Too good to be true --probably a swindle by Saul Friedman

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You would think that when you reach a certain age, you'd be wise to scams. But my mail and the adventures of Bernard Madoff suggest that whether we are young or older, rich or not so rich, we can forget the basic law of the scam: If it's too good to be true, it is too good to be true.

I could not believe that Bob M. of Smithtown acknowledged in a letter that he fell for the television infomercial (and advertising in Newsday) from a company that promised highest prices for his unused or damaged gold jewelry. In a prepaid envelope, Bob sent a gold necklace, ring and "dental gold" and trusted people he'd never met.

"I was expecting to get $250 and was hoping for more," he wrote. But the check he got was for $37.01. He angrily returned the check, and luckily got his gold back. Had he chosen a direct deposit, he was told, it would have been a "done deal." He called them "swindlers." Perhaps, but they had the cooperation of a willing participant.

And apparently willing participation has been the same, on a much, much larger scale, for millions of Americans who bought houses and life insurance policies in order to flip them or went searching for high returns on investment schemes with gurus like Madoff, even when they didn't know what they were investing in. Reflecting on the chaos in the American financial system, New York Times economic columnist Paul Krugman called this "the Madoff economy."



Saul Friedman
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Several financial reporters have said that most of the knowledgeable people, friends of friends of friends, who invested with Madoff had to have known that the steady 1 or 2 percent a month returns were too good to be true.

When he confessed his fraud to his sons, Madoff called his enterprise a "Ponzi scheme." It's a classic scam in which investors are paid abnormally high returns from funds coming in from newer investors. As the economy collapsed and the number of new investors dwindled, Madoff's "pyramid" scheme fell apart.

Many people, especially investors with modest portfolios, did not realize that their financial advisers were investing their money in conduit funds that were, in turn, invested with Madoff. Others, like reader H.B.F., who e-mailed his plight, bought into the Madoff scam with the same unseeing trust that Bob M. displayed when he sent jewelry through the mail.

"I am a senior citizen who has invested two IRAs in an investment limited partnership, which in turn invested 100 percent of its funds in a company called Maxam, a conduit to the Bernard Madoff companies," H.B.F. wrote. A retired accountant, now 69, he acknowledged that he did so knowing "full well that the monies were going to a Madoff enterprise. I, like everyone else, was duped by his reported successes." He lost $580,000, and his partners lost millions, and he's hoping he may recover something through the insurer for brokerages - the Securities Investor Protection Corp., the nongovernment counterpart to the FDIC, which has become the Madoff receiver.

If you're a Madoff victim and wondering the same, visit sipc.org, where you can file a claim. But a good broker I know doesn't hold out much hope, for no one yet knows how much, if any, of Madoff's holdings will be left to liquidate and distribute. Besides, the broker said, the investment through the partnership is not like a share of stock in a company that has intrinsic value. "When I see a limited partnership in a brokerage account or an IRA," said the broker, "that's a bright red flag. It means the money is in someone else's hands and is out of the broker's control."

Consumer writer Jane Bryant Quinn says smaller investors, such as H.B.F., as well as Madoff's richest victims, yielded to the temptation to make easy money. She wrote, "We love to believe in market wizards who hold secrets to making serious money. In fact there is no such secret... ." Her advice: "Even if your mother is your investment adviser, look to the quality of the oversight" as well as the quality of each investment. "You want a major accounting firm checking the books and a brand-name custodian tracking the trades and the amount of money in your account." A good, reputable full-service broker costs more but can help you spot the risks like a partnership in a retirement account.

In the current, volatile bear market, it's tempting to look for another Google or Apple or Microsoft. But all you should hope for if you're in or approaching retirement is an adviser or broker who can help you keep up with or beat the market indexes slightly. Try allocation and diversification, rather than a risky flier that a friend of a friend recommended.

The fallout from the Madoff fraud, by the way, has included an old allegation, mostly from political conservatives, that the Social Security system is nothing more than a huge "Ponzi scheme" that is bound to collapse. And a commentator at a Web site critical of Social Security (socialsecurity.org) said, "just like Ponzi's plan, Social Security does not make real investments - it just takes money from later investors to pay benefits to earlier, now retired, taxpayers." That might be true if Social Security were an investment scheme. But it's an insurance and pension plan, which has a safe risk pool and invests its surplus in Treasury bonds, which can be valued (now at $2 trillion). Look up its financial outlook in the trustees report at the real Social Security Web site, ssa.gov. That's more than you could do with Madoff investments.



WRITE TO Saul Friedman, Newsday, 235 Pinelawn Rd., Melville, NY 11747-4250, or by e-mail at saulfriedman @comcast.net.