For most Americans, Christmas has been Hijacked. Or whatever was left of Christmas after the dreaded R word, the non-bail out of the auto giants, but the top most question is: In the fraud dictionary,

Has Madoff replaced Ponzi?

Every year, I watch, good, honest, hard-working people go and lose a lot of money to some Ponzi scheme or the other. This year it is Madoff. Of course all this has happened in the US, and many Indians do not identify themselves with the Madoff problem.

However, please remember all the characteristics that are present in the Madoff problem are there in India just as much. Some important questions to ask are – is my advisor competent and trustworthy?

It is not sufficient that he is your neighbor, boss, relative, etc. He should be both competent and trustworthy.

Does he walk the talk? Does he himself invest in similar asset classes that he advises you to invest or does he keep his money else where. Typically you are looking for a restaurant where the owner himself eats!

After executing the deal, do you really need him to access the investments? This is a little tricky question. In case you have anything less than Rs. 10 million to invest you should be using vehicles that have public access – like a mutual fund or a unit linked insurance plan apart from ppf, national savings certificate and bank deposits. Normally you should be able to access these investments without any intervention with the executor. The exceptions to this are of course some banks which do not allow you direct access of your mutual funds, your PMS, etc. In case you have invested in a PMS with a broking company and the DP is the same brokerage firm that should be a red flag.

If something was to go wrong, and you get falsified statements, you will not know till there is a huge scam.

So if your bank, broker or advisor gives you only his “view” of your investments and you cannot deal with your investments the way you want to deal with it when you want to deal with it without the intervention of your Relationship Manager that should be a big red flag. Madoff is proof that big social names are not a protection! So the agent belonging to your society, your club, your swimming pool, your walking club, etc. should not let you cloud your decision of choosing a professional. Treat your money with respect, please. It is hard earned!

Are my investments liquid without the need for the person through whom I executed the purchase? The answer to most PMS schemes, real estate partnership schemes, private equity deals, art, etc. the answer is no. So if you sour relationships with the guy(s) with whom you did the deal you can safely kiss your money good-bye. Take the case of art – the person who sold it to you does the valuation and keeps telling you that it is doing well. Frankly this is scary. Many buyers, many sellers, 3rd party valuations, are all not just nice things to have, but mandatory if you have put serious money into it.

And for heaven’s sake ask all these questions BEFORE you put your money, not after. Stunningly, in India well regulated industries open to public inspection can be sold only be ‘qualified’ people. However, F&O, PMS, equity broking, real estate PMS, real estate partnerships, etc. which are perhaps subject to less (or no?) regulation than mutual funds and life insurance can be sold by anybody.

If you remove the words Madoff and Ponzi, this article can still be suitable. So forget which part of the world you are. Forget that you are dealing with a ‘big’ bank which never lets you sleep, please learn to ask these questions. Surely SEBI, IRDA, RBI, Dr. Manmohan Singh, are all there.

However, when it is your backside that we are talking about, take care yourself!

and if you want to know about the oxymoron sophisticated investors who invested in Madoff, please read wsj. Specifically


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