Seniors Beware: Securities Regulator Details Investment Frauds
by James J. Eccleston, Esq.
he head of the state securities regulators' association, Patty Struck, recently testified before the United States Senate. Her testimony, entitled, "Protecting Senior Citizens Against Investment Fraud", noted how widespread investment fraud against seniors has become.
Consider this: Ms. Struck cited an estimate that while people aged 60 and older make up 15% of the U.S. population, they account for 30% of investment fraud victims. Seniors are "bombarded with pitches for financial seminars", advertisements, and cold callers, many promising "higher returns and little or no risk." In truth, she said, securities regulators see just the opposite: "high risk and no returns, just devastating losses."
Indeed, the problem may become worse, not better. Ms. Struck cited statistics that the 50-plus population is the fastest growing segment worldwide. Boomers have more than $8.5 trillion in investable assets and, over the next 40 years, will inherit at least $7 trillion from their parents.
Seniors must be wary of the three disturbing trends that state securities regulators are fighting to prevent. They are: (1) senior specialists; (2) sales of variable (and equity-indexed) annuities; and (3) sales of bogus investments by unregistered/unlicensed individuals. Let's examine these areas.
First, so-called "senior specialists" frequently conduct seminars, typically with a free prime-rib dinner, to convince seniors that they know how to reduce taxes, minimize investment risk and avoid state probate laws. Ultimately, they usually recommend that seniors liquidate their current securities positions and use the proceeds to buy fixed, indexed or variable annuities that the "specialist" offers.
The case of Investors Capital Corp. illustrates what a scam this pitch truly is. Massachusetts securities regulators brought a legal action against the firm, alleging that the "Certified Senior Adviser" (CSA) designation was used by Investors Capital advisers "as a means of misleading elderly Massachusetts residents." That is because coursework required for the CSA designation included teaching participants about how to "[d]evelop leads and design materials sensitive to the senior population." Participants also were promised that they would be able to attract 200-300 seniors to seminars. Finally, the coursework for the CSA designation was light - a three day live course or home study - and the examination for it was a multiple choice exam with home study participants allowed to select their own proctor.
Although Investors Capital advisers touted their CSA designation and proclaimed their expertise in managing and solving financial problems facing seniors, in reality the Massachusetts securities regulators alleged that the firm steered seniors toward investing in equity indexed annuities. The advisers misrepresented the fact that investing in equity indexed annuities allowed investors to participate in stock market gains without risk. In reality, equity indexed annuities "are complex insurance products with high commissions and long holding periods (as well as stiff penalties for early withdrawals), which make them unsuitable for many older investors", Ms. Struck testified.
The second disturbing trend is the continued sale of variable annuities to seniors. Ms. Struck told the senators that a "perennial fixture" on the securities regulators' list of "top scams" involves the sale of variable annuities with little regard to whether they are suitable. These are unsuitable for "many retirees", Ms. Struck stated. Like their cousin, the equity-indexed annuity, variable annuities charge high surrender fees for early withdrawals and have steep sales commissions. Additionally, while often claimed to have guaranteed returns, in truth these products are vulnerable to the volatility of the stock market. Moreover, high costs and the taxable nature (ordinary income and not capital gain) of the product erode the performance of these products.
The third disturbing trend is the sale of investments by unregistered/unlicensed individuals. Ms. Struck testified that this is a "problem area inundating state securities regulators." Investors should buy securities only from advisers who are registered and licensed to do business as securities salespeople or registered investment advisers. Unfortunately, investors fail to see the red flags when their insurance agent, accountant, adviser or lawyer who is not licensed to sell securities convinces them to buy. "Bogus" investments include some limited partnerships and promissory notes.
All investors must be careful. Seniors, as the strongest growing segment of the population and a large percentage of fraud victims, especially must be vigilant. Usually, their retirement nest eggs depends on it!
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James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.
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