Con artists are targeting the life savings of baby boomers and older seniors in a wave of investment scams.
State securities regulators are reporting a surge of investment fraud against investors ages 50 and older, according to the North American Securities Administrators Association, a voluntary association of state securities agencies responsible for grass-roots investor protection.
“The reason they’re targeting seniors is pretty simple,” says Matt Kitzi, Missouri’s securities administrator and chairman of NASAA’s enforcement committee. “The seniors are the segment of the population that have managed to save and accrue the most investments. Bad guys, crooks and hucksters are going to follow the money. And seniors have had a lifetime to accrue investments and funds.”
In 2010, state securities regulators launched 1,241 enforcement actions, including criminal complaints and cease-and-desist orders, involving investors ages 50 or older, according to NASAA. That was more than double the 506 cases in 2009.
And state securities regulators expect the surge in fraud targeting investors ages 50 and older to continue. With more than 76 million baby boomers approaching retirement age, con artists have a large pool of potential targets. The oldest baby boomers turned 65 in 2011.
“We’ve always seen senior fraud,” says Patricia Struck, administrator of the division of securities with the Wisconsin Department of Financial Institutions. “It’s not anything new. It’s the volume. There are just more older people as baby boomers hit retirement age.”
And baby boomers and older seniors who suffered big losses in their investment accounts during the financial crisis are looking for ways to bolster their retirement savings.
“There’s a genuine fear they will outlive their money because they lost a considerable chunk of it,” says Bob Webster, director of communications for NASAA.
“They may be a little more willing to listen to a fraudulent pitch that promises to provide enough money for the rest of their lives.”
Unregistered securities in the form of promissory notes, private offerings or investment contracts are the most common product used in senior abuse cases, according to an enforcement report from NASAA. Senior abuse cases involving unregistered securities outnumber cases involving “traditional securities” by 5 to 1.
“Most of the fraud that we see is conducted by people who don’t have proper licensing and sell unregistered securities,” Webster says.
Promissory notes marketed to individual investors are a popular type of unregistered security pitched to seniors by con artists, says Lori Schock, director of the Securities and Exchange Commission’s office of investor education and advocacy.
“It’s an outright fraud,” Schock says. “Generally speaking, promissory notes aren’t sold to individual investors.”
Other types of investment scams include affinity fraud, where con artists infiltrate a senior club or organization, create a bond with seniors and then pitch a fraudulent investment.
“Affinity fraud is a big issue that crops up quite a bit in church groups, senior centers, social networking and veterans associations,” Kitzi says.
Oftentimes, con artists will befriend the leader of a group or organization and they may pay off a couple of “initial investors” within the group. These initial investors will often help to promote the scam to other friends in the group or organization.
“People put their defenses down,” Schock says. “If it’s good enough for my friends, then it’s good enough for me.”
Con artists also are targeting seniors in more informal settings such as weekly lunch groups or morning coffee groups, Struck says.
“Just as often as a formal organization, it’s a gathering of friends,” Struck says.
Fraud at free-lunch seminars
Fraud at free-lunch or free-dinner seminars targeting seniors is on the rise, with state securities regulators reporting three times as many fraud cases involving these events in 2010, compared with 2009.
Many free-lunch and free-dinner seminars are marketing tools used by legitimate investment professionals selling legitimate investments. But some of these events are outright investment scams run by con artists, Webster says.
“A lot of fraud can start off in a free-lunch seminar. It can be a first point of contact,” Webster says.
The best way to guard against fraud is to check out the credentials of the person running the free-lunch or free-dinner seminar.
“A lot of folks offering seminars aren’t licensed to sell or give advice regarding securities,” Kitzi says. “Before you invest a single dollar with any investment, seniors, anyone, should call their state securities regulator and ask about the person and the product.”
Warning signs of a con
A telltale sign of an investment scam is a high-pressure sales pitch urging investors to act immediately. Don’t be fooled.
“‘You have to act today. It won’t be here tomorrow.’ That’s the close for almost every scam,” the SEC’s Schock says. “A legitimate investment will be there tomorrow, next week and next month.”
Another sign of investment fraud is the promise of too-good-to-be true returns.
“There’s no such thing as a risk-free investment. Any investment will carry a degree of risk,” Webster says. “What you’ll see in fraudulent pitches is a promise of risk-free investments or low-risk, high-return investments. Those should be warning signs.”
Do due diligence before investing
Check to see if an investment professional is licensed in your state. Contact information for state securities regulators in the 50 states and Washington, D.C., is available on the NASAA website.
Your state securities regulator can tell you whether an investment is registered and if a broker or a broker’s firm has a disciplinary history.
You also can check the disciplinary history of brokers and investment advisers by using online databases at SEC.gov and the Financial Industry Regulatory Authority, or FINRA, website.
The Investment Adviser Public Disclosure website, AdviserInfo.sec.gov, has a database that includes the registration statements filed by investment advisers registered with the SEC.
Before buying stock, check out the company’s financial statements by using the SEC’s EDGAR database, which stands for electronic data gathering and retrieval and can be found on the SEC’s website at sec.gov.