Madoff Redux: Starr Advisor To The Stars Charged
This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.
It's not nearly as big as the Bernie Madoff scam, but Kenneth I. Starr (not the Whitewater Starr) was charged with carrying out a $30 million fraud, which included money laundering and making false statements to to the IRS.
Starr's victims were "high net worth, celebrity clients" who as we all know, seem to make perfect patsies. The U.S. Attorney in Manhattan also named Andrew Stein, the former president of the New York City Council, as part of the shenanigans.
As a reminder, here are the warning signs that investors should look for to avoid being "Madoff-ed," or "Starred". They include:
- 1. Reluctance to discuss investment strategy: Madoff was known to tell would-be investors that he couldn't disclose any of his strategies because it was proprietary information. Financial advisors don't have to disclose every trade they have ever made, but they should present you with an investment policy statement and should encourage you to fully understand the strategy employed.
- 2. Control of all aspects of the investment process: When hiring a financial advisor, there are three distinct pieces of the process: the advice, the trading and the custodianship. In Madoff's case, he owned all three pieces, but in most firms, at least one of the pieces is handled separately, allowing for a third-party to conduct checks and balances.
- 3. Power of attorney: According to a separate SEC complaint against Starr, he and his colleagues had power of attorney, or signatory authority, that enabled them to control many bank and investment accounts belonging to their clients. Never, ever grant this type of authority to an investment advisor.
- 4. Use of an unknown auditor: Ask the advisor for the name of the auditing company and ask your own CPA or friends in town if they have ever heard of the firm and/or know of the auditor's reputation. It was curious that Madoff ran a seemingly large business, yet the auditors were a small-time outfit that virtually nobody had known about.
- 5. Be cynical about stellar returns in every type of market: It may seem crazy to question returns, but one huge, red flag that typifies these types of schemes is that they promise the world. Madoff never had a losing month and his returns were consistent to the point of being manufactured. Starr said he was investing in "sure deals," which as we all know, do not exist in the investment world!
If deep down you think that there could be a problem, seek a second opinion from another adviser. Or you can just trust your gut and move on to another firm.
Jill Schlesinger is the Editor-at-Large for CBS MoneyWatch.com. Prior to the launch of MoneyWatch, she was the Chief Investment Officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.
