Fight Financial Fraud With Tricks of Your Own

Do retirees have GPS devices that tell con artists where they live? It often seems so.

Older investors are often besieged by swindlers because they tend to have higher net worth and are more accessible to crooks than younger Americans. They also may have cognitive impairments that cloud their judgment, according to a report in February by the Center for Retirement Research at Boston College. It found, “The ability to make effective financial decisions declines with age as dementia and other types of cognitive impairment increase.”

Over all, investment fraud is a growth business. Last year, when the Federal Trade Commission said it received 1.8 million complaints, it noted that its largest single category involved identity theft — a crime that frequently victimizes older Americans.

With the Internet providing more opportunities for swindles and the new federal JOBS act possibly waiving some regulatory requirements for small businesses seeking investors, the potential for even more fraud looms. Retirees and their families would do well to call upon financial advisers and lawyers, and perhaps law enforcement authorities, for guidance.

Such advisers might collaborate in communitywide efforts to flag and curtail fraud. Compounding an escalation in investment fraud is the fact that many retirees now have inherited money from their parents. This “demographic bulge,” according to the Center for Retirement Research, will make this generation tantalizing to swindlers. “It’s pretty clear this will be a rising problem in the future,” said Kimberly Blanton, who researches and writes a blog for the center.

A new provision of the JOBS law (for Jump-Start Our Business Start-Ups) allows people to pool their money for a business — a way of investing also known as crowd-funding. This imposes less rigorous rules on small companies going public, which will be able to offer shares directly to the public with less oversight by the Securities and Exchange Commission.

In a case predating the new law that nevertheless illustrates the fraud risk in such offerings, the S.E.C. recently charged a California man with violations of antifraud laws for promising to sell stakes to investors in technology start-ups — the “next Google.” Benedict Van of San Jose settled charges with the agency without admitting or denying guilt. Mr. Van was censured by the agency, which did not require him to pay back $7 million solicited from investors because he had spent it all on operating expenses and rent.

Lou Straney, an instructor for certified fraud examiners, said he worried that retirees struggling to increase their incomes would fall prey to swindlers offering investments in start-ups. “This is incredibly dangerous,” said Mr. Straney. “Fraudsters will seize on this and try to sell promissory notes based on growth from fictitious companies.”

Mr. Straney, who also investigates investment misconduct and fraud, said that in recent years promissory notes had dominated the list of swindles involving retirees. The premise is simple: a broker or adviser offers a high-yield note that could be linked to anything from a commodity to a life-insurance settlement. Once they have received a few million dollars from investors, they stop selling the notes, close their operations and disappear.

Much of what propels retirees to take more risk is the search for yield. With all insured vehicles and short-term bonds still returning in the low single digits, millions of investors are tempted to chase products with higher returns. That may lead them into high-fee products that pay brokers from 2 to 10 percent in commissions, Mr. Straney said.

News headlines also inspire fraud merchants to act. Whenever the price of a commodity soars, that creates an increased opportunity to sell investments. Two of the top investor traps seen by the North American Securities Administrators Association, a state regulators group, involved energy or gold and other precious metals.

Some energy investments, for example, falsely promise to garner a share of profits from untapped oil and gas reserves. Precious-metals swindles have long relied upon special coins, stakes in dormant mines and new extraction equipment to hook unsuspecting investors.

Even bad news attracts swindlers. Distressed real estate schemes have been common following the housing downturn. Foreclosed properties sold as investment pools are linked to promissory notes. In one Florida swindle last year, $2.3 million was solicited from investors to buy, refurbish and resell properties. The operator of the swindle later pleaded guilty to fraud.

Protecting retirees from investment fraud requires a comprehensive effort. The Investor Protection Trust, along with other groups, has urged families to engage professionals to monitor and intervene when financial fraud is suspected.

Part of a family intervention involves regular conversations with retired family members and friends. Are they being solicited for investments? What kinds of pitches are they receiving? Are the solicitors asking for Social Security numbers or bank account information? Those are glaring red flags.

Many swindles involve outright identity theft or phishing, where personal information is used for such thievery as emptying bank accounts or stealing tax refunds.

It is worthwhile to ask health care and legal professionals serving older investors to stay alert for any telltale signs of fraud and to report them to authorities. While victims are reluctant to talk about their misfortune once they have been cheated, they often boast of being offered superior returns while the swindle is unfolding.

Due diligence is also essential. If any offer of abnormally high return is received, have it checked out by an independent third party, like a certified public accountant, chartered financial analyst or fee-only certified financial planner. Most responsible advisers are also fiduciaries, meaning they are legally responsible for representing a client’s interests above their own.

Typically, inquiries like “How are outsized returns produced?” or “Can I see audited financial statements of a company making an offering?” can stop operators at the initial pitch. While any statement or document can be falsified, if the sellers evade a barrage of detailed questions, that is a good sign that they are not legitimate.

The backgrounds of brokers and advisers should also be checked. State securities regulators will tell if brokers or advisers are registered and what is in their background files, like previous lawsuits or criminal charges. See the site nassa.org for a list of regulators.

With regulators and other watchdogs constantly outnumbered by would-be swindlers, the onus is on investors and their families to vet any potential vehicle. With more eyes on investors, many swindles can be avoided.

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