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Mini-Madoff: Don’t Get Had

The Exchange

Four associates of Nicolas Cosmo, the so-called mini-Madoff, were arrested on charges they pocketed $38 million for their part in his $400 million fraud. Cosmo was arrested in early 2009, just weeks after Bernard Madoff was arrested for a $50 billion scheme  considered to be the biggest financial fraud in U.S. history.

Bloomberg Businessweek reports
the four were account representatives of Hauppauge-based Agape World Inc. and Agape Merchant Advance, investment companies run by Cosmo, who pleaded guilty to mail and wire fraud charges in a scheme affecting more than 4,000 investors.

The recent arrests are a reminder of the danger of being had and falling victim to greed-fueled fraud. In light of that, we reached out to Legend Financial Advisors' Jim Holtzman for a reminder of the red flags to look for so you aren't had by the next mini-Madoff.

Who is Who

Who is the custodian and who is the advisor? A custodian is a third-party financial institution that holds and safeguards securities owned by a fund and its investors. The custodian and the advisor should not be one and the same, says Holtzman.

Returns and Explanations

Are returns too consistent? Consider how the investment performed in a good market year vs. a bad one. If it appears to perform well no matter what, ask questions. Some funds legitimately perform well in good and bad markets -- they're designed to. But most don't.

If the manager will not or cannot explain the returns, that's clearly a red flag. Madoff, for instance, was quite arrogant and created the perception of being too elite to deal with those questions, says Holtzman.


Who is doing the auditing? If it's one of the "Big Four" -- PwC, Deloitte Touche Tohmatsu, Ernst & Young, or KPMG -- that's a good sign. If it's a small fund or firm, it may very well have a smaller, lesser known auditor, says Holtzman. But a one-man-shop would be a red flag.