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MAKING CENTS OUT OF THE NEWS
Blog #4
(January 22nd, 2009)
SCOUNDRELS, THIEVES, AND HANGAR TALK
By Tom McAllister, CFP™
As if the Bernard Madoff ”Ponzi scheme" scandal weren't enough, two weeks ago news broke about Marcus Schrenker, an Indianapolis-based financial advisor. Schrenker, we learned, attempted to fake his own death in order to avoid facing his clients, at least some of whom appear to be victims of fraudulent actions.
This past weekend, a third story of scandal hit the national media. I had already seen the news in the Sarasota Herald Tribune, of which I am a wintertime subscriber at my SW Florida home. A Sarasota-based hedge fund manager named Arthur Nadel disappeared last week, apparently with $350 million disappearing along with him.
Of the three stories of scandal, the one about Marcus Schrenker has a personal twist for me. I met Mr. Schrenker twice in the fall of 2007 and talked to him four or five times by phone subsequent to those meetings. Schrenker contacted me to introduce himself, and, since I, too, am based in the Indianapolis area, I received him as a colleague. I accepted his invitation to visit his office and see his operation. His office was in fact very nice, with an amazingly complex computer setup.
What was most fascinating to me, however, was Schrenker's now-famous airplane, a Piper single-engine jet turbo prop seating six people. I have had a lifetime love affair with airplanes and am an inactive instrument-rated pilot with a respectable history of 1700 hours as pilot in command. Mr. Schrenker claimed more than five times that number of hours as pilot and instructor, and was an aerobatics (stunt plane) pilot to boot. Pilots love to fly, and the next best thing for us pilots is to "hanger fly", meaning talk about flying. Marcus Schrenker and I had a good time hanger flying.
Later that week, Schrenker invited me to accompany him on a flight to Omaha, Nebraska and back. We each had business to take care of there, so he went his way and I mine, meeting back at the airport after our separate luncheon appointments. After takeoff, Shrenker allowed me to pilot the plane for the twenty-minute ascent. Upon reaching cruise altitude, I turned control over to the auto-pilot. I must say, Shenker's jet was the "hottest" and nicest plane I had ever flown. You may imagine what a strange feeling it was for me, eyes glued to the TV, seeing the remains of that superb airplane lying in pieces in a Florida swamp.
More facts may surface about Schrenker as the days pass. Apparently it has been proven in civil court that he defrauded some of his annuity investors. The insurance companies who had to make up those losses sued him for commissions paid him on the inappropriate transactions. In addition, Shrenker is accused by Indiana securities regulators of continuing to do businesses after his licenses expired. Whether or not Schrenker defrauded his money management clients remains to be seen.
Meanwhile, information continues to come to light on Arthur Nadel, the Florida hedge fund operator. Nadel was active in the community and made substantial charitable contributions. His abrupt disappearance left no trace of $350 million in investor money.
How can you as individual investors protect yourselves against such thievery? First and foremost, NEVER turn actual dollars over to a private money manager. Legitimate money managers do not take possession of cash or securities, but instead use custodians such as Chas. Schwab and Company, Fidelity Investments, or Pershing, Inc. to hold assets in SIPC insured accounts. Bank trust departments and major wire house brokers are also insured custodians. No matter which custodian you select, you should be able to access your investment account records at any time, day or night. Hedge funds should be audited by a "Big Four" international firm. If a money manager uses a CPA firms of which you've never heard, that is a red flag!
Before selecting a money manager, it is important for you to verify that he or she has a clean record with securities regulators, including the SEC, FINRA (Financial Industry Regulatory Authority), and the various state regulators. All this information is publicly available. Breaking news on the Arthur Nadel scandal illustrates my point. All the way back in 1982, Nadel was disbarred as an attorney in New York. The reason? Nadel defrauded investors and stole from an escrow account! Careful due diligence on the part of clients and their planners at any point since then would surely have uncovered these facts, and much pain for later investors might have been averted.
Lastly, trades in your accounts should be at discounted rates. After all, you are paying the money manager for investment advice and guidance, and so trades need not include broker guidance, just execution.
Even after forty six years in the practice of financial planning and investment guidance, not to mention my work as a financial industry arbitrator, I was not prepared for so much drama and disgrace related to my beloved profession in the space of less than a month. Apparently, as I pointed out in a former blog, robust as due diligence efforts might be, bad apples continue to crop up. Again, I want to caution my clients and readers: Avoid falling into the trap of allowing the very, very small percentage of fraudulent operators to scare you away from the professional money management that is so core to long-term wealth-building and sound financial planning.
With all the rapid changes in our economy and in the investment markets, there are many investors who would benefit from more consistent guidance. We are currently accepting new financial planning and investment clients, and would appreciate your referrals.
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