Avoiding Bernie Madoff How to avoid schemes, scams and fraud in your investment portfolio Tim Howald, CFA Managing Director – Southwest Region

How to avoid schemes, scams and fraud in your investment portfolio

Tim Howald, CFA

Managing Director – Southwest Region

A Long History of Scams and Schemes Madoff Stanford Enron Worldcom Barings Petters Mutual Ponzi Cosmo Nadel

Madoff

Stanford

Enron

Worldcom

Barings

Petters

Mutual

Ponzi

Cosmo

Nadel

Types of Fraud Blatant Frauds Earnings Manipulation “ Pump & Dump” Ponzi Schemes And many more….

Blatant Frauds

Earnings Manipulation

“ Pump & Dump”

Ponzi Schemes

And many more….

Blatant Fraud Nigerian Investment Schemes “ A Sure Thing” “ 2% a month – Guaranteed!” Email Solicitations If it’s too good to be true…

Nigerian Investment Schemes

“ A Sure Thing”

“ 2% a month – Guaranteed!”

Email Solicitations

If it’s too good to be true…

Dear Friend…. Good day, How are you today? Hope all is well with you and your family?,I am using this opportunity to inform you that this multi-million-dollar business has been concluded with the assistance of another partner from India who financed the transaction to a logical conclusion. Due to your effort, sincerity,courage and trust worthiness You showed during the course of the transaction.I have left certified international bank cheque for you worth $1,200,000.00 cashable anywhere in the world. CONTACT: Mr.Tokpe Maurice Cotonou,Benin Republic. His email address: tokpe.maurice@XXXX.com

Good day, How are you today? Hope all is well with you and your family?,I am using this opportunity to inform you that this multi-million-dollar business has been concluded with the assistance of another partner from India who financed the transaction to a logical conclusion. Due to your effort, sincerity,courage and trust worthiness You showed during the course of the transaction.I have left certified international bank cheque for you worth $1,200,000.00 cashable anywhere in the world. CONTACT: Mr.Tokpe Maurice Cotonou,Benin Republic. His email address: tokpe.maurice@XXXX.com

Earnings Manipulation Corporate Management uses fraud to make the earnings of a company appear better than they actually are. Usually confined to a single company Often hard for the untrained (and trained) to detect Examples: WorldCom, Enron, Tyco

Corporate Management uses fraud to make the earnings of a company appear better than they actually are.

Usually confined to a single company

Often hard for the untrained (and trained) to detect

Examples: WorldCom, Enron, Tyco

“ Pump & Dump” Heavy “marketing” of shares of a small obscure company causes price to rise, then owners of shares who are usually behind the “pump” – dump their shares Small companies with very little trading and usually very low price Beware OTCBB and “Pink Sheets”

Heavy “marketing” of shares of a small obscure company causes price to rise, then owners of shares who are usually behind the “pump” – dump their shares

Small companies with very little trading and usually very low price

Beware OTCBB and “Pink Sheets”

Ponzi Schemes Named for Charles Ponzi Initial investors are paid from money gathered from later investors. Early investors may actually gain if they get out – but usually they are so enthralled with the returns they pour more hard-earned capital into the scheme – and get friends to join in.

Named for Charles Ponzi

Initial investors are paid from money gathered from later investors.

Early investors may actually gain if they get out – but usually they are so enthralled with the returns they pour more hard-earned capital into the scheme – and get friends to join in.

What can we do? Money in Mattress? Banks? Mutual Funds? Hedge Funds? There is no where to hide – we must be diligent!

Money in Mattress?

Banks?

Mutual Funds?

Hedge Funds?

There is no where to hide – we must be diligent!

What can we do? Understand the Strategy Operational Due Diligence Review Personnel Diversify

Understand the Strategy

Operational Due Diligence

Review Personnel

Diversify

Understand the Strategy Is there a strategy? Is the manager willing to explain it? Does it make sense? Does the performance match the strategy ?

Is there a strategy?

Is the manager willing to explain it?

Does it make sense?

Does the performance match the strategy ?

Short Volatility Generates small regular returns Will have occasional large negative returns Oct 2008

Generates small regular returns

Will have occasional large negative returns

Oct 2008

Short Volatility Returns

Operational Due Diligence What to Look For Independent Auditors Operational Risk Self Administered ADV Review

What to Look For

Independent Auditors

Operational Risk

Self Administered

ADV Review

Operational Red Flags “ Yes” answers to Item 11 in ADV Conflicts of Interest Related Broker/Dealer Investment Adviser Bank Internal Conflicts Trading or Recommending Securities

“ Yes” answers to Item 11 in ADV

Conflicts of Interest

Related

Broker/Dealer

Investment Adviser

Bank

Internal Conflicts

Trading or Recommending Securities

Personnel Check Backgrounds SEC.gov FINRA.org

Check Backgrounds

SEC.gov

FINRA.org

ADV/Personnel Examples

Limit Exposure Diversify, Diversify, Diversify 5-10% in any individual fund or strategy Rebalance Annually

Diversify, Diversify, Diversify

5-10% in any individual fund or strategy

Rebalance

Annually

Questions

Contact Information Tim Howald, CFA 702 991 7220 [email_address]

Tim Howald, CFA

702 991 7220

[email_address]