This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Sunday, January 25, 2009

Protect yourself against fraud

If you listen to our radio spots, you are well aware of the stream of fraud cases that have come out recently. Most notably is former NASDAQ chairman Bernard Madoff’s Ponzi scheme that may have cost investors as much as $50 billion.

Then there’s the case involving Marcus Schrenker, an Indiana investment manager who faked his own suicide when he parachuted from his plane that crashed in Florida. Sarasota, Fla.-based hedge fund manager Arthur Nadel, who reportedly owed $50 million to investors, also disappeared. His car was found at the airport after he had apparently threatened to kill himself. Finally, lest we forget Sam Israel, the hedge fund manager who was convicted this summer of stealing $450 million from investors, only to fake his suicide. If you recall, Israel left his car on a bridge in upstate New York, along with a suicide note and then went on the run, only to be found three weeks later.

Relatively speaking, losses aren’t nearly as bad as fraud. When investors suffer losses, they can generally recover, given enough time and the right advice. In cases of fraud, more often than not, investors are left with nothing and are forced to completely start over. And while many brokers are members of an insurance agency called Securities Investor Protection Corporation (SIPC), which provides limited coverage against fraud and theft, not all securities professionals are members. What’s worse, if a so-called professional is willing to steal client money, is it too much to think he or she would falsely claim SIPC membership? Investors need to know how to protect themselves from cases of fraud. To help investors recognize potential wrongdoing, we’ve compiled a short list of red flags that should sound the alarm that all may not be right. They are as follows:

• Lack of transparency. This is most common among hedge funds. Examples include a financial adviser not periodically sending confirmations or statements, being hard to reach or delaying account redemptions for longer than a few days.

• Returns that are too consistent. In the Madoff case, investors were told they were earning 8 percent a year, regardless of market conditions. This simply isn’t possible. While a fund manager may average 8 percent, or even more, over several years, seeing the same returns year after year ought to be cause for second thoughts.

• Ability to get physical possession of funds, other than for fees. In all the cases listed, investment managers had direct physical possession of client assets, or could easily obtain possession. Investors are better protected when advisers use an independent third party as a custodian, as is the case with mutual funds.


  1. If you recall, Israel left his car on a bridge in upstate New York, along with a suicide note and then went on the run, only to be found three weeks later.

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