By: Jack WaymirecloseAuthor: Jack Waymire Name: Jack Waymire
Email: jack@paladinregistry.com
Site: http://paladinregistry.com
About: Jack writes for the InvestorWatchdog website and Worth magazine. He worked in the financial services industry from 1976 to 2004. For twenty of those years he was the president of a Registered Investment Advisory firm and a Broker/Dealer. Jack is the author of Who's Watching Your Money? The 17 Paladin Principles for Selecting a Financial Advisor and is a co-founder of PaladinRegistry.com.See Authors Posts (87) | July 16, 2009 | Investor Information, Ponzi Schemes

One characteristic of sleazy criminals like Bernie Madoff is their egotistical belief that they are smarter than everyone else. This may explain why Madoff thought his massive Ponzi scheme would go on forever. It also explains how he slept at night without  concern for the financial carnage he was inflicting on thousands of people. I bet he never thought he would spend the rest of his life in prison.  It’s just too bad he can’t live the full duration of his 150 year sentence without heat, air conditioning, cards, or television.

A historic stock market decline triggered the weekly demise of one investment scam after another. That’s because there are fewer investors in down markets so there is no new money to meet the increasing distribution demands of longer-term investors. $7 billion of withdrawal requests caused the demise of the Madoff scam.

Tough times may also spawn new scams as financial service companies and advisors struggle to maintain their affluent lifestyles. Plus, a prolonged bull market will produce huge amounts of new money from investors who are trying to recover the losses they have experienced since 2007.

New scams will have the same three characteristics as their predecessors:

1. Scamsters say they produce exceptional returns for little of no risk. They know this is what investors want to hear.

2.  Scamsters do not want major third party custodians holding your assets. They have to control custody so an independent third party is not generating reports that contradict their fake ones. Some of the biggest independent custodians include: Schwab, Fidelity, Pershing, and TD Ameritrade.

3. A high percentage of scams describe a "black box" investment strategy. The box is supposed to be a sophisticated strategy for generating exceptional returns that no one has discovered until now. They also suggest the average investor will not be able to understand how the box works due to its unique characteristics and complexity.

Use these rules when you evaluate investment pitches. First, if it’s too good to be true, it’s not true. Second, never give an advisor possession of your assets. Always make sure there is a major custodian involved. And third, if you can’t understand it, don’t invest in it.