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4 Ways To Protect Yourself From An Investment Manager Scam

In recent weeks, there has been a flood of reports of people being scammed by their money managers.  At Christian, we have been inundated with questions from people that want to know how they can protect themselves.  What is the most troubling about the recent scams, is that at least some of them did not have any major red flags that would have tipped off investors.  In the Bernard Madoff case, you would have been investing with the former Chairman of the NASDAQ Stock Exchange.  He was a man with an unblemished reputation for nearly forty years.  This was an investment firm that had been audited each year by an independent CPA and survived numerous additional audits from securities regulators.  Reports are that there was a consistent average annual return of about 10 to 12%.  Of course, in recent years these returns seem very good.  The truth is that they were not so good that this would have been a red flag to an average investor.  Madoff type scams are the hardest to catch on to.  The most cunning of con-men cloak themselves in credibility.


Recent Cases

Bernard Madoff accused of embezzling 50 billion dollars from clients.

Watch This Amazing Interview With The Guy
That First Caught On To Madoff

Marcus Schrenker accused of bilking investors out of millions, although more exact figures are not available yet.  Schrenker went on the run and attempted to fake his own death by parachuting from his plane before he crashed it in North Florida.


Arthur Nadel accused of stealing more than 350 million dollars from clients.  Nadel is currently on the run and his whereabouts are unknown.  Warning Signs in the Nadel case.  Florida Hedge Fund Manager Disappears With 350 Million Dollars 


4 Ways To Protect Yourself From Being Scammed By Your Investment Adviser

1.  Keep Your Money In A Separate Account 

Make sure your money is in a separate account that is held by a firm independent of your financial adviser.  Many investors do not know that they can open up an account at just about any discount brokerage and assign the management of that account to an investment adviser.  When assigning authority over this type of account, you should execute a limited power of attorney.  The powers granted should only allow the investment adviser to make investment decisions on the account and collect their annual fee.  This type of arrangement provides you with complete protection against embezzlement, since your adviser does not have the ability to withdraw funds from your account beyond the amount they are due for management fees, which should be 2% or less per year.

2.  Deposit Only What Is Within SIPC Insurance Limits

Be sure your money is on deposit in an SIPC (Securities Investors Protection Corporation) insured account.  If you are not sure whether or not your account is insured by SIPC, you can call (202) 371-8300 to make an inquiry.  SIPC insurance will cover up to $500,000 of securities which includes up to $100,000 of cash on deposit per customer.  SIPC Website

Some may say it is not realistic to stay within these guidelines, especially if you have several million dollars.  In these troubled times, I would much rather be burdened by maintaining multiple accounts than worrying if my money is being stolen.  Many firms such as Charles Schwab have additional private insurance that is designed to go above and beyond what SIPC coverage provides.  My view of this ‘additional coverage’ is that I am glad it is there, but I am still going to stick to my limit of $500,000 at a single brokerage firm.

3.  Be Skeptical When Your Adviser Is The Best On The Block

A common thread in many of these schemes is an investment adviser that seems to have the midas touch.  Some reports I have been reading about Arthur Nadel, say that he was claiming to average more than 30% per year for his clients.  If your adviser seems to never make a mistake and is always providing above average returns, your concerns should be raised.  One thing is for sure, these scammers know that nothing will attract money more quickly than the lure of very good returns.

4.  If Your Adviser Is Large Enough To Require An Audit, Check Out The CPA Auditor

In the case of the boy band promoter and financial scammer Lou Pearlman, the accounting firm that certified his books and records did not exist.  That’s right, the firm of Cohen & Segal never existed but was the name that appeared on all of the financial documents Pearlman used to bilk investors out of more than 300 million dollars.  In the Madoff case, his auditing firm Friehling & Horowitz was comprised of only three people.  One of the partners is 80 years old and is retired and living in Florida.  Investigators are probing the relationship between Madoff and the accountants.  It is now being reported that Horowitz worked for Madoff prior to his retirement in 1997.  Things are looking a bit too cozy between Madoff and his ‘independent’ auditors.

Sometimes You Can Just Be Scammed And There Is Little You Can Do About It

Many of you know my own story and how I was scammed out of nearly two million dollars by my own brother, who was my accountant. Not only did I end up insolvent and in bankruptcy, but my partners also lost significant sums of money.  I had an independent auditor that gave my firm a clean bill of health each year.  I received financial statements every month from my brother and nothing seemed out of place.  In hindsight, there were some signs of my brother beginning to live an extravagant lifestyle, but without even being asked he offered an explanation for this.  He claimed he and his wife had inherited a million dollars from her grandfather.  According to all of my books and records, all of our money was accounted for and our annual reports were signed by our CPA.  This was my own brother and I trusted him and believed that he loved me and my family. I was personally devastated to learn that I was being scammed for more than five years!

My biggest mistake in all of this was that I expected my companies to provide for my retirement and my kids’ college funds.  I did not save or invest money and kept putting money back into the businesses, considering it my best investment.  Never could I have imagined a scenario where it could all be gone and so quickly.  This is one of the reasons I have dedicated so much of my time and effort to my latest project Christian Internet Income.  I am helping Christians to establish multiple streams of income by developing online businesses.  Other than spreading your money out over a number of different accounts, establishing multiple streams of income should be one of your most important goals.

Interesting Articles To Read

Madoff Swindle Was Aided and Abetted by Lack of Due Diligence

Accountant: Fla. money manager owed $50 million

Broward County investors fear Ponzi-type fraud

Regulators were warned about parachuting financier

Welcome to Florida, Can I Interest You in a Shady Hedge Fund?


To check out your broker, contact your state division of securities or FINRA.

James L. Paris
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