Daily Money Tip: Due diligence crucial in investment endeavors

Posted: January 09, 2014

Wall Street, it seems, is capable of doing business with criminals - like JPMorgan Chase & Co. did with scam artist Bernie Madoff. So it is critical to do your own due diligence when giving money to a new manager.

JPMorgan agreed Tuesday to pay $2.5 billion in fines to Madoff's victims and regulators for ignoring the red flags related to the $65 billion Ponzi scammer.

Despite warnings, JPMorgan continued to invest in Madoff's secretive hedge fund up until just a few months before the criminal mastermind's 2008 arrest. E-mails between top compliance executives reveal worries about "too-good-to-be-true" investment returns by Madoff. But JPMorgan Chase was generating millions of dollars in revenue annually from Madoff's bank account, so the bankers continued doing business with Madoff.

Jeff Brenner, however, saw it coming. The founder of Maragell L.L.C. in Haddonfield, and an expert forensic investigator, Brenner was asked by a potential investor to look into Madoff.

"We went out to check Madoff's auditors, Friehling & Horowitz," Brenner said, referring to a small company in Rockland County, N.Y. "It was a two-man shop in a mall. One of the accountants [David Friehling] spent most of his day at the gym. There was no staff for a $65 billion hedge fund? I told [a prospective Madoff investor] it was stupid to invest."

The client ended up investing anyway, and losing millions of dollars, Brenner said.

Friehling pleaded guilty in 2009 to fraud charges, and is cooperating with prosecutors. Horowitz had already retired and died shortly after the fraud came to light.

"Our 2006 investigation of Madoff raised numerous red flags," Brenner explained. "While Madoff's fraud was enormous, at its heart it was an affinity fraud. People who knew him - or who trusted their advisers, who in turn knew Madoff - invested their money without applying the same level of scrutiny as they did when purchasing other investments."

No matter the manager, conduct your own due diligence, Brenner advised.

"Start by gathering documents, not just the prospectus, but from third-party sources like financial news outlets, former investors, lawyers, and bankers," Brenner said. "Call everyone and ask questions.

"If the investment is opaque or it just doesn't make sense, do background checks into the history of the principals regarding past businesses, investment track record, regulatory enforcement actions. We uncovered a hedge fund manager driving a $200,000 car and traced its ownership to an undisclosed affiliated business. It may be the current investment opportunity is just another in a series of failed strategies, or worse, the lifeline to pay off debts from an earlier scheme."


erinarvedlund@yahoo.com

646-797-0759

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