Most Common Older Investor Scams
In recent years, older investors have increasingly been victimized by securities fraud. This in large part undoubtedly is related to the concentration of wealth held by older investors. Fraud on older investors is particularly troubling because not only have they often amassed their investment funds over the courses of decades, but, they are generally beyond their earning years and have little or no ability to rebuild their retirement funds.
The following list contains examples of investment products which increasingly have been used in illegitimate schemes to defraud older investors. Investors should exercise appropriate scrutiny before investing in these types of products.
Charitable Gift Annuities: In this type of scheme a fraudster will pose as a charitable organization offering monthly annuity payments in exchange for payments which purportedly will be invested to both pay an annuity to the investor and to benefit charitable organizations. Unbeknownst to the investor, a significant portion of the monies are not being invested for charitable purposes, but go directly to the fraudsters’ personal account. The charitable organization is merely a front. When investing in charitable annuities, investors should make sure that the salesperson is representing a legitimate charitable organization and that the organization is fully aware of the salesperson’s activities. For example, the SEC found one fraudster that raised at least $52.9 million through the sale of Charitable Gift Annuities. He represented to investors that their funds would go into stocks, bonds and money market accounts, but $19.2 million of the monies raised were diverted to a hidden account that afforded him a luxurious lifestyle. To keep the Ponzi scheme running, he used $7.9 million of investors' money to pay earlier investors and spent $3 million in commissions to sales agents. When the plan collapsed, he told investors that Mid-America had "disbanded due to inadequate assets." [See Securities and Exchange Commission v. Robert R. Dillie and Mid-America Foundation, Inc., Defendants, and Mid-America Financial Group, Inc., Relief Defendant (U.S.D.C., District of Arizona, Phoenix Division, Civil Action No. CV-01-2493-PHX-JAT)]
“High Return” or "Risk-Free" Investments: In this type of scheme a fraudster often will tout unrealistic returns can be realized from "Low-Risk Investment Opportunities.". But no investment is risk-free. And sometimes the investment products touted do not even exist – they're merely scams. Investors should be wary of opportunities that promise spectacular profits or "guaranteed" returns. As the adage goes, if the deal sounds too good to be true, then it probably is. For example, the SEC found fraudsters that induced at least 803 elderly investors nationwide to invest in notes in PCM and the PCM Fund ("PCM notes") that purportedly paid a "guaranteed" return of 5.5% to 8% per year. The fraudsters claimed that investor funds would be used to make secured loans to businesses. They also represented that independent IRA administrators conducted "due diligence" on the PCM notes, and that investors would be repaid their principal at maturity, or that investors could redeem all or part of their investment before maturity, subject to a penalty. All of these representations were false. The loans were not secured. Further, the PCM notes were not liquid because the fraudsters failed to promptly return investor funds. Some investors had to threaten to file, or actually file, lawsuits against the defendants to get back their money. Nor was it true that IRA administrators conducted due diligence. [See SEC v. D.W. Heath & Associates, Inc., et al., No. CV 04-02949JFW (Ex) (C.D. Cal.)]
Investment Advisor Services. An investment advisor is a person or company responsible for making investments on behalf of, and/or providing advice to, investors. An investment advisor has a duty to serve the best interests of their investing client. At times, however, an investment advisor will take advantage of their position of trust to use unauthorized and deceptive methods to essentially steal money directly from their clients. Investor should be careful to review their monthly account statements and to conduct an annual review of their investment plan with their investment advisor. Investors should remain objective in their relationship with their investment advisor and remain alert for abnormal changes in their monthly account statements. For example, the SEC found an investment advisor that misappropriated at least $5.4 million from the accounts of four profit-sharing plans that were advisory clients of her employer. As part of that scheme, the investment advisor placed unauthorized orders to sell securities in these accounts and forged documents that transferred the proceeds from those sales to the accounts of two elderly women who were also advisory clients. The advisor then forged the signatures of these women on checks made that she made payable to herself, her creditors, and her relatives. [See SEC v. Susana P. Longo, Case No. 1:05-CV-0164 (N.D. Ga.)]
Certificates of Deposit or Bonds: Investors searching for relatively low-risk investments that can easily be converted into cash often turn to certificates of deposit (CDs). A CD is a special type of deposit account with a bank or thrift institution that typically offers a higher rate of interest than a regular savings account. Unlike other investments, CDs feature federal deposit insurance up to $100,000. Investors, however, should be wary promises of above-market returns and careful to confirm the legitimacy of the CD with the purported issuing bank or thrift institution. For example, the SEC found fraudsters that raised more than $3.9 million from at least 50 investors in several states by claiming to sell CDs that did not exist. The fraudsters lured investors, many of whom were elderly, with promises of above market rates on FDIC insured CDs purportedly issued by an entity called the "Liberty Certificate of Deposit Trust Fund." The fraudsters also distributed fictitious investment documents and account statements to attract investors and to ensure they continued to invest in the scheme. Further, rather than purchase CDs, the fraudsters used all of the proceeds from new investors to make payments to earlier investors, and to pay their own personal expenses. [See SEC v. Reinhard et al., Civil Action No. 06-997-CMR (E.D. Pa.)]
Promissory Notes: A promissory note is a form of debt – similar to a loan or an IOU – that a company may issue to raise money. Typically, an investor agrees to loan money to the company for a set period of time. In exchange, the company promises to pay the investor a fixed return on his or her investment, typically principal plus annual interest. While promissory notes can be legitimate investments, those that are marketed broadly to individual investors often turn out to be scams. Investor should be careful to determine their legitimacy and should seek the advice of an objective third party when in doubt. For example, the SEC found fraudsters that purchased and used mailing lists to target elderly individuals in north and west Texas for investments in so called "guaranteed" and fully-collateralized "promissory notes." In order to solicit senior citizens, the fraudster disseminated literature designed to alarm the elderly recipients with claims that the Texas probate process was lengthy, complicated and expensive and to suggest that they could provide "estate planning services," "living trusts" and "revocable trusts" to overcome the identified problem. When the targets of the mailing responded, they were urged by the fraudsters to liquidate legitimate, safe investments, to withdraw IRA monies and to invest in high risk investments in order to achieve a higher rate of return. Investors were told their investment would be used to fund business ventures, including short-term, high-interest notes, bank cards, resort projects and short-term, interim mortgage loans, all of which did not exist. Instead, investor monies were used by the fraudsters to make interest payments to earlier investors ("Ponzi payments"), pay exorbitant sales commissions, purchase several parcels of real estate, acquire and operate a pawn shop, make payments on personal credit cards and to construct a residence and lake home. [See SEC v. Gary Landon Davenport, et al., Case No. 7:99-CV-185-R, USDC, NDTX (Wichita Falls Division)]
Sale and Leaseback Contracts. In an attempt to avoid the investor protection of the securities law, some investments are structured to resemble the sale of a piece of equipment such as a payphone, ATM machine or Internet booth located at a remote venue where the investor cannot service and maintain the equipment and must enter into a servicing agreement. In order to make the deal more attractive, investors are told that after a given period the equipment can be sold back to the seller at the investor’s original purchase price. The investor is also promised a specific rate of return. In a variant of this scheme, a real estate interest such as a long-term lease in a resort community is sold instead of physical equipment. Frequently the equipment or property does not exist and the seller lacks the financial capacity to keep the promise of repurchase. Investors should be wary of any sale and leaseback contract and should seek the advice of an objective third party when in doubt. For example, the SEC found fraudsters that engaged in a fraud to offer and sell unregistered investment contracts in a scheme involving pay telephone lease-backs. The fraudsters promoted the massive scheme through the use of insurance agents and over the Internet, in which they raised more than $74 million from more than 2,000 mostly elderly investors. [See SEC v. Phoenix Telecom, L.L.C., et al., Civil Action File No. 1:00-CV-1970-JTC (N.D. Ga.)]
High Risk Investments. Some unscrupulous investment advisors make unsuitable recommendations to purchase investment products that don’t meet the investing objectives and means of an investor. Unsuitable recommendations might occur when a broker sells speculative investments such as options and futures, penny stocks, etc to a 95-year-old widow living on a fixed income with a low risk tolerance. Investors should be careful to review the risk profile of each investment recommendation and should seek the advice of an objective third party when in doubt. In one such example, the SEC found fraudsters that induced their clients to invest in the high-risk securities despite being aware that the securities carried a high risk of loss and were not suitable for elderly, unsophisticated investors seeking secure investments for retirement. In order to persuade their clients to invest large amounts of their savings and retirement funds in the high-risk securities, the fraudsters falsely misrepresented that the investments had little or no risk and were as safe as bank deposits. The fraudsters falsified documents to make it appear that their customers had the net worth and risk tolerance to qualify for the speculative investments. [See SEC v. William Edward Sears and Patricia Jean Sears Million, Case No. CV-05-1473 CO (D. Ore.)]
Other Types of Elder Fraud
Churning. An abusive sales practice in which unethical securities professionals make unnecessary and/or excessive trades in order to generate commissions. Most churning occurs where a broker has discretion to trade the account. In such cases, it is not necessary that the broker receive prior approval from the client to complete a transaction. Investors should be careful to review their monthly account statement and cognizant of any abnormally high trading activity.
Equity Indexed Certificates of Deposit. These hybrid securities products offer an interest coupon payment or return that is based on a stock market index, usually the S&P 500. Returns are not FDIC insured. They are dependent on the performance of the stock market. These are complex securities that promise a rate of return calculated over a defined period of time based upon some form of securities market index. A declining stock market means the possibility of no return on your investment. As a result, these products pose liquidity problems and are therefore, not suitable for seniors in particular who may need the money for retirement living. Investor should be wary of investment products with complex terms that they do not understand and should seek the advice of an objective third party when in doubt.
High Pressure Sales Seminars. In fraudulent sales seminar scheme, an investment adviser(s) will lure investors to attend sales seminars, sometimes at fancy hotels and restaurants, with promises of a free lunch. While these sales seminars may be perfectly fine and may provide a free meal, the fact is that sometimes they are used to pitch unsuitable products, using high pressure sales tactics. Investors should remain skeptical of any high pressure sales tactics and should not be immediately lured into making an investment decision on the spot. Investors should always take the time away from the sales seminar to make an objective investment decision and to seek out third party advice.
Prime Bank Schemes. In a prime bank scheme, fraudsters often claim investors' funds will be used to purchase and trade "prime bank" financial instruments on clandestine overseas markets in order to generate huge returns in which the investor will share. However, neither these instruments, nor the markets on which they allegedly trade, exist. To give the scheme an air of legitimacy, the promoters distribute documents that appear complex, sophisticated and official. The sellers frequently tell potential investors that they have special access to programs that otherwise would be reserved for top financiers on Wall Street, or in London, Geneva or other world financial centers. Investors are also told that profits of 100% or more are possible with little risk. Investors should be wary of opportunities that promise spectacular profits from any investment product from outside U.S. securities market.
Pump and Dump Scheme. In a pump and dump scheme, fraudsters drive up the price of a company's stock (typically a microcap or penny stock) using false and misleading statements and then sell at a peak. Once the fraudsters quit touting the stock, the price typically plummets, leaving investors holding worthless or next to worthless securities. The elder investors should remain particularly skeptical of any securities priced be $5 or that does not trade on a registered securities exchange. Investors should be skeptical of any “too good to be true” stories coming from salespersons that are not registered broker or investment advisors and should seek objective third party advice.
Variable Annuities. Variable annuities are tax-deferred investments that typically place mutual funds inside of an insurance wrapper for tax deferred potential investment growth. While these products are legitimate investments, regulators are concerned about their popularity in the sales community. Commissions to those who sell variable annuities are very high, which provides incentive for sellers to engage in inappropriate sales. Variable annuities are only suitable for a very small percentage of the investing public and generally are not appropriate for most seniors. The steep penalties for early withdrawals also make variable annuities unsuitable for short-term investors. Be especially wary of any broker who wants to sell you a variable annuity to hold inside a 401(k) or IRA. You are already getting tax-deferred growth in an IRA or a 401(k), and the variable annuity simply adds a layer of cost with no additional tax benefit.