by Lawrence C. Melton, Esq., lmelton@dhayeslaw.com, www.aboutbrokerfraud.com
THE HAYES LAW FIRM, 1235 North Loop West, #510, Houston, Texas 77008, www.dhayeslaw.com, phone number: 713-862-2152 or 1-866-332-3567, toll free.
At the SEC Senior Summit, held September 10, 2007 in Washington D.C., the panelist spent some time discussing "phantom fixation" which is a tactic fraudsters use to tempt the investor. In basic terms, the fraudster guarantees that you will make such-and-such an amount of money from your investment. Generally, the promised return is unreasonably high. You recognize this, but are seduced all the same. The broker has clouded your thinking with cleverly crafted speeches that promise the heaven and earth. No pronouncement is too daring: he says he will double and triple your money, turn you into a millionaire within five years, and you want to believe this. The prospect of accumulating riches blinds you to the harsh reality of life. Yet the harsh reality of life is precisely what you need to face. There is no pot of gold at the end of the rainbow, never was. The broker's silver-tongued promises were nothing more than cheap and calculating sales pitch. The broker's promise of riches were in fact an illusion, a mirage, a fantasy, a "phantom." You were the victim of phantom fixation.
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
