and How to Smell a Rat: The Five Signs of Financial Fraud (Fisher Investments Press)
Ken Fisher Interview Part 2
Stockerblog: Speaking of Stanford, do you think there are some of these people who think they are doing the right thing? Let’s use Stanford as an example, I don't know what the banking laws are in Antigua, maybe he thought he was abiding by the currently allowed laws for banks in Antigua. Is it possible that any of these people could be thinking that as long as I abide by whatever law of the country I am working in, then I'm doing everything right, or do you think they've planned it all along as a total rip-off. Does it really depend on the person, does it evolve over time or what do you think?
Fisher: I think there may be people that believe things like that but the fact is, in the case of Stanford, he as a example, as I mentioned earlier, he falsified his background throughout his career, he made up phony stories, he must have known he was a phony. The process of promising people CDs with such high returns, where he knew what was going on with the money and how much money he was taking out personally, he must have had a criminal mind. The fact is, there may be people who are naïve enough, if you believe their own baloney, as a criminal. But I think most of them know exactly what they are doing. I think probably if you got away with it as long as they got away with it, you begin to get a callused nature over time, that you believe that you will be able to continue to get away with it, and even if they come after you, you will be able to talk your way out of it.
But let me point out very simply to any of your listeners (and readers) who aren't very clear about this, when you are in Antigua or any other place, when you take money from American investors, you are still subject to American law. If anyone in a Stanford-like modality believes that they can set up in another country, and embezzle from Americans and not be subject to American law, they are completely fooling themselves. They must not have spoken to any form of credible attorney and they are simply waiting to go to jail. Antigua is a country that would not have provided Mr. Stanford protection because it does have extradition treaties to America. In fact, what he would have had to have done if he had been thinking three steps ahead of them is that he would have been out of America, gone from Antigua to a country without extradition proceedings and set up housekeeping there. The irony is, if you recall when he was initially apprehended, was that he had come back into America, gone to rural Washington DC to associate with his mistress. That tells you that when he goes to the nations capital, at one level, he was fairly confident that he would get his way out of this.
When you go back to the point of saying 'alleged', the fact is at this point in time, while Mr. Madoff has one, at this time, alleged co-conspirator, the criminal activities against Mr. Stanford's people are actually fairly clear, and the number of people that are talking against him are very clear, and if you think there is any way he isn't convicted, you're missing the central point. This guy is toast.
Stockerblog: There is one part of your book where you talk about clawbacks, which I think is a very important part of your book. Many people have heard the word clawback for the first time after executives at major financial institutions took large bonuses either shortly before their collapse or shortly after a government bailout, but there's another really important definition of clawback that's extremely important relating to investors who profit from frauds and Ponzi schemes. I've heard many investors say, 'If I only knew Madoff was a fraud, I would have kept my money with him for five or ten years then taken my money and run.' But they don't realize that those funds can be considered ill-gotten gains even if they are totally unaware that there was a fraud involved at the time they invested with them. Can you discuss that in more detail?
Fisher: Sure. There's a concept in the law known as fraudulent conveyance which implies that even if you're an innocent party to a fraud but you benefited by it, the court has the right to call your money back into the proceeding to equalize it with the other victims. Usually there is a three to four year statute of limitations, so that people who got out of Madoff the earliest, they end up being relatively scott free. But if you got out one, two, or three years before, you're still subject to clawback, which means that in bankruptcy proceedings and the lawsuits involved with the bankruptcy proceedings, the judge will say 'If you've got this money, you have to return it to the estate.' The irony in this is that someone may have, at one point in time, put in a dollar, I'm making this up out of thin air, taken four out of Madoff by luck. Then, because they had four, because they were wealthy, they got paid and spent the money, they don't have the money and the court now tells them that they've got to come up with the money and pay it back.
You can actually have received the money in your hand but still end up bankrupt from it because you've disbursed all or some of the money and now you're expected to cough it back. The irony of this standard Ponzi scheme victim is, while he or she understands that while they can't get their money back, they thought they had this increase in wealth. When the Ponzi scheme's exposed, they come to understand they never did.
The tremendous irony of the person who took their money out is that they actually had the money in their hand and yet they still may end up bankrupt from this proceeding. It's a scary part and it's not logical, because as you said, the people that think 'Well if I just get my money out, I'm OK,' they've missed the point.
Stockerblog: This should put all investors on alert, because even if they've been dealing with someone for a long time, they think their getting great returns, and their thinking of taking their money out, they would have to do a second set of due diligence even if they've had their money with their money manager or hedge fund or whatever.
Fisher: Well, there's no reason not to take the money out if you suspect someone's an embezzler. I mean, you wouldn't put your money there in the first place if you suspect he's an embezzler. Thinking of it another way, going back to the first principal in my book, How to Smell a Rat: The Five Signs of Financial Fraud
, the simple most basic way to protect yourself is to make sure you have bona fide independent third-party custodian and your money is being held in some place like Charles Schwab, Fidelity, Merrill Lynch, or UBS, and not by Ken & Fred's brokerage firm that nobody has ever heard of where you put the money into Ken & Fred's and then Ken and Fred take it out the back door. Stockerblog: Getting back to the clawback for a second, let's say you put $500,000 with XYZ Company, and four years later, your account's now worth $2,000,000, you take the money out, you buy a million dollar home, you give gifts to relatives and friends of the other million, and then now it turns out to be a fraud. Now the government (or court) can come back to you for the $1.5 million that supposedly earned but really didn't.
Fisher: Actually, they can come back to you for the whole $2 million, because the people who didn't take money out got nothing back, and what the court is going to want to do is say 'Give it all back and then we'll equalize you with the other victims.' Then if there is some money to disburse to some of the victims, you get your share of that equal to the other victims. It's not like if you put $500,000 in you have the right to get $500,000 back, because the other people that put their money in that didn’t take it out got nothing back. You're treated the same as them.
Stockerblog: So in that particular example, they may end up with, if they're lucky, a hundred thousand, and since they have to give back two million, half of it's already gone, they have to sell their home to come up with at least a million, and that could put them into bankruptcy.
Fisher: Moreover, the other point to realize is that in most of these cases, once they become exposed, the process of litigation becomes nearly endless, it goes on for years and years, they may get some money back out of the estate, they may not because the legal fees may eat up the whole estate, and if they do get money out of the estate, it's not going to happen quickly.
End of Part 2 – Stay Tuned for Part 3
If you missed Part 1, you can check it out here
By Fred Fuld at Stockerblog.com
Copyright 2009. All rights reserved. Reproduction of this interview prohibited with out permission. All opinions are those of Ken Fisher, and do not represent the opinions of Stockerblog.com or the interviewer. Neither Stockerblog nor the interviewer nor the interviewee are rendering tax, legal, or investment advice in this interview.
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