Keep eye on investments, Lindeen says in wake of Madoff scheme
By JOHN S. ADAMS Tibune Capitol Bureau • January 25, 2009
HELENA — Many investors are finding it difficult to open their 401(k) statements after watching years of retirement savings disappear in the Wall Street collapse.
But in the wake of the Bernard Madoff Ponzi scheme that state officials say cost at least 35 Montana investors more than $18 million dollars, experts say it's more important than ever to pay close attention to the performance of your investments.
"I've heard a lot of people tell me that they are not even opening their statement. They're tired of seeing the bleeding. They're tired of looking at the drop in the value of their 401(k) plan so they're putting their head in the sand. This is not a time to do that," said Lynne Egan, chief of securities examinations/licensing with the Montana Auditor's Office.
At least 35 investors in Montana were either directly or indirectly affected by Madoff's alleged Ponzi scheme, where investors are paid returns out of the money provided by subsequent investors rather than profits.
Experts estimate Madoff bilked investors worldwide out of more than $50 billion. Officials say it could take years for investigators to get to the bottom of the complex investment scheme and figure out where the money went. Some reports state that Madoff may not have made a single legitimate trade.
Egan said the Madoff scandal highlights the importance of investors vigilantly tracking their investments and thoroughly researching advisers and firms before handing over their money.
Egan said the majority of the Montana investors known to be affected by the scheme were clients of a Bozeman-based investment adviser who is under investigation. Egan would not disclose the adviser's name because of the ongoing investigation, but said the adviser was licensed with the state.
"We have approximately 33 investors that maintained their accounts with a state-registered adviser who had a majority of their $18 million cumulative assets invested in one of the feeder funds that invested directly with Mr. Madoff. That was the Tremont hedge fund," Egan said. "So investors who thought they were with the Tremont fund were instead investing directly with Mr. Madoff."
Egan said it's not yet clear if the financial adviser under investigation disclosed the true nature of the fund to clients. She noted that advisers have a fiduciary and legal duty to fully disclose to their clients just how and where their money is invested.
Jim Searles, Senior Vice President of D.A. Davidson & Co., said it's imperative investors thoroughly research a firm before doing business.
"If you are investing with an outside entity, then you should have a great deal of understanding of that investment firm," Searles said. "I think it comes down to thoroughly knowing who you deal with. Make sure you've done the due diligence with those people that you deal with, that their books and records are fully audited, and that their assets are under the custody of a responsible custodian."
That's where the state auditor's office can help.
Montana Auditor Monica Lindeen said that one of the first lines of defense investors have before forging a relationship with a new investment adviser is calling her office.
"When somebody does have an issue with an investment or an investor, and they think that there's been wrongdoing or fraud, it's not always evident who to call," Lindeen said. "The state auditor's office is the office to call, and we can be a resource for them, not only in terms of if there has been potential fraud in their investments, but also on the front end. When people are making their investments, they need to utilize this office as well."
Egan said there are 700,000 licensed securities salespeople in the United States. Of those, 70,000 salespeople are licensed to sell securities in Montana. She said the auditor's office has access to a detailed database that can provide potential investors with critically important information about all licensed — and some unlicensed — investment advisers.
"Is this person licensed in the state of Montana? If they're not, they shouldn't be doing business in Montana. We can also look at the product, as well. We can look at investment advisers and say, 'are there complaints against that adviser?'" Lindeen said. "The last thing a person should do is just hand over their money to somebody without really, truly understanding if this person is going to take good care of it."
Egan said that investors also need to pay close attention to their investment statements — as painful as that may be — during the economic crisis.
"Investors that see a substantial drop in an investment that they thought was conservative or safe should contact us and let us look into it," Egan said. "If we have a complaint, we will certainly track that down and get to the bottom of it. But we just can't be proactive in this; we have to have people call us."
Lindeen said that in the case of fraudulent investing — such as in the Madoff Ponzi scheme — there's little chance the auditor's office can recover the lost money.
Meanwhile, despite the turbulence in the economy and the markets, D.A. Davidson's Searles said it still can be a good time to invest.
"It's a great time for people that have the ability to invest on a regular basis," Searles said. "Unless you just have unbelievable luck, you're never going to be able to time the market where you're always getting in on the bottom and getting out on top, but if a person on a regular basis is adding to personal savings and 401(k), if the market is down, you're buying a lot things cheap. It's a great time to be committing."
Tribune Capitol Bureau Chief John S. Adams