Would You Honestly Spot a Scam?

12/22/2008 12:01 am EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

There is a certain fascination in watching the growing list of sophisticated investors who were taken in by what may have been a $50-billion Ponzi scheme allegedly perpetrated by Bernard Madoff. It’s the kind of weird emotion that makes people stop to gape at the scene of a traffic accident, or follow a fire engine. 

The names of those scammed reportedly range from Hollywood mogul Jeffrey Katzenberg to charities involving director Steven Spielberg and publisher Mortimer Zuckerman to some of the world’s largest banks like HSBC and Banco Santander. And it also includes hundreds of not-so-wealthy retirees, as well as the country-club set in Palm Beach and New York.

How could so many wealthy, sophisticated investors (and investment advisors) have missed the now-apparent red flags? And, more importantly, if they could fall victim, how can you, the ordinary investor, make sure you don’t get involved in a scam?

The answer is, of course: If something is too good to be true, then it can’t be true!

You’ve heard that saying many times. But could you have recognized this scam if someone offered you a chance to invest, and promised a future regular stream of money you could count on?

It certainly was a tempting offer, and part of its legitimacy stemmed from the AAA reputation of Bernie Madoff. He had decades-long relationships with many of the people he allegedly fleeced and actually turned down some potential clients, burnishing his reputation for exclusivity. 

Interestingly, the investment returns he reported weren’t so outrageous as to trigger inquiry—just  a small percentage every month. But that consistency, in itself, should have been a warning (although there are many honest investment advisers who generate relatively steady payouts for income-oriented investors). 

And now it’s been revealed that, given the size of his investment funds, it would have been impossible to execute all those options trades that were the hallmark of his strategy in such a limited market.

Sure, hindsight is 20/20. But complacency and greed and hope are the enemies of investment success. No one is smarter than the market every single moment. That is, no one except scam artists.

It may not be easy to prove your doubts. But just because you can’t “put your finger” on the worry, doesn’t mean you should get involved. Trust your gut! Yet that’s just what so many people don’t do: They rationalize their own doubts and figure they’re just not “smart enough” to understand this great deal. In fact, that’s what con artists rely upon. 

So are you sure that you couldn’t be taken in by a Ponzi scheme? Really?

OK, then I hope you aren’t counting on living off Social Security! 

What do you think? Could you spot a scam artist? Have you? Share your experiences and thoughts by joining the conversation.

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