Detect accounting fraud, invest safely.

We’ve all heard of Madoff’s $50 billion Ponzi scheme. In Sarasota, FL, investors of Arthur Nadel’s hedge funds lost over $300 million. Joseph Forte fabricated numbers in his reports to investors and scammed investors out of over $15 million.

It’s interesting that so many investors fall victim to such fraudulent schemes. The SEC requires hedge funds to market to accredited investors only, who by definition have at least $1 million in net worth or has annual income of $200,000 or more. You’d think such investors could smell a scam right off the bat. But greed has a way of lowering anyone’s guard.

Here are some warning signs that I think could save us all from sending our life savings to fraudulent hedge funds:

Non-accredited investors are targeted

A compliant hedge fund can only market to accredited investors. If you are not one, don’t even think about hedge funds.

Marketed to the public

Hedge funds must never market to the public. A hedge fund that goes around marketing its past performance in the public is a huge red flag. Hedge fund annual reports must be password protected and are reserved for current investors and prospective pre-qualified investors only.

Hedge fund advisor is not registered with SEC

Beginning February 1, 2006, SEC requires hedge funds managing in excess of $25 million with 15 investors or more register with the SEC. If the hedge fund you’re looking at fits these conditions, make sure it is registered.

Fund manager has criminal records

Run some surface background checks on the fund manager. Google, LexisNexis, federal and state courts and even private investigators are worth the trouble if you are about to hand a million-dollar check over to a stranger. Ditch the fund at first sign of dirt.

Returns are too good to be true

If the returns reported are always beating the market, the fund never has a down year, and overall just seems too good to be true, it probably is. Talk to other fund managers about the reliability of the returns.

Even if the fund passes the above tests with flying colors, ask yourself if you trust the guy. Run if you even have the slightest doubt.