Ask questions before you invest

REMEMBER Bernard Madoff. He should be as well-known to investors as Warren Buffett, but for different reasons.

Buffett is known for investment success and philanthropy. Madoff should be remembered as the embodiment of deceit.

Five years ago, on Dec. 11, 2008, Madoff was arrested for running what has been labeled one of this country's largest Ponzi schemes. Madoff, who had been a prominent member of the securities industry and the chairman of Nasdaq, is serving a 150-year prison term for bilking investors out of billions of dollars.

In looking back at how Madoff could con so many people, even other investment professionals, we can learn from the things the investors didn't do to protect themselves, says Chicago securities lawyer Andrew Stoltmann. He represents investors in suing brokers and brokerage firms. He sees the mistakes.

Stoltmann is concerned that many investors won't remember how Madoff's victims were scammed. He's worried that the surging stock market may cause some people to let their guard down.

So, what lessons should we learn from Madoff? The biggest one is to ask lots of questions.

* Where's my money being kept? Make sure your assets are held with an independent custodian such as a large investment firm or insured bank, Stoltmann recommends. Madoff was able to hide his scam for so long because investor funds were accounted for by his firm alone. He created the client statements.

* How is my money being invested? You need to understand how your investments will generate a return. After Madoff was caught, many of the stories from victims indicated they didn't really know how their money was invested. They couldn't explain how he supposedly achieved consistent returns. When people did ask him, Madoff wouldn't tell them or explain his strategy. If that happens to you, walk away. Fast.

* Who is your accountant? Despite allegedly managing billions of dollars, Madoff used a virtually unknown accounting firm. Admittedly, this isn't a question a regular investor would think to ask. But Stoltmann says you should check to see who is doing the auditing if you aren't dealing with a large, well-known investment firm.

* What's the investment strategy? Madoff claimed he was using a "split-strike" strategy to make money. It's a legitimate strategy that involves terms such as "call and put options." It's a complex way to earn money, and one that the average investor isn't likely to understand. "Investors need to peel the onion, kick the tires and understand how their money is being invested," Stoltmann said. "And if you ask and still don't understand it, then you should consider other investment alternatives. Confusion and complexity is a scammer's best friend."

If you don't understand how your money will make money, don't invest. Don't listen to the promise of returns, no matter how good they sound.

* Do you have any history of customer complaints? Use the Financial Industry Regulatory Authority's "BrokerCheck" system to research the backgrounds of current and former FINRA-registered brokerage firms and brokers. But even a check for past customer complaints isn't a guarantee that you won't be conned. "We've had cases where we've sued brokers who had a clean record," Stoltmann said. "Most people who lose money never come forward and complain."

I attended an investment seminar at the request of a friend who suspected that what she was being offered sounded funky. After the presentation, I began to ask questions. The more questions I asked, the more agitated the investment promoter became. At one point, she tried to stop me by suggesting that she take me aside, away from the group. I protested, arguing that perhaps I had questions that the others in attendance wouldn't think to ask or were too scared or intimidated to ask. The fact that she wanted to shut me down for asking what I thought were basic questions about the company's record and how our money would be invested was a huge red flag.

"Unethical people hate probing questions," Stoltmann said.

We shouldn't blame Madoff's victims for not knowing they were being scammed. After all, his Ponzi scheme went undetected for years by the Securities and Exchange Commission. But the anniversary of his arrest is worth noting if but to point out the importance of checking things out and asking lots of questions about the person and/or firm you are considering hiring to invest your money.