Recent research into investment fraud suggests how investors can protect themselves from Ponzi schemes like the one used by Bernard Madoff.

The research, which was carried out by Professor Hervé Stolowy and his co-authors, examined the various stages of trust that Madoff established to scam clients out of billions.

Professor Herve Stolowy
Professor Herve Stolowy

Recommendations from the study include granting institutions the resources to organise independent controls and taking the concerns of third parties seriously. Restricting the maximum size of portfolios managed by a single investment fund is also suggested.

Stolowy says, “The financial markets cannot function without trust, and trust can always be abused. A number of organisations that invested in the Madoff fund did so on the recommendation of board members who had links with Madoff. One of the organisations interviewed by the researchers had a policy of never investing in a body linked to a member of its board – and that is what saved it.

“In addition, it is a good idea for investors to apply the principle of diversified investments. At the same time, even all these measures taken together cannot totally exclude the risk of fraud.”


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Hervé Stolowy, from HEC Paris, in collaboration with Martin Messner from the University of Innsbruck, Thomas Jeanjean, ESSEC Business School, and C. Richard Baker, Adelphi University and NEOMA Business School.