Avoiding investment fraud: Asking the right questions

The recent news of a newly discovered Ponzi scheme out of Florida and the daily news reports about Jones find us unfortunately still talking about fraud and how to avoid being part of one.

The common feature of the Madoff and Jones frauds was a lack of a custodian-a third party who holds the actual investment products invested on your behalf and from whom you receive a report on your assets.

This third party confirmation
of your holdings is a powerful tool
against many of the frauds
that have been experienced.

If you invest with money managers, we thought you might appreciate a due diligence checklist for investing. Accordingly, we asked Commonfund to provide one.

A not-for-profit, Commonfund was established over 30 years ago by the Ford Foundation to teach American universities how to properly invest. It has grown to be a major player in the investment business managing over $35 billion of assets. It is what is called a “manager of managers”. Thus it doesn’t invest in, say, particular equities, but instead, assembles a group of equity managers who Commonfund believes are good at what they do (will yield enhanced returns) but also are “safe”- the managers operate cleanly and stick to their knitting- invest in a risk pattern which mirrors how they market themselves.

And because it is a not-for-profit, Commonfund returns its profits to the charitable world by providing continuous educational opportunities - studies, conferences, articles, etc.

The JCF uses Commonfund as a “manager of managers” but also as advisors and teachers. We believe that they can do a much better job of investigating money managers as to their suitability than we can. An example follows.

In December 2008, we traveled to Commonfund’s offices in Connecticut as part of a due diligence process. The meeting started at noon but I interrupted immediately with a question. On the route down, my Blackberry had received 20 e-mails asking- “Did we get caught?” The Madoff story had just broken. Commonfund, thankfully, answered no. So I responded on the Blackberry- no, no, no…..

About an hour later I interrupted again - “Why aren’t we in Madoff- great profile, great returns?” The answer:

Commonfund had visited Madoff,
pulled out their list of questions
and found the answers lacking.

Further, an investigation of the auditor led to more questions. The conclusion: not a suitable Commonfund investment.

The bottom line: Ask questions; and remember to check out the custodian.

View the money manager checklist