Protection from Investment Scams

An article that I found on the internet that has information for all investors. It has contains the organizations to contact if you believe you have been the victim of investment fraud.

Protect Your Retirement From These Investment Scams by Kimberly Lankford

Retirees are being lured by Ponzi schemes, unsuitable annuities and over-hyped investment returns.
Ed and Ruthann Wolfe just wanted a safe place for their retirement savings. During his 32 years at the Rubbermaid plant in Wooster, Ohio, Ed had amassed more than $320,000 in his 401(k), all of it invested in low-risk Fidelity mutual funds.
After Newell bought Rubbermaid in 1999, early-retirement offers were made to more than 180 employees at the Wooster plant, including Ed, then 55. At the same time, many of his colleagues began attending investing seminars hosted by a Merrill Lynch broker, who was telling investors they could earn more money if they retired than if they stayed on the job. "There was a buzz going around the shop about how good this could be," recalls Ed. "We thought we couldn't afford not to do it."
The Wolfes turned over their entire $320,000 in retirement savings to the broker, with instructions to keep their money in low-risk investments because they needed to start making withdrawals right away. So they weren't concerned when the stock market tumbled in 2001.

Then they began hearing from friends whose investments had declined in value. Ruthann called the broker and was shocked to find out that they'd have to stop withdrawing money or go broke. Their retirement stash, which the broker had invested in high-risk Internet and tech companies, had plunged to less than $100,000. "I felt it could be the end of the world," says Ed, who went back to work driving trucks for two and a half years.
Cases similar to that of Rubbermaid's retirees have been cropping up across the country. "In the past two years, we've had about 100 formal disciplinary actions involving seniors," says Mary Schapiro, chief executive of the Financial Industry Regulatory Authority, which oversees U.S. securities firms.
In one high-profile case settled last summer, NASD (Finra's predecessor) fined Citigroup Global Markets $3 million and ordered the company to pay $12.2 million to more than 200 former employees of BellSouth. The regulators said Citigroup failed to adequately supervise a team of brokers based in Charlotte, N.C., who used misleading sales materials -- promising 12% annual returns -- during dozens of seminars for BellSouth employees from 1994 to 2002. Instead, more than $12 million in former employees' accounts evaporated during the bear market. "These are people who were persuaded to take retirement early -- who didn't have to and probably shouldn't have -- based on these misrepresentations," says James Shorris, of Finra's enforcement division. Citigroup says it is "working on all fronts to prevent a similar situation from occurring again."
Baby-boomers nearing retirement, and their parents, make irresistible targets for this kind of scam. "When you're looking at $16 trillion in retirement accounts changing hands in the next 15 to 20 years, that's a big market share for anybody," says Alabama Securities Commission director Joseph Borg. In a sweep of "free lunch" financial seminars, the Securities and Exchange Commission found unethical business practices in nearly half. In addition to promises of over-the-top investment returns, the most common scams include Ponzi schemes and sales of unsuitable annuities.
Retirees are vulnerable because they're looking for ways to stretch their income. Plus, many seniors are afraid to ask questions, consult with their children or complain to regulators. "A lot of people think they'll lose their independence if they admit they were taken advantage of," says Barry Lanier, chief of the bureau of investigations for the Florida Department of Financial Services. When Finra surveyed senior investors last year, only 56% of the victims who admitted to being defrauded said they had reported the incident.
The money that seniors have amassed is "usually irreplaceable," says Jacob Zamansky, a securities lawyer in New York City. "They can't afford to lose the principal, so they generally need to be conservative. Anything that doesn't meet that investment objective should be viewed very suspiciously."
Ed Wolfe hired Zamansky in 2002. A year later, after his case went to arbitration, he was awarded $310,000, including legal expenses. About 75 of his Rubbermaid colleagues also received settlements from Merrill Lynch. "Financially, we're pretty much back on track," says Wolfe. "But mentally, I'll never be the same."
Ignore the Hype
Be suspicious of any sales pitch that promises unrealistic returns. "Anytime you're talking about average returns of greater than 12%, you're not in the ballpark," says Jim Eccleston, a securities lawyer in Chicago. In the BellSouth case, not only were investors led to believe they could earn about 12% per year, they were also told they could afford to withdraw 9% of their funds annually for 30 years.
Before doing business with a broker, check his or her background using Finra's BrokerCheck tool. Look for disciplinary actions taken against the broker, as well as red flags -- for example, the broker has frequently changed firms.
If the adviser is a certified financial planner, check his or her credentials with the CFP Board of Standards. Also consult the Senior Investor Resource Center and the SEC's senior investor page.
Just checking whether the broker has a securities license can keep you out of serious trouble. "Maybe one in ten of our cases involve a licensed stockbroker," says Colorado securities commissioner Fred Joseph. Many of the most notorious purveyors of bogus investments never held a license.
In Wolfe's case, keeping good records made a big difference in the outcome. So keep a copy of any mailings you receive from a broker or handouts you get at a sales presentation. Take notes during your conversations. Talk with the broker about your investment goals and ask him or her to summarize your discussion in writing, recommends Tom Grzymala, a certified financial planner and expert witness in securities cases. "I want to see the account information about what type of investor you are," he says.
Losing money in the stock market doesn't necessarily mean there's been wrongdoing or that a crime has been committed, says Tracy Stoneman, a Colorado securities lawyer and author of Brokerage Fraud: What Wall Street Doesn't Want You to Know. Securities law looks at whether the broker made investments that were suitable for you. To determine that, a broker needs to know your goals, risk tolerance, tax status and whether you need ready access to your money, says Schapiro.
In return, you should ask the broker to rate an investment's risk on a scale of 1 to 10 and to put the answer in writing. If the investment starts to lose value, ask for a written explanation. "Put the brokerage firm on notice that the losses make you uncomfortable," says Stoneman. Writing down your concerns and faxing them to the broker and his supervisor "is a wonderful protection tool," she says.
If you continue to have problems, don't hesitate to complain to the brokerage firm and your state securities regulator (find contact information at www.nasaa.org). But even the SEC and Finra generally can't recover your losses. For that, contact a securities lawyer (www.piaba.org) to take your case to arbitration.

Be Cautious With Annuities

One night in 2005, Virginia LaValley called her son, Ken, and told him she had just made a new investment that was paying 7% annually. "I don't know a whole lot about investing," Ken admits. Still, he thought that his mother, then 75, was mentally sharp enough to make her own decisions. But when co-workers told Ken that earning a guaranteed 7% was unrealistic, he figured "something wasn't right."
When Ken started to investigate, he found that his mother had been duped into buying unsuitable annuity products -- the most common complaint insurance regulators handle. Florida's Department of Financial Services has 51 open investigations involving variable annuities, plus 105 investigations into equity-indexed annuities, a complicated product that ties payoffs to stock-market indexes while guaranteeing a minimum return.
Annuities themselves aren't necessarily bad. In fact, an immediate-payout annuity can provide lifetime income for seniors. But deferred annuities, such as variable and equity-indexed products (which are usually used for long-term retirement savings), can cause big problems if they're sold to people who need immediate access to their money. Many of these annuities levy a surrender charge if you try to withdraw your money within the first seven to ten years.
But seniors are tempting targets for the hard sell. Agents often get commissions of 4% to 7% for selling variable annuities, and 5% to 12% for equity-indexed products. An agent who convinces a retiree to roll over a $200,000 IRA into an annuity can earn as much as $24,000.
Commissions seem to have been the motive in the case of Virginia LaValley, who lives in Boynton Beach, Fla. The agent persuaded her to trade in almost $40,000 in annuities -- which had a minimum return of 3% and no longer had a surrender period -- in order to buy new equity-indexed annuities with a 2% minimum return and a brand-new surrender period of 15 years. Virginia would have paid a penalty if she had tried to withdraw the money before age 91, and she would have owed a whopping 19% surrender charge if she had taken out money within the first year.
To complicate matters, Ken began noticing signs of dementia in his mother. Always impeccable about keeping records, Virginia hadn't balanced her checkbook in months. Mounds of junk mail were heaped on her dining-room table, and she felt obligated to answer it all, sending more than 500 small checks to charities and sweepstakes in 2005.
On the advice of a reputable financial adviser his mother had consulted in the past, Ken contacted a lawyer. Working with the insurance company that issued the annuity, American Investors, they got Virginia's money back after providing medical records that proved she was suffering from dementia when she bought the annuity.
When Florida's Department of Financial Services investigated, officials discovered that the same salesperson had duped a number of people in their seventies and eighties into buying high-commission equity-indexed annuities with surrender periods that sometimes stretched past age 100. The state took away the agent's license and fined him $40,000, but many of the families are still trying to get their money back.

Build Your Case

Be skeptical of any claims made at a free-lunch seminar, a common sales tactic to get seniors into a one-on-one meeting. And don't trust a salesperson just because he or she has a professional designation that focuses on seniors. Such credentials sometimes require little more than paying a fee and passing an easy take-home test. (Look up the requirements for professional designations at Finra.org.)
Ask specifically about annuity surrender charges and how much money you can withdraw each year. Also ask about interest guarantees. Some annuities offer a bonus in the first year, after which the minimum guarantee drops to 2% or 3% -- much less than you'd earn on a bank certificate of deposit. Equity-indexed annuities have returns based on Standard & Poor's 500-stock index, but they pay out only a portion of the gains.
Take notes and ask for a written summary of everything you discuss with the salesperson. Just requesting paperwork could discourage an agent in search of an easy mark.
If you find that you or your parents were sold an unsuitable annuity, contact the insurance company. If you can provide evidence of mental incapacity, it may be easy to get your money back.Don't hesitate to call your state's securities department or state insurance department. "You can always weed out bad agents by telling them you'd like to call us and put us on speakerphone," says Cindy Hermes, who spent years in the consumer-assistance division of the Kansas Department of Insurance. If the agent balks, walk away.