by Dr. Mark Skousen, Contributing Editor
Wednesday, March 31, 2010: Issue #1228
No one would accuse Harry Markopolos of beating around the bush when it comes to talking about the government protecting the public against fraud and bad investment advice.
He’s the private investigator who uncovered Bernie Madoff’s massive $65 billion Ponzi scheme, which destroyed the financial lives of thousands of individuals and foundations around the world.
He repeatedly tried to warn the Securities & Exchange Commission – without success – and penned the inside story of how he uncovered the biggest fraud in Wall Street history his book, No One Would Listen. It’s a fascinating read.
So are there any lessons for investors in this famous case? I interviewed Harry Markopolos last week and he offered five tips to stay out of trouble…
The Grade for Financial Regulators: F
“Can individual investors depend on the SEC or other government agency to protect themselves against fraud and bad investment advice?”
That was the headline question that I put to Markopolos. His response was blunt: “No. America’s financial regulators have proven themselves incompetent and incapable of regulating this nation’s financial system and need wholesale replacements of their staffs.” Markopolos asks outloud: “What good is a hunting dog if it doesn’t hunt. It’s only a show dog.”
Some investors have sued the SEC for negligence, but I doubt they will win. Many investors won’t ever see their money again.
One of the surprises in Markopolos’s book is that the financial press were also negligent in going after Madoff.
He explained that he took his evidence of Madoff’s Ponzi scheme to Forbes, The Wall Street Journal and other media, but none of them would bite. “Investigative reporting is a dying business,” he said.
Markopolos says Madoff is a marked man because some of the investors were wealthy Mafiosos. The latest physical attack on Madoff in federal prison will not be the last.
Harry Markopolos Offers Five Tips to Keep Out of Trouble
Harry Markopolos outlined five recommendations to preserve your hard-earned capital when approached by investment salesmen…
- Select your own investments. Don’t be talked into an investment product by a broker who calls you.
- Make sure managed money is custodied at an independent third party custodial bank.
- Avoid most offshore entities.
- Avoid most structured products, such as private equity deals or insurance products – they’re too expensive, too illiquid and full of hidden costs.
- Forget about background checks from the SEC or Better Business Bureau. Be your own investigator. Shop around and seek advice from qualified independent advisors.
I’ll add two more tips of my own to Markopolos’ list…
- Always diversify. Never put all your funds with one money manager, no matter how good a track record he’s got.
- Always be suspicious of any managed account that never loses money.
Time to Abolish the SEC?
I asked Harry Markopolos if he agreed with Wall Street reporter Charles Gasparino, who said at last year’s FreedomFest: “The SEC gives investors a false sense of security and should be abolished.”
Markopolos wouldn’t go that far. Instead, he said the new SEC chairman should fire most of the staff and replace them with competent financial experts. They should be held accountable and offered incentives to catch thieves like Madoff. He also favors having only one regulatory body.
Interestingly, Congress rewarded the SEC for its incompetence by increasing the annual SEC budget to $1.3 billion. Result: SEC lawyers are hounding honest fund managers in a desperate effort to find more dirt on Wall Street and restore its tarnished image.
For example, The New York Times recently highlighted the case of Richard Kwak, a 72-year-old Morgan Stanley stockbroker, who was tried twice by the SEC for manipulating a stock in the 1990s. Defending his honor, he refused to settle with the SEC and was eventually cleared by a jury. Twice. But it cost him $1 million in legal fees and mental depression. Kwak complained, “The SEC went after me instead of Madoff.”
Unfortunately, this sin isn’t isolated. It happens all too often.
But the bottom line is this: Investigate before you invest. Only you can protect yourself against fraud and bad investment advice.
Good trading – AEIOU,