How Can Investors Recover Money Lost by a Fraudulent Money Manager?
TASA ID: 1464
How Can Investors Recover Money Lost by a Fraudulent Money Manager?
The news of the massive fraud perpetrated by Bernie Madoff has created shockwaves around the financial world. Unfortunately, even though the Madoff case is the most glaring for its size, other frauds have emerged since the recent decline in stock prices. Some money managers have tried to cover up their losses by misstating returns to attract new investors. Others have diverted some money from investors' accounts to make up for lost fees, or went all the way and embezzled all funds entrusted to them.
It is logical to expect that law firms representing defrauded investors will look at all possible places where all or some of the funds could possibly be recovered. Obviously, the first place to look is the accounts held by the money manager. After that, the next move should be to go after an advisor who recommended investing with that money manager. Advisors could be banks, brokerage firms, funds-of-funds or registered investment advisors (RIAs).
Advisors assume a fiduciary relationship with customers who entrust them with money to invest. Because of this relationship, an advisor is obligated to recommend investments which are suitable for the investor, in accordance with the investor's objectives, risk tolerance, degree of financial sophistication, etc.
An advisor is also responsible for performing due diligence on the proposed investment understanding the investment strategy of the money manager and the risks entailed by that investment strategy. As an example, it is surprising that many of those who analyzed Madoff's performance record and saw that his accounts produced a steady return (between 10 and 13% per annum) under different market conditions never questioned the reliability of this performance record.
An advisor is also obligated to fully disclose any conflict of interest with the money manager, such as receiving payments for referring clients to the advisor; excessive compensation may be considered unethical.
In conclusion, advisors who invested customers' funds with fraudulent money managers could be targeted as a source to recover lost money.
In the case of a Ponzi scheme, such as the one that Madoff allegedly perpetrated, an interesting legal question is if money that was paid to investors as "return" on their investments could be claimed by defrauded investors. In a typical Ponzi scheme, new money is raised to pay old investors; therefore, payments that old investors receive are actually money "stolen" from new investors.
This article discusses issues of general interest and does not give any specific legal, medical, or business advice pertaining to any specific circumstances. Before acting upon any of its information, you should obtain appropriate advice from a lawyer or other qualified professional.
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