This week a little story about a $50 billion investment fraud has metastasized. Madoff Securities, a brokerage firm that ran a secretive investment fund on the side, has closed down -- revealing that its steady 10% annual returns was a result of a Ponzi scheme. For some who trusted Madoff a week ago, they are today coming to grips with life without money. Is Madoff the only one out there? I doubt it. So you need to protect yourself.
How did Madoff accomplish this? That story has yet to be revealed. But founder Bernie Madoff revealed that he was using money from his most recent investors to pay off the earlier ones who requested their money. And a letter from hedge fund research and advisory firm, Aksia -- which steered its clients away from Madoff -- reveals five useful clues:
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Unknown accounting firm. Madoff used an accounting firm Friehling & Horowitz that employed three people -- one was a 78 year old living in Florida.
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Incomprehensible investment strategy too good to be true. Madoff employed a "split conversion strategy" which was never clearly defined and whose returns other traders could not duplicate.
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Deception about technology. Madoff claimed it was technologically sophisticated but a visitor to its offices found paper tickets sent through the mail.
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