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What Has the Madoff Scandal Taught Us?

In December 2008, the unraveling of Bernie Madoff's Ponzi scheme turned the investment world upside down. Investors, investment firms, regulators, and charities suffered catastrophic losses. People's faith in the financial system was profoundly shaken in ways that have not yet fully been resolved. It's been two years, and new Ponzi schemes and securities fraud cases continue to come to light every week. How should investors respond?

Learn from it, advises Barry Ritholtz, the CEO and Director of Equity Research at Fusion IQ, an online quantitative research firm. In a recent article on, Ritholtz offered investors ten lessons to be learned from the Madoff scheme. A few among them:

  • #7. Diversify your assets among several unaffiliated financial firms. Many investors lost everything in Madoff's scheme, because they had invested all of their assets with him. "If the worst happens, this is a recipe for disaster," wrote Ritholtz.
  • #5. Make sure you fully understand each and every one of your investments. You should be able to articulate the benefits, the risk factors, the projected returns, the basis of the investment, and the investment strategy.
  • #2. Remember: "Too good to be true" is a cliché for a reason. If you're promised overly high returns at super-low risk, there's probably something fishy about the investment.
  • #1. It is imperative that you conduct proper and detailed research on every financial professional and investment product you consider. Don't rely on third party references or testimonials - perform your own due diligence.

Next step? We advise all investors who believe they may be the victims of investment fraud to consult with an attorney to find out how to recover losses and hold the schemer accountable.

The information contained in The Firm’s posts on its blog, fraud alerts, investigations or elsewhere on the site is based upon information obtained from other sources including, but not limited to, news outlets and federal, state, and regulatory agency filings. All suspects and subjects of postings herein are presumed innocent until proven guilty in a court of law or administrative action and any and all crimes are alleged until a court or regulatory agency finds otherwise .

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