to compensate them. According to Philip Dinhofer, a criminal attorney in Rockville Center, N.Y., who has represented plaintiffs in lawsuits against financial firms and other companies, the approximately $2 billion will be distributed to Madoff victims on a pro rata basis. And fees to the court, attorneys and trustee overseeing the case on behalf of the Madoff victims will be deducted first. "When victims and investors get screwed over in a crime, they have problems right away," says Dinhofer. "They're at the mercy of the trustee. The trustees have a formula in their minds to be just and they proceed from there."

Nonetheless, Madoff victims are getting more than most investors caught in such fraudulent schemes. Madoff investors "may get better than 50 cents on the dollar," says Erin Arvedlund, who authored a book about the Madoff scheme published in 2009. "In a Ponzi scheme that's good because they usually get nothing."

Investment professionals caution that investors can help themselves avoid a Madoff-like situation, in which an institution fleeces the unsuspecting customer.

Contact the SEC

When an investor senses wrongdoing, he or she can contact the U.S. Securities and Exchange Commission as well as state securities offices. "An investor has resources if he thinks he's being defrauded," says Jon Maxson, a partner at and the co-founder of Beacon Capital Management in Franklin, Tenn.

Plus, he says, investors can seek the havens of companies that use third-party custodians to look after clients' funds. While Maxson's firm gives investment advice, "We use third-party custodians like Ameritrade," he says. "We don't hold our clients' money.

"We get asked that question quite often – ‘How do I know I can trust you with my money and how do I know you're not another Bernie Madoff?'" Maxson says. "If I had a dollar for every time I've been asked that question, I could retire."

The Bottom Line

The Madoff case, among other outcomes, underscores just how vulnerable investors are after they are swindled. Diversifying your portfolio among different advisors and investments can help minimize losses.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

  
Originally posted on Investopedia.com


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