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In the most
recent bad news from Wall Street, Bernard Madoff, former NASDAQ Stock
Market chairman and founder of Bernard L. Madoff Investment Securities LLC,
was arrested and charged with securities fraud.
What did he do? He allegedly collected money to invest from clients,
made up false statements to show that they were doing well, and used new
clients' money to pay interest and withdrawals to existing clients.
This is known as a Ponzi scheme and is estimated to involve more than a $50
billion loss for his investors.
His clients didn't see this coming. Could they have? Let's look
at three key safety tips that would have prevented this from happening.
Know what you own. Stick to stocks, bonds, ETFs, and mutual
funds that are publicly traded and listed on major exchanges like the New
York Stock Exchange. They are valued independently at least daily, if
not minute-by-minute, while the exchange is open. You can check their
reported returns against your own portfolio. If you can't look up the
prices and performance in the newspaper or on the Internet - that's a red
flag - ask a lot more questions.
Use an
independent custodian. Madoff held his client assets, managed them,
and priced them, too. See the conflicts of interest? Investment
performance can look better if the prices reported to clients are
manipulated, which is allegedly how Madoff showed winning year after
winning year despite market turmoil.
At Yeske
Buie, our clients have an independent third party, Schwab Institutional,
pricing each investment they own. We have no input on investment
pricing, and that separation is a very good thing. We also stick to the
publicly traded securities mentioned above and avoid the kind of private
funds that Madoff ran.
Check on
insurance. Our clients benefit from fraud insurance. The first
part is Securities Investor Protection Corporation (SIPC) coverage for
$500,000 per account. Then, at Schwab Institutional, there is an
additional $149.5 million per account from London insurers.
Fraud
insurance does not protect against market declines; but it does protect
against theft of securities and/or related fraudulent transactions.
When Madoff's clients go to find their assets, which have allegedly been
fraudulently paid out over the years, will there be insurance in
place? No insurance protects 100%, but at $150 million in total
coverage, our clients have one of the largest and best plans available.
One final thought - if an investment sounds too good to be true,
it probably is. Reportedly Madoff claimed consistent annual returns
of 10-12% with little volatility and no annual losses. Can you name
any legitimate investor who can make that claim in recent years?
On another
note, we've just updated the website to include a number of additional
resources. From the home page (www.yebu.com),
you can now access copies of recent email messages, several articles we've
written on topics ranging from how the investment markets work to how you
can protect yourself from identity theft, and some very interesting graphs
that put the current market turmoil into a larger perspective.
Take care and
don't hesitate to call or write!
Elissa and
Dave and the YeBu crew
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