by Kelly Greene
Scam artists increasingly are targeting people trying to repair their nest eggs. Here's what to watch for.
Many investors in their 50s and 60s are desperate to bulk up their nest eggs. But they remain skittish about the stock market -- and are frustrated with low interest rates.
It's a combination that makes them especially susceptible to fraud. "Anybody who's even thinking about retiring is panicking because they're going to outlive their savings," says Joseph Borg, Alabama's top securities regulator. "Along comes a scam artist with a guaranteed, super-safe deal. It's a perfect storm."
State securities agencies have seen their caseloads explode in the past year. And nearly half of investor complaints involve investment fraud targeting people age 60 and older, according to the North American Securities Administrators Association, based in Washington, D.C.
What are the latest schemes? What should people be on the lookout for? Here are some of the newest types of fraud, according to those who keep track, and how to steer clear of scams.
Despite the bursting of the housing bubble, many longtime homeowners still have substantial equity. Some salespeople are inducing them to lend that money, by means of credit lines or reverse mortgages, to limited- liability companies or partnerships promising steady returns.
Kim Cooper, a 47-year-old home-health nurse in Orange County, Calif., used $100,000 from a home-equity line of credit to invest in April 2008 with a local firm, MacArthur Birch LLC. She believed her money would go into a trust buying international securities, and she received a promissory note pledging a 5% monthly return for a year, she says. Instead, Ms. Cooper lost her money.
"We were told all kinds of things -- the money was frozen, Homeland Security had the money in a New York bank because they wanted to make sure it wasn't being laundered," she says. "They kept us hanging on."
The California Department of Corporations, which regulates securities, issued a "desist and refrain order" against MacArthur Birch and two of its managers in October for selling investment contracts without telling investors that their money would be put into another trust. The state also said in its order that the firm didn't tell investors that the state had issued a similar order against that trust in 2007.
MacArthur Birch requested a hearing on the order, set for Aug. 26 in Los Angeles. The firm's managers and attorney didn't return phone messages or emails seeking comment.
Promissory notes like the one issued to Ms. Cooper are becoming more common, says Pat Huddleston, a former Securities and Exchange Commission attorney in Atlanta who has started a service offering due diligence on investments for individuals (investorswatchdog.com). "They look contractual, and they purport to pay interest like bank accounts, CDs and other things that are solid and reliable," says Mr. Huddleston. "It makes an investment look really safe, even when it's not."
Of course, there are legitimate reasons for home-equity loans and reverse mortgages, such as supplementing retirement income to pay long-term-care costs or rising property taxes. But be wary of anyone who recommends that you take out such a loan to make an investment.
Life Settlement Securities
Life settlements, in which older adults sell their life-insurance policies to investors at a discount to face value, have drawn scrutiny for the industry's high fees, opaque nature and aggressive sales practices. Now there are concerns about fraud in the "securitizing" of life settlements. Some companies are packaging hundreds of policies and using them to back the sale of notes. That means the policies being securitized could be overvalued -- or faked, says Denise Voigt Crawford, Texas securities commissioner.
Last year, Texas investigators seized about $20 million in assets from National Life Settlements LLC, a Houston company that sold secured notes backed by life-settlement contracts and promising up to 10% annual interest to about 320 investors, including retired teachers. The state considered the investments to be unregistered securities, and a court-appointed receiver testified that the firm paid new investors with money from earlier ones, rather than investing in life settlements.
A Texas district-court judge issued a permanent injunction against the company's doing business in the state and appointed a permanent receiver to return investors' money.
National Life Settlements' principals, Howard Judah Jr. and Gregory Jablonski, settled the claim without admitting to the state's charges. "The state's position was that these were securities, and our clients' position is that this was an insurance product," says Brent Haynes, a Houston lawyer who represented them.
One important distinction: Until the economic turmoil of 2008 and 2009, a growing number of people had been selling their own life-insurance policies to investors in exchange for a lump-sum payment, according to data collected by Conning Research & Consulting in Hartford, Conn. (A lack of capital in the life-settlement market has slowed the market in the past few years.) For older people who no longer need the policies and could use the money now , this may be a reasonable decision -- and is different from investing in a securitized group of such investments.
Heightened awareness of global warming, along with President Barack Obama's challenge to end U.S. dependency on foreign oil, has created a pool of baby boomers receptive to "green" investments -- some of which are fakes, Mr. Huddleston says.
Late last year, the SEC accused Nova Gen Corp., San Diego, which claimed to own technology capable of converting coal into virtually emissions-free biodiesel fuel, of making false statements and selling unregistered stock. Nova Gen projected "wildly unrealistic" revenue based on building power plants for which it lacked permits and funding, according to the SEC's complaint, filed in December in federal court in San Diego. "In reality, Nova Gen is a shell of a company that has no operational technology and no revenues," the complaint says.
Nova Gen has denied the allegations in court filings. The company's lawyer didn't return calls seeking comment.
Of course, alternative energy is a hot new investment category with legitimate ways to make money. But you'd be better off seeking out a mutual fund, or exchange-traded fund, that would use a small portion of your equity investments, to diversify your overall portfolio.
Scams in which a company offers to buy and store gold for investors -- and to sell the material when it increases in value -- are also increasing, says Judith Shaw, Maine's securities administrator. The problem: "In many cases, the gold doesn't exist," she says.
The right way to invest: Go through a reputable, local gold dealer, Ms. Shaw says. If you don't want to hold onto the bullion yourself, carefully evaluate the seller's offer to store it for you. "Purchasing your precious metal from somebody who's local is far and away better than doing it over the Internet," she says. "Our message always is, 'Please just call us first to check them out.' "
Steering Clear of Fraud
Although every investment has its own set of wrinkles, there are some basic ways to steer clear of various types of investment fraud. If it seems nearly impossible to evaluate an investment product's underlying risks, "avoid it like the plague," Ms. Crawford says.
Also, don't sign anything presented as "top secret." Ms. Cooper, for example, was asked to sign a confidentiality agreement, so she didn't tell her financial planner about the investment until it was too late to get her money back.
Don't invest with your home equity, either. Ms. Cooper is spending an extra $1,000 a month to pay back the home-equity loan she used to invest with MacArthur Birch and worries how she'll afford a new car, which she needs to do her job.
Things you should do: Start with your own background check on the investment and the people pitching it. A good first stop is your state securities department. Go to nasaa.org and click on "Contact Your Regulator." State officials should be able to tell you whether a security is registered, and if it's not, why it isn't. The same agency can tell you if the salesperson is licensed to sell securities where you live. You can also check an investment adviser's history by going to finra.org, clicking on "Investors" and then going to "Finra BrokerCheck."
Seeking out the background of the people involved in creating and selling a product could be even more important. Check with state securities regulators everywhere the people have lived for any actions brought against them. Check federal or state databases for bankruptcy or criminal filings, too.
"A company can always file with [a] secretary of state or create an accounting firm to do an audit and look legitimate," Mr. Huddleston says. "But a scam artist can't hide his own background as easily."
Ms. Greene is a staff reporter for The Wall Street Journal in New York. She can be reached at email@example.com.