With all we are reading in the news about the Madoff scandal, the first questions that come to mind are just how did he get away with this for so long and what can be done to make sure you don't find yourself caught up in this type of fraud?
The short answer to the first question is that it is remarkable he got away with it for such an extended period of time. Anyone who took the time for proper due diligence was finding ample reason to avoid investing with Madoff (see this CNNMoney.com article on who wasn’t a Madoff victim). And, now, stories are emerging everywhere of missed opportunities beginning as early as 1992. The 2005 Markopolos letter to the SEC is especially astonishing as it correctly outlines the impossibility of Madoff’s performance and correctly identifies it as a Ponzi scheme and yet resulted in no substantive SEC action.
Acting as his own custodian and avoiding any kind of transparency look to be a huge part of how he managed to get away with it for so long, but also the most prominent red flag that should preclude an investment fiduciary from choosing this type of investment. Both an ABC News article and a Kiplinger’s column look at how acting as his own custodian should have been the first and clearest sign that something wasn’t right.
Practice 3.4 in the Prudent Practices for Investment Stewards handbook (and its legal substantiation) tells you of the fiduciary duty in this regard, “A due diligence process is followed in selecting service providers, including the custodian.” The lack of an independent, well-known custodian would not withstand a reasonable due diligence process and you would quickly move on.
If you want to learn more about the Madoff fraud, the most comprehensive look at the entire scandal that we found is from Bernard Madoff’s Wikipedia entry. It is clear and well written and includes extensive citations, so you can find more detailed information on the parts of the article that interest you most.
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