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Where Did All The Money Go in the Aftermath of the Madoff Scandal?

Financial Expert Says Madoff Took Care of Friends and Family While Investors Lost Millions; Suggests Diversification, Looking at More Liquid Mutual Funds

People have talked about how much money investors have lost in the very elaborate Ponzi scheme concocted by Bernie Madoff, but very few have discussed where all that money went. Paul Woldar, Founder of Legacy Financial Management, says that while we don’t know conclusively yet, he believes the money went into bad investments as Mr. Madoff was distributing funds to himself, his family and friends. To make sure others do not fall into the same trap, Mr. Woldar suggests diversifying out your investments to specialist managers effectively eliminating the ability of one manager to lose all of your funds. He also suggests taking a more informed and active role in the management of your assets, diversifying your holdings and utilizing mutual funds which offer greater liquidity. Mr. Woldar, who has spent more than 20 years as a fixed income specialist on Wall Street, currently advises not-for-profits where to best invest their money.

Mr. Madoff is accused of stealing up to an estimated $50 billion from his investors. He allegedly promised big returns on their investments, but delivered with imaginary gains by paying off old investors with money from new ones. Due to multiple breakdowns in oversight from the Securities and Exchange Commission and auditors, Mr. Madoff was able to get away with this for years. As a result, many individuals and charitable groups have found their endowments and personal accounts wiped out.

According to Mr. Woldar, Mr. Madoff gave a lot of the money to early investors to create the illusion of great returns. A lot of the money was in investments that went bust or are down tremendously, and he paid out a good amount of it to himself and other family and employees. The lesson learned, said Mr. Woldar, is not to put all your eggs in one1 basket — which is what so many people and organizations did.

Mr. Woldar also urges non-profit groups to minimize investing in hedge funds because of their instability. Many hedge funds have shut down over the past six months and many more will over the course of the next twelve. Most people have no idea how a hedge fund they are contemplating investing in works or what it is invested in, they just hear how hedge funds have created large returns and want to be part of that, according to Mr. Woldar. Instead, he suggests looking at more liquid mutual funds. The way to invest is multiple levels of assurances. First, if your account is at a large brokerage firm such as a Merrill Lynch or Morgan Stanley, there’s no hanky-panky with your holdings. Second, Mr. Woldar invest significantly in large, liquid mutual funds such as Blackrock or Franklin Templeton, giving his clients total visibility and liquidity, but also the benefit of a specialist in the sectors that we select. It is impossible for there to be any surprises, other than an absolute collapse of the market, but in these securities you have liquidity and hopefully expertise to minimize the damage. If someone is getting extremely large returns, their risk profile has to be significant — not something he would recommend to an endowment. Eventually that risk will catch up. Remember, if a return sounds too good to be true, it probably is.

Mr. Woldar also advises against putting money in asset-backed securities, particularly credit card receivables right now. While those securities have greater liquidity than hedge funds, he says investors should pull out of that sector as soon as possible. In a bad economy, people tend to run up their credit cards and then find themselves in the position of not being able to repay them. There is a real likelihood that that market is going to be under tremendous pressure in the next 3-6 months. This market is going to have difficulty, and it won’t be just new deals with recent credit card receivables, but older deals as well, according to Mr. Woldar.


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