If it seems too good to be true, well, you know the rest. But that doesn't keep people of all walks of life from falling for get-rich-quick scams every day. The reason is simple: It's called greed, and it clouds even the most grizzled investor's good judgment. So it shouldn't come as a surprise that scores of investors -- from sophisticated hedge funds to simple retirees -- entrusted so much money to Bernard Madoff and his alleged $50 billion Ponzi scheme.

"When people are looking at really attractive returns year after year, greed trumps fear and skepticism," says Andrew Lo, director of MIT's Laboratory for Financial Engineering. Throw in the fact that Madoff, a Wall Street celebrity and former chairman of the Nasdaq Stock Exchange, was considered by many to be beyond reproach, and you have a recipe for disaster. Madoff was arrested on Thursday and charged with securities fraud. A federal judge appointed a receiver to oversee his firm's assets and accounts.

With the benefit of hindsight it's easier to see the warning signs. That's of no solace to those burned in what's being described as the mother of all pyramid schemes. For the rest of us, some simple lessons learned from the Madoff saga now can be tragedy avoided later.

Stocks Go Up AND Down

The first warning sign is so simple and yet so critical: Stocks and bonds fluctuate over time. The relentlessly smooth, positive returns Madoff generated for more than a decade should've been the first blaring alarm bell that all was not as it seemed, Lo says.

The professor's work on hedge funds and illiquid assets happened to discover a technique for detecting fraud. It turns out that smoothness is a proxy for illiquidity. The opposite is also true. In other words, if your broker invests in something liquid like exchange-traded equities for as long as Madoff did and only generates smooth, positive returns, be suspicious. That's not a smoking gun, it's a smoking cannon.

As Dana Basney, director of due diligence and forensic accounting services at CBIZ (CBZ), puts it: "That's your first clue. Nobody has positive returns for 15 years in a row. It just doesn't make sense." And if your portfolio is generating positive returns when the rest of the market is down, oh, say, 30% to 40%, be doubly aware.

"If a guy is making money this year I would be concerned," says Basney. "He's either a genius or he's damn lucky or he's a fraud."

They're Called Con Men for a Reason

A confidence man gains your confidence. That's why they're called con men. That's also why there's simply no substitute for audited financial statements and internal controls. A long and burnished reputation like Madoff's creates an ideal environment for grifters because it allows investors to forego any disbelief in improbable returns.

"A lot of people didn't ask the questions they should have because Madoff was such a big cheese," Basney says. "They trusted him."

That's the hallmark of a con man. To protect yourself, make certain that your brokerage provides audited financial statements from a reputable accounting firm, such as the Big Four of Deloitte & Touche, Ernst & Young, KPMG or PricewaterhouseCoopers.

It's just as imperative to check for lots of little details in those statements. Ensure that all the transactions that are supposedly occurring in your account are recorded. The paperwork should document every buy and sell, as well as dividends paid and interest earned. Madoff reportedly provided such a granular level of detail, but most Ponzi scheme operators don't, says Basney.

"If your statement provides only your earnings -- your beginning balance and your ending balance -- be very, very cautious," he says.

Do Diversify and Due Diligence

We all know the importance of diversification among asset classes and within asset classes. Sometimes it's even important to diversify among investing styles to navigate a sideways market. We even know that it's important to diversify our savings, checking and certificate of deposit accounts among different banks to ensure we're within FDIC limits.

One thing we tend to forget is that it's just as important to diversify among brokers. Folks who had their entire nest eggs in Madoff's hands could very well be wiped out. Diversification would've at least limited the damage.

"A good rule of thumb is don't keep more than 25% of your retirement assets in any one place," Basney says. It might seem impractical, but the ultimate in safety is to spread your accounts among three or four brokers.

Finally, do your own due diligence. Madoff's seemingly impeccable reputation trumped the kind of careful questioning of methodology, risk and return his investors should've undertaken. A con man's celebrity, combined with a remarkable performance, can make him a miracle worker in the eyes of his marks.

"Investors' greed overcame their fear," says MIT's Lo. "Many of them went into investments that they know they probably shouldn't have."