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How to Avoid Investment Frauds like Madoff and Bayou?

Avoiding 99% of frauds like Madoff and Bayou is pretty easy if you do some basic due diligence. Madoff used itself as the administrator and custodian for its own assets. Every reputable investment fund uses 3rd-party administrators and custodians. For obvious reasons, it’s a lot harder to fake numbers if a 3rd-party is holding your assets and doing administration.

If you only invest in firms that use reputable 3rd-party administrators, custodians, auditors, and law firms, you will avoid most frauds PERIOD. Be sure to verify that they are using the firms they say they are by calling and asking for email verification from the partner in charge of the investment firm client.

1) Custodians: You want prime brokers and custodians that are part of the chosen nine, explicitly backed by the U.S. government: JP Morgan, Goldman Sachs, Bank of New York Mellon for cash custodial accounts, etc.

2) Administrators: IFS, division of State Street and Citco Fund services.

3) Auditors: You don’t want unknown 3-person audit firms like the one Madoff used. You want brand-names like Deloitte & Touche, Rothstein Kass, etc.

To reiterate if you only invest in firms that use reputable 3rd-party service providers and verify that those providers are serving the firm, you will avoid Madoffs and Bayous.


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  • http://www.zentrader.ca jeff

    The only real way to avoid frauds like Madoff is to oversee your investments yourself. Nobody is going to watch your equity curve like you. If you don’t have time to put in the time they have websites like Covestor and Zecco where you can piggyback proven, sucessful investors.

    Cheers