I just finished the exceptional Ron Cherow tome, Grant.   I didn't know much about Grant other than he was a no-nonsense military general who vanquished the Confederate Army in 1865.   I had also assumed that he was a lifelong drunk and an inept, corrupt president.

Now, I'd rank Grant as one of the greatest, most principled leaders in US history, an underrated president given short shrift by historians.

Distilling his accomplishments, Grant devised, led and executed the military strategy that preserved the Union.   After the war, Grant's leadership helped bound the country together again.    

As president, he championed the fifteenth amendment establishing voting rights for African-Americans, won a war against the Ku Klux Klan during Reconstruction and deftly navigated the country through one of the worst economic depressions in history.   

After alcohol problems derailed his military career before the Civil War, Grant was disciplined enough to manage his alcoholism for the rest of his remarkable career and life.

While his presidency was indeed rife with corruption, Grant was guilty of having a really bad judge of character.   Eventually, Grant's naivety and judgment led to one of the most infamous investment fraud events in history.

The Grant & Ward fraud debacle was the foremost financial scandal of the nineteenth century.  After Grant unsuccessfully ran for a third presidential term in 1880, he embarked on a two-year world tour.  Running low of money, he returned to the US and joined his son Buck's new Wall Street brokerage business, who had partnered with a swindler named Ferdinand Ward to form Grant & Ward.   

Grant personally invested $100,000 with Ward, who was by then running a classic Ponzi scheme, fraudulently paying outsized cash distributions to existing investors using new client's investment capital.  Ward traded on Grant's good name and the buzz from early investors led to a rush of new investment business.   As the scheme ballooned, Ward was forced to borrow large sums from banks to fund investor pay-outs, pledging the same investment securities multiple times.

When the scheme first showed signs of stress, Ward convinced Grant to borrow $150,000 from railroad baron Cornelius Vanderbilt to keep the firm afloat.   It was for naught as the scheme and the firm went down in flames in 1884, destroying all client's investment accounts and leaving Grant financially destitute. 

Historians believe Grant was duped by Ward about the scheme, the verdict is uncertain about his son's involvement.

Only Grant's highly successful memoir, published by Mark Twain, repaid his debts and provided for his wife after his premature death from throat cancer in 1885.   

The most spectacular form of investment fraud is the Ponzi scheme, named after the swindler Charles Ponzi.  He was an Italian immigrant who swindled investors out of $20 million in the 1920s - that's real money today.   But the Ponzi scheme of all schemes was pulled off by Bernie Madoff, who swindled $65 billion of investor capital before crashing in December, 2008.


What was noteworthy about Madoff was not only the magnitude of his scheme, but his ability to dupe clients for so many years via the sustained flow of new client money.

By the end, it was considered fashionable among the upper crust to have investments managed by Madoff.   Unfortunately, these naïve dolts convinced scores of charities to invest their endowment capital with Madoff and it ended tragically for many of them. 

What is so sad were the obvious signs that something was amiss with Madoff's investment program.   First and foremost, Madoff promised his clients a 1% monthly return on their invested capital due to his "proprietary" investment process.  Talk about a suspension of disbelief!

I actually saw a copy of a sample Madoff client investment account statement after the crash.  The statement was so un-professional looking it almost appeared hand-typed.

The point is that although the main reason Madoff's Ponzi scheme sustained itself for so long was social-psychological reasons, another key reason was that Madoff served as the custodian of the firm's client investment accounts, which enabled him to concoct fake client account statements at will. 

On a smaller scale, the investment advice profession gets tarnished every time you read about another financial advisor busted for a fraudulent investment scheme improperly using client investments.   It happens too often.

However, the reality is that investors can greatly reduce their risk from bad advisor behavior by using good common sense and some best practices, which I have enumerated below:

·        Never invest with a advisor solely because of their social circles or based on your brother-in-law's endorsement.  Be objective and do your homework.

·        Understand the advisor's investment process and maintain a healthy skepticism about any promise or guarantee of future investment return.  Make the advisor explain how your money is being managed.

·        Know the firm that is serving as custodian of your investment assets.  A third-party custodian that produces independent account statements provides confidence about the market value of your investment holdings and account activity.

·        Don't write checks payable to an advisor or their firm.   Investment checks should be payable to the third-party custodian.

·        Occasionally check on your current advisor and research prospective ones.    If licensed, visit www.brokercheck.org and type in their name to see their profile, including past client complaints and / or regulatory actions, all of which is public record.

·        If the advisor is with a registered investment advisory firm ("RIA"), they are regulated either by the state or the SEC.  Review the RIA's Form ADV to learn about any past client complaints and /or regulatory sanctions, all of which is also public record.

·        Review your account statements on occasion and look for unusual activity.

·        Understand the advisor's outside business activities, which is also public record.   Where is the advisor spending most of their time?

·        Choose an advisor that holds him/her self out as a fiduciary. 

Now, don't tackle me at the door with accusations at our next investment review meeting, but do ask many questions and see if you like our answers.

Until next time, be well….Tim

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