In December 2008, Bernard L. Madoff was arrested amid allegations he operated a $50 billion Ponzi scheme. He pleaded guilty to 11 felony counts on March 12, 2009, and was sentenced on June 29, 2009, to the maximum sentence of 150 years behind bars.
One of the reasons this fraud went on for so long un-detected was that Madoff was both the investment adviser and custodian to his clients. Custody by investment advisers means holding client funds or securities, directly or indirectly, or having the authority to obtain possession of them.
Investors should insist that their adviser establish their account with a third party custodian such as a bank or broker/dealer. Use of a custodian reduces the opportunity for fraud since the investment adviser does not have custody of your assets. Also, custodians send monthly or quarterly statements directly to you. Your investment adviser should also be providing you with performance reports or account statements they generate. This duplicate reporting system makes fraud easier to detect.
More information is on the web at:
http://www.sec.gov/investor/alerts/custodyinvestor-alert.htm
