My friend Paul Sullivan just wrote an interesting article for the NYT called How to Avoid Being Taken In by a Ponzi Scheme. You might remember that Paul Sullivan wrote the book Clutch that I reviewed at Business Insider.
One of the ways I suggest is to ask about who are the other parties involved in the investment. Not everyone who is recommended is evil.
With Madoff, for example, his firm was the broker dealer, the investment advisor, and the custodian for client funds. There wasn’t an outside pair of eyes looking at the accounts. To make matters worse for the investors, he hired an auditor who he paid handsomely (a dimwit) so he wouldn’t ask questions.
Partnerships and funds can be a source of abuse because they lack the transparency between investor and manager.
Steps you can take to help avoiding getting involved with a Ponzi Scheme:
1) Ask who is going to issue your monthly statements and call them to confirm;
2) Ask who the Prime Broker or custodian is and then call them;
3) Ask who the auditor and accountant are, and call them too;
4) Ask to speak with a few existing clients and a few former clients.
Most importantly, if it doesn’t feel right. Halt and do nothing. More will be revealed.