Investment fraud is the major non-violent crime perpetrated against older citizens!!!
by Lawrence C. Melton, Esq., lmelton@dhayeslaw.com, www.aboutbrokerfraud.com
THE HAYES LAW FIRM, P.C., www.dhayeslaw.com, 1-866-332-35567 toll free
Last Monday, September 10, 2007, the Securities Exchange Commission held a summit on senior investment fraud at which the panelist discussed, among other things, free lunch seminars aimed at defrauding seniors. Contributors at the summit included the AARP, FINRA and NASAA. See, Darla Mercado, Senior Summit targets fraudsters, InvestmentNews.com, September 7, 2007. http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20070907/REG/70907012
Although thousands of citizens annually fall victim to the many kinds of consumer fraud practiced by con artists, older Americans are the most preyed upon group of the consumer population. 1 Elderlaw Advoc. Aging 7:2 (2d ed.). At an earlier setting, Patricia D. Struck, President of the North American Securities Administrators Association (NASAA), gave the following testimony before the United States Senate, Special Committee on Aging:
"While our cases of senior investment fraud may not make national headlines, they are devastating in their impact to the victims and their families. What would you do if your mother or father turned over their retirement nest egg to a smooth-talking "senior specialist" who promoted unsuitable investments?"
"These are dangerous economic times for seniors...con artist read the headlines, and they need little encouragement to emerge from the side streets and back alleys to Main Street where older investors live."
(Struck, Senate Testimony, 03/29/06).
Indeed, state consumer affair offices all across the country are reporting a steady increase in cases of fraud against the growing population of senior citizens. Hearings and surveys show that fraud directed at older consumers is widespread and pervasive, affecting nearly every aspect of the seniors' lives. Investigations reveal a growing use of scare tactics, rush deals, pressure for down payment, secrecy, and claims of authority by those practicing fraud against older victims.
FREE LUNCH SEMINARS
Arguably the biggest problem these days is the so-called free lunch seminar. Participants at last weeks summit noted that unscrupulous brokers and investment advisers conduct free lunch seminars in order to actively pursue and single out elderly clientele under the belief that they make easier prey. Essentially, the corrupt broker is looking for an investor with diminished understanding of the stock market. Such an investor tends to depend completely and totally on the representations of his or her stockbroker. If the broker is unethical, he or she will place the client's savings in investments that increase the brokers commissions to the detriment of the client's financial well being.
I am in receipt of an advance copy of a press release that will be published by The Hayes Law Firm, P.C. The press release does a good job summarizing the findings from last weeks summit. Here is an excerpt from the press release:
As the saying goes, there is no "free lunch." A recent investigation by the SEC of 110 "free lunch" seminars found serious issues with this popular tactic used by investment advisors. Deficiency letters or letters of caution were sent to 78% of the investment firms investigated. In addition, 23% of the investment firms are under review for possible further investigation or action by a state, FINRA or SEC.
As part of its ongoing effort to protect senior investors, the SEC initiated its investigation of broker-dealers, investment advisors and other financial services firms that offer so-called "free lunch" sales seminars. The detailed report summarized their findings:
- Sponsors of "free lunch" offer attractive inducements
- Seniors are the Target
- Seminars designed to sell
- Misleading, exaggerated sales materials are often used
- Broker Firms fail to supervise these Seminars
- Bad Investment Advice is given leading to unsuitable investments
- Fraudulent practices including misrepresentations of risk/return, fictitious investments
"We have so many clients who have fallen victim to these sales tactics," said Debra Brewer Hayes of The Hayes Law Firm. "The saddest thing is that they target seniors, those who can least afford to lose their life savings. Just remember, a "free lunch" could cost you a bundle." The Hayes Law Firm encourages investors to report investment advisor fraud and to seek damages.
(PRESS RELEASE: SEC WARING--BEWARE OF "FREE LUNCH" INVESTMENT SEMINARS, The Hayes Law Firm, P.C., not yet released).
MEANINGLESS PROFESSIONAL TITLES
Working hand-in-hand with the free lunch seminar scam is the meaningless professional title scam, sometimes referred to as the "source credibility" tactic. Fraudulent Financial Advisers are increasingly obtaining meaningless official-sounding titles in order to trick seniors citizens. These questionable "professional" titles are often bandied about at free lunch seminars where the so-called specialist reviews the seniors investment portfolio. The self-proclaimed specialist typically recommends liquidating the securities and using the proceeds to purchase indexed or variable annuities products.
FINRA addressed this issue at the SEC Seniors Summit held on Monday, September 10, 2007. Mary L. Shapiro, CEO of FINRA announced a regulatory sweep aimed at preventing this all-to-common scam:
"The first sweep is aimed at the use of inflated or meaningless professional titles by advisers who are seeking to lure seniors into thinking they are experts in retirement planning. The use of so-called professional designations is becoming an increasingly common device used to entice investors to open an account. The unfortunate trust is that seniors can be susceptible to these tactics. Our research shows that some seniors are more likely to listen to pitches from people with such designations. We at FINRA are deeply troubled by this development...."
(Remarks by Mary L. Shapiro, CEO, FINRA, SEC Seniors Summit, September 10, 2007).
Investors, especially senior citizens, need to approach professional designations with extreme skepticism. These days anyone can call himself an expert. Obtaining a fancy sounding title is simplicity itself. Don't be fooled. Remember, if everyone is an expert, then no one is. With such a large number of people walking around with professional titles, some of them have to be liars.
Here is how it works. A financial adviser working for an insurance company will pay a certain amount of money for a correspondence course to obtain an official sounding title. The course might take a couple of days or maybe a couple of hours. Then the adviser takes an easy multiple choice test and obtains the "professional" title. But does that make him an expert? Doubtful. He probably only took the weekend course to get the title, not the knowledge or expertize. Why? Obviously, he wants the title to pull the wool over your eyes. Don't let him.
As Mrs. Shapiro commented on Monday, September 10, 2007:
"The unfortunate fact is that some designations can be obtained simply by paying membership dues to an organization with an impressive sounding name. Too many times these designations mean absolutely nothing. Seniors put their trust in these individuals and are led down a path of financial ruin."
Remarks by Mary L. Shapiro, CEO, FINRA, SEC Seniors Summit, September 10, 2007.
The NASAA is on the same page. NASAA President and Wisconsin Securities Administrator Patricia D. Struck said:
"Individuals may call themselves senior specialists to create a false level of comfort among seniors by implying a certain level of training on issues important to the elderly, But the training they receive is often nothing more than marketing and selling techniques targeting the elderly."
Regulators Urge Investors to Carefully Check Credentials of Senior Specialist, NASAA, December 12, 2005.
The Senate Special Committee on Aging is in the process of investigating Old Mutual Financial Network, Allianz Life, American Equity Investment Life Insurance, Society of Certified Senior Advisor's, Piece of Pie Strategic Coaching, and Senior Insurance Training Services. (Charles Duhigg, Senate Panel Investigates How Insurers Sell to Elderly, July 20, 2007); (Gary S. Mogel, Senate eyes insurer sales to seniors, July 20, 2007).
The financial adviser will use one of the above impressive-sounding titles to trick senior citizens into believing he has credentials and expertise. In reality the adviser may be an inexperienced novice in this area who simply took a phony on-line correspondence course. Once the adviser has fooled the senior into believing he is an expert, the adviser will earn big commissions by placing the senior in a bad investment, such as a variable annuity.
PHANTOM FIXATION
Along with "free lunch seminars," the panelist discussed "phantom fixation" which is a tactic fraudsters use to tempt the investor with a vacation or a sum of money. They guarantee that you will make such-and-such an amount of money.
Recently, Money-Track, a public-television series, and Investor Protection Trust, an investor education group, joined forces to conduct a survey of U.S. investors. The survey found that 43 percent of U.S. investors would fall for a "guaranteed return" investment scam. It is improper for a broker or financial planner to guarantee a specific rate of return. Such a promise ignores the volatility of the market and creates a false expectation in the investor's mind. Always remember: rates of return fluctuate.
Did your broker promise you an average 10-24% return? It is generally inappropriate to guarantee or promise any particular percentage of return. Brokers will sometimes use this as a ploy. If you want a large annual rate of return on your investments you will have to be aggressively invested. By tricking the customer into agreeing to a large annual return, the broker is justified in placing the customer in overly aggressive and risky positions.
The "Phantom Riches" Tactic--dangling the prospect of wealth, enticing you with something you want but can't have. "These gas wells are guaranteed to produce $6,800 a month in income."
There are a number of complicating factors at play which undermine the notion of guaranteed returns: trades may occur, accounts may be assessed fees or interest charged for stock purchased on margin, securities may undergo any of a number of capital events during the month, and cash may be deposited into and/or withdrawn from the account at different times during the month. All of these factors affect the level of return.
Nonetheless, Darla Mercado of InvestmentNews.com reports that "[g]iven the investment swindle scenarios, such as the opportunity to invest in an options-trading system with guaranteed returns of at least 100%, 43% of investors said they would take the bait" See Darla Mercado, 43% Of Investors Are Suckers, Survey Finds, InvestmentNews, May 29, 2007.
One of the reasons the "phantom riches" or "phantom fixation" tactic hoodwinks investors is that the actual investment product is so difficult to understand. For instance, it is a challenging task to understand the complexities and nuances of certain annuities and insurance products. This is true even for sophisticated and experienced investors. It is doubly challenging in the case of elderly investors. In this regard, senior citizens are particularly vulnerable to broker misconduct, as they are frequently swindled into complex and inappropriate investments which they do not understand.
Investment firms typically defend securities fraud claims by asserting that the investor knew and accepted the risks of an investment strategy. This defense is less compelling in the context of elderly investors, many of whom lack meaningful investment experience or the ability to recoup losses. Moreover, the debilitating effects of a major illness, along with memory loss and disorientation, which come naturally with old age, work to disable the older investor and detract from the older investor's ability to reason or use cognitive judgment.
Nonetheless, a broker may know that an elderly client is in critical health. While the customer is in this vulnerable position, the unethical broker may take advantage of the customer by placing her in an unsuitable, high-commission investment, without properly explaining that the investment is not be in the best interest of her or her family.
Common problem areas include variable annuities and IRA losses. To learn more about variable annuities go to http://www.dhayeslaw.com/index.php?n=2&sn=11 . To learn more about IRA losses, go to http://www.dhayeslaw.com/index.php?n=2&sn=13 . In addition, most state securities departments provide information that is helpful to seniors. For instance, Texas provides a list of 10 tips on how seniors can protect themselves against securities fraud: http://www.texasinvestored.org/10tips.php
THE HAYES LAW FIRM, P.C., www.dhayeslaw.com, 1-866-332-3567 toll free
www.aboutbrokerfraud.com
