Before the Madoff story broke, a research and portfolio advisory firm called Aksia issued a statement warning clients to avoid doing business with his investment fund, citing several red flags which it uncovered during an investigation. A review of these indicators offers insight into due diligence as well as warning signs to look out for prior to doing business with a firm. Aksia picked up on the following patterns and inconsistencies, and the fund’s concerns were quickly validated:
- The firm utilized an especially volatile investment strategy, but was still able to garner stable returns of 8-10% over an entire decade.
- A financial advisor who claimed to have studied the firm’s operations issued a letter to the Securities and Exchange Commission in 2005 stating that Madoff was running a Ponzi scheme.
- The firm was run by family members, and the strategy was erratic and undocumented.
- The firm’s comptroller wasn’t based in the United States, but in Bermuda. The “feeder funds” were audited by reliable auditors, while the primary investments were not.
- Accounting statements were sent via mail, as opposed to email, as is commonly practiced in the industry.
- The firm had been looked into previously.