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Watch out for these Retirement Scams!
By: Joshua Lipton, Forbes Magazine
After reading about it in the local newspaper, you decide to attend a seminar at a neighborhood steakhouse where a broker will offer a lecture on how to retire early, earn high investment returns and enjoy steady annual cash withdrawals, all while you finish off that complimentary, medium-rare T-bone.
The broker is dressed sharp while pitching his difficult-to-resist game plan. The catch of course is that you will have to roll over your 401(k) plan and open an individual retirement account at his firm. There is brief mention of risk associated with stock market volatility and of fees, but you focus on the promise of capital growth and juicy annual withdrawals of 9%. Sounds too good to be true. And it is.
According to securities regulators, these types of luncheon pitches are rampant across America. But they warn that, in most cases, the safe and secure annual withdrawal amounts too often assume stock market returns that aren't realistic. As a result, many investors find that in the end their nest egg has been fried. Instead of pursuing leisurely passions, these "free lunches" wind up leaving would-be retiree's scanning the local newspaper for job listings.
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The oldest baby boomers turn 62 this year, and more than 70 million of them will likely enter retirement over the next 20 years, says T. Rowe Price. Retirement assets in the U.S. topped $17.6 trillion in 2007, up 7% from 2006, according to the Investment Company Institute. But the current retiring crop of boomers is faced with the misfortune of ending their income accumulation years during a bear market. Moreover, after a "lost decade", when the S&P 500 barely advanced, many feel like they need to make up for lost capital fast. That fear, coupled with a general lack of financial education, makes them easy targets for hustlers looking to make a quick buck.
These days, retirement scams range from the out and out fraud, where scammers intentionally separate seniors from their capital, to the more benign cases such as employers misusing or squandering the assets in a 401(k) plan.
"It is a concern", says Fred Joseph, the Colorado Securities Commissioner. "Some investment promoters tell people they can retire and make more money than they did when they were working. So they encourage people to take money out of the company pension plan or the 401(k) and give it to them."
Adds Joseph, "If they are legitimate, they will put it in an annuity, for example, that has high costs, high surrender charges and high up-front fees. That's if they are legitimate. If they are not legitimate, they will just spend your money. Then you're broke."
Although individuals aged 60 or older make up just 15% of the U.S. population, they account for 30% of fraud victims, according to the North American Securities Administration Association. The oldest ripoffs still remain the most popular, regulators say: Ponzi and pyramid schemes, pump and dumps, and high-return or "risk free" investments. Other common cons include "prime bank" fraud.
This is a scheme in which a "prime bank note" is supposedly issued or traded by some of the world's biggest banks. Joseph explains how they work: The transactions involve notes, guarantees, letters of credit, debentures or other seemingly legitimate types of financial instruments being issued by an unidentified "prime" bank. Of course, it's all a fairy tale: Neither the prime bank note nor the secret bank trading program exists.
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Joseph says these schemes have been around since the 1980s, but investors still manage to get taken by the scams, year in and year out.
Last year the U.S. Attorney's office, the FBI, IRS and the Colorado Securities commission convicted a Denver-based high-yield/prime bank investment scheme of mail fraud, wire fraud, securities fraud and money laundering. The too-good-to-be-true investments were sold using names like "Capital Holdings", "Reserve Foundation Trust" and "Fast Track". And, in the end, hundreds of investors were defrauded of more than $50 million. Between 1999 and 2003, Norman Schmidt of Denver, the scheme's leader, his wife Jannice, along with five other co-conspirators promised prospective investors rates of return from 2% to 400% per month.
Impressive-looking monthly statements were sent out like clockwork and investors were encouraged to let their profits ride and invite friends into the deal. Investors were also assured that a prominent insurance company would cover them from losses. In the meantime, the funds held in more than 60 bank accounts, were used in part to support the promoter's lavish lifestyle, including the purchase of eight NASCAR race cars, and Aspen's Redstone Castle, an Italianesque mansion built in 1901 that spans 20,000 square feet and has 42 rooms and 11 bathrooms.
But prime bank scams are yesterday's news. The new game plays off skyrocketing oil prices and $4 per gallon gas. According to Joseph, oil and gas scams have become the "fraud de jour". He is currently dealing with about 24 such fraud cases in Colorado. "It's one of my biggest issues right now", he says.
Last spring, for example, Joseph's office settled an enforcement action against a Wichita, Kan., operation going by the name of Key Resource Companies along with its president, Dale Lucas and vice presidents Russell Kilgariff and Michael McNaul. Oil and gas wells gushing profits was the lure and the investments were peddled between 2003 and 2006.
What the promoters failed to tell the suckers, say regulators, was that they were paying these sales agents up to 50% of the invested amount in commissions and that at least one of their agents was a convicted felon. In the end, the defendants had to pay $300,000 in restitution to 15 Colorado investors, and were barred permanently from the security industry in Colorado. Investors, of course, lost most of their money.
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According to regulators, there are a number of ways investors can protect themselves against retirement scams.
First, remember these four basic red flags, says the U.S. Securities and Exchange Commission: If it sounds too good to be true, it is; guaranteed returns aren't; beauty isn't everything (a fancy looking Web site doesn't mean the party behind the site is credible); pressure to send money right away. If you spot any one of these themes in the sales pitch, the SEC says, be skeptical about the legitimacy of the investment.
Equally important: Know the salesperson. The Financial Industry Regulatory Authority is the largest non-governmental regulator for all securities firms doing business in the United States. You can verify registration and disciplinary information about an individual broker or brokerage firm by using FINRA BrokerCheck or calling them toll-free at 800-289-9999. If that broker is registered, check to see if there is any kind of employment or disciplinary history.
To double-check the background of an investment adviser, contact your state securities regulator or call 202-737-0900.
Another common sense tip: Before committing to any kind of retirement strategy, FINRA recommends consulting with a financial professional of your choosing instead of immediately signing on with someone who "found you".
"Make sure that you don't isolate yourself from people that you would usually get advice from, like your attorney or accountant", says John Gannon, FINRA's Senior Vice President for Investor Education. "The person who is going to commit fraud is usually someone you just met, who persuades you to do something that, if you thought logically about it, you probably wouldn't do. It is very important to get a second opinion".
Another smart move: Cut back on unsolicited phone calls. Put your name on the national Do Not Call Registry: 1-888-382-1222. "I consider the phone to be a weapon", says Joseph. "It can be used just like a gun to steal money".
Finally, be cautious about those ever-popular "free lunch" seminars, where finance "experts" arrive, dish out free eats and tout schemes promising early retirement with no deduction in income.
Regulators conducted 110 examinations between April 2006 and June 2007 of these seminars. The result: 57% of the firms used advertising and sales materials that were misleading, exaggerated or included unwarranted claims. Joseph offers this guidance: "My own advice is to be skeptical. The motive for these guys, remember, is to sell you something".
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