INVESTMENTS  -  SENIORS
 
 

How To Avoid Investment Scam Artists
 

Caveat emptor. It’s the one phrase everyone remembers from Latin class. Yet who among us does not respond to the offer of a “deal,” if only with a quickening of the pulse? We can’t help it: it’s human nature. And so it is that millions of humans, even normally cautious folk who exhibit good sense on the other 364 days, each year fall victim to scam artists. Seniors citizens, in particular, are all-too-often victimized.

In the investment community, scam varieties wax and then wane as the media and regulators hear about them. One of the latest to come to our attention involves prospecting among newly retired or downsized employees who are likely to be holding sizable lump-sum payouts from qualified employer retirement plans. This is a vulnerable population, people who find themselves with sudden access to what is, in many cases, the most money they have ever had to manage on their own. Increasingly, these people are besieged by brokers who want them to roll over their retirement savings from the company plan into an individual retirement plan sold or managed by the broker.

So what’s wrong with that? Reputable brokers have long sought clients among preretirees, typically by offering companies free investment seminars for their employees. But the scam artists are different.

The tactics are new

To avoid having to operate under even marginal employer scrutiny, unscupulous brokers are approaching their targets individually after buying lists of retiring and downsized employees, often from outside consultants who work with security systems or company retirement, payroll, or benefits plans. Sometimes the information is available for free in a company newsletter.

These “brokers,” many of whom don’t even have securities licenses, make repeated hard-sell pitches for their products, usually over the phone. At best, the investments they’re promoting may be inappropriate for their prospects; at worst, they’re unconscionable ripoffs. And the people they’re selling them to are often unsophisticated investors. They have never selected their own investments or worked with a financial advisor. They don’t know what questions to ask, let alone what answers to expect.

The consequences can be devastating

While high-risk investments can cause suffering for those retirees who don’t realize that principal as well as earnings are at stake while they’re being gouged by high commissions and inappropriate vehicles that maximize tax liability, bad rollovers have particularly disastrous results for younger employees who have just been laid off: in addition to being hit with income tax on deferred contributions and capital gains tax on earnings, working-age investors will pay an additional 10 percent premature distribution penalty on their nest egg.
 
 

Help is available

To help investors protect themselves, state securities departments offer a 16-point sticker encouraging consumers to ask brokers a series of basic questions. “Where did you get my name?” and “Where is your office?” and “Can you mail me copies of your company’s financial statements?” will quickly identify scammers. The North American Securities Administrators Association in Washington has also revised the book it published with the Council of Better Business Bureaus, appropriately called How To Be an Informed Investor: Protect Your Money from Schemes, Scams & Frauds. Available from state securities departments, the book alerts consumers to a range of scams including micro-cap stocks and assorted Ponzi schemes (see sidebar). For further information, the National Futures Association in Chicago offers a free booklet called Investment Swindles: How They Work and How To Avoid Them.
 

Investors can take steps to help themselves

While you’re waiting for your reading materials, here are some red flags to watch for:
 

 • You don’t fully understand the investment. (There’s a good reason for that.)

 
 • A pitchman tells you that instead of working for your money, you should let your money work for you. (It will work for someone, but it won’t be you.)

 
 • An up-front payment is required. (The scam artist has to earn a living somehow.)

 
 • A credit card or checking account number is required. (Hear the background noise? This is a “boiler room” operation set up to conduct a telemarketing scam. Sorry, but you never, ever give out this information on the phone.)

 
 • In response to a request for written information, you’re told the company does business only through telephone offers. (That’s too bad, because you never buy anything over the phone.)

 
 • You have to act today. (You have the rest of your life in which to repent.)

 
 • It sounds too good to be true. (It is.)

Any time you’re considering a sizable commitment of funds, check first with an accountant, lawyer, or trusted friend or family member. If either of you feels the slightest doubt about the investment, double check with someone else whose judgment you trust. And so not forget that word of mouth recommendation of an investment advisor from a relative, close friend, or colleageu is often a good source of a trustworthy professional.

Classic Consumer Scams

The Ponzi scheme. Named in honor of Charles Ponzi, who popularized it in the 1920s, this get-rich-quick scheme involves several tiers of investors. Victims in the first tier are asked to “invest” (or lend the scam artist) a sum of money – today – with the promise of its return in 30 days, plus substantial interest. After 30 days, the money plus interest is duly returned; the victim is invited to participate in a second round and typically accepts, not realizing that the “interest” came not from an investment, but from money put up by a second tier of “investors” who will be repaid, in turn, from money advanced by a third tier of recruits plus first-tier repeats. At some point, the Ponzi artist will simply disappear with the cash advanced by serveral tiers of victims.

The pyramid scheme. This is a chain letter asking you to (1) remove the top name from a list of, typically, six names; (2) send a specified sum of money to the person whose name you removed; (3) add your own name to the bottom of the list; send the letter to, say, six people; (4) wait for the money to roll in. It seldom does.

The out-of-state land deal. You are offered a deal on raw land at an incredibly low price. What you are not told is that zoning laws prohibit development, or something like a lack of running water (or alligators) makes it uninhabitable. Yes, people still fall for this one, but they can contact the Interstate Land Sales Registration Division in Washington, DC.