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After Bernie Madoff, knowing who to trust with your investment funds

When the Bernie Madoff affair shocked the nation, investors began wondering who they can trust. What matters more in an investment manager: the quality of an individual or the institution? How the pros pick who to trust with their investment funds.

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Picking up on signals

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Benjamin Bingham swears by in-person meetings with public company managers as a means to discern whether managers are as solid as their corporate social responsibility reports suggest.

"Tone of voice that conveys defensiveness or natural humility ... may be the only signals that can be picked up beyond what is easily found on the Internet," Mr. Bingham, managing director at Philadelphia-based Benchmark Asset Management, writes in an e-mail.

Even in a data-driven age, some in high-finance still rely on low-tech networks to reveal what they really want to know about company leaders when they're making investment decisions. Ed Easterling, who picks which hedge funds to include in his fund of funds based in Corvallis, Ore., primarily considers funds based in Texas, where he lived for years. The reason: If one manager has a history of treating business partners badly, Mr. Easterling is apt to find out with a few calls to fellow Texans in the industry.

"Let's say, hypothetically, you found out that somebody cheats on his wife," says Easterling, president of Crestmont Holdings, an investment management firm. "When data points like that sufficiently accumulate – sometimes it takes just one, [such as a fraud case], sometimes it takes five or 10 – you begin to say, 'Wait a minute. This person may not have as strict a threshold on integrity as I'm looking for.' "

Is character discernment enough to avoid the Enrons, AIGs, and Bernie Madoffs of the business world?

"Someone can be a completely moral person, but when you go into a corporate context, what you measure is what people are going to give you," says John Camillus, professor of strategic management at the University of Pittsburgh's Katz Graduate School of Business. "In that kind of situation, you have to look at: What are the control systems that are in place? What are the measures of success in the organization? And how are people compensated?"

Feeling vindicated

While investors may forever debate discernment methods, some feel vindicated by their experiences. Easterling, for example, tends to trust a few select fund managers whom he believes to be deeply knowledgeable about every company they bankroll. Thus he felt he'd made a good choice one day when colleagues complained about how one of his fund managers plays golf.

"They said, 'The worst part about playing golf with him is he always wants to talk about his ideas, and he always knows so much about the companies he invests in,' " Easterling says. "They would have no incentive to tell me that kind of a story. [But] that's the kind of comment that tells you whether this person really is as diligent as he says he is."