Welcome to the December 2018 edition of our newsletter! In this issue, we’ll look back on the decade since Bernard Madoff’s Ponzi scheme was uncovered and what has – and has not – changed in the years since.
Billions Lost, But Was Anything Gained? Ten Years Since The Madoff Scandal Broke
Although first described as a Ponzi scheme — where early investors get returns to bolster a fund’s credibility, only to have later investors get nothing and the fraudster take those investments – Madoff’s long-running operation also had other hallmarks, most notably of affinity fraud. Madoff approached various non-profit groups, particularly those prominent among the Jewish faith, to which he also belonged, marketing his investments as a means of garnering astonishing returns. After that outcome failed to materialize, some groups had to scale back their operations or shut down altogether. While the bankruptcy trustee has worked diligently to recover, and return, as much of the looted billions as possible, in some instances relief simply did not arrive quickly enough.
Efforts to Regulate A Changing Landscape Against Affinity Fraud and Other Scams
While useful reforms were put into place after the Madoff case gained international attention, so too have new avenues cropped up for fraudsters to exploit many of the same traits Madoff did. Although the U.S. Securities and Exchange Commission implemented an enhanced system for the reporting of anonymous tips and whistle-blowing, and also required many funds to hire independent auditors to conduct “surprise exams,” most of these enforcement improvements exist on the back end of a transaction. When it comes to soliciting clients and marketing investments, the proliferation of largely unregulated social media has made it easier, many would argue, for fraudsters to draw would-be investors into Ponzi schemes and other scams that prey on greed or need, especially among closely-knit groups as Madoff had done. In addition to fundraising events and the like which Madoff used to identify and solicit clients, today’s fraudsters use Facebook and Twitter to present an often unchallenged perspective of their can’t-miss investments.
Detecting such affinity fraud rests largely with individuals and the community in which they interact – by the time law enforcement or regulators are involved it’s often too late. Some old maxims will always apply – if it sounds too good to be true, it probably is – but new techniques are also needed. If a client is approached about a new investment that sounds too fantastic, ask questions about the marketer’s history. How long has their firm been in existence? When was their web site created, and by whom? Also analyze their social media presence and look for any instances of litigation against them, even small claims cases (as some victims may have invested amounts too modest for higher courts.) Also, researching their background thoroughly is an important if obvious step – if a purveyor’s background indicates little to no financial experience prior to launching an investment, especially if they had been active in relevant communities in other roles and were now looking to exploit the trust they had built. Prevention and early detection is difficult but essential in such situations, and a skeptical investigator can help your clients avoid heartbreak and financial ruin, especially during the holiday season.