Promoters of fraudulent investments are targeting the 77 million baby boomers in the U.S. who make up 25 percent of the population, according to securities regulators and prosecutors (“Boomers Wearing Bull’s-Eyes,” Wall Street Journal, Kelly Greene). Regulators expect to file a record number of enforcement actions involving investors age 50 years and older, as financial fraud against boomers is “rampant” throughout the nation, according to the article.
In 2010, there were 1,241 criminal and civil regulatory fraud actions involving investors age 50 and over, versus 506 cases in 2009, according to the North American Securities Administrators Association (NASAA), the association of state securities regulators. Unfortunately, the number of enforcement actions is tiny compared to the number of actual fraud cases out there.
Part of the problem is the disastrous stock market crash that wiped out billions of dollars of boomers’ savings. Regulators say that people who have experienced such losses at the worst possible time in their lives are particularly vulnerable to fraudulent sales pitches promising outsized returns to make up the losses. While the stock market has come back some, the Dow Jones Industrial Average is still 15 percent below its peak in October 2007.
Another part of the problem is the fact that we, as we age, become less adept at making financial decisions. The Boston College Center for Retirement Research found that this ability peaks at age 53.3 and declines thereafter. Another study by a Texas Tech University professor found that knowledge about financial matters falls 2% each year after age 60, while, at the same time, confidence in being financially knowledgeable actually increases ? a dangerous combination that favors promoters of fraudulent investments.
Regulators warn investors to be especially wary of exotic and complex alternative investments, which include unregistered securities like promissory notes, private (Reg D) offerings, non-traded real estate investment trusts (REITs), oil and gas limited partnerships, gold, foreign currencies, and other non-traditional investment contracts. Of the enforcement actions involving investors age 50 and over, alternative investments outnumbered traditional stocks and bonds and mutual funds five to one.
Regulators also note that the number of ponzi schemes, real estate fraud, and “free lunch seminars” have surged.
In one case described in the article, on December 6, James D. Risher of Sanibel, Florida was sentenced to more than 19 years in prison after pleading guilty to mail fraud and money-laundering charges. Risher had raised over $22 million from more than 100 investors. Risher siphoned off $8 million as “management and performance fees,” spent $4.5 million on personal items like jewelry, and recycled $3.6 million back to investors as “distributions.”
In another case involving investors in Georgia and North Carolina, Ephren Taylor, Jr. solicited older members of his church to invest in promissory notes to be held in self-directed IRAs. (Self-directed IRAs are a favorite of fraud promoters because they are allowed to hold exotic alternative investments.) Investors were not repaid and the Georgia securities commissioner is investigating.
Investor attorney J. Boyd Page, senior partner of Atlanta-based Page Perry, commented: “We have seen a surge of cases involving losses in alternative investments. These investments are often pitched as providing both high returns and relative safety by virtue of having a low correlation to the stock market. Unfortunately, many of them are loaded with derivatives and leverage, and have declined as much or more than the stock market in recent years. Many alternative investments are very dangerous and unsuitable for most investors, and, as we have seen, some are outright frauds.”
Page Perry is an Atlanta-based law firm with over 150 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. For further information, please contact us.