THE COLOR OF MONEY
Securities experts' war on con artists aimed at protecting the elderly

By Michelle Singletary

For con artists, this is the ideal time to scam seniors. As a result, securities regulators are launching a major pre-emptive mission.

The North American Securities Administrators Association, which represents state and provincial securities regulators in the United States, Canada and Mexico, has announced a series of investor education initiatives and the creation of an online "Senior Investor Resource Center" full of tips and warnings for elderly investors.

"These are dangerous times for seniors," said Christine A. Bruenn, the association's president and Maine's securities administrator. "We have a volatile stock market. A three-year bear market. Record low interest rates. Mix all that in with rising medical costs and the fact that people are living longer. The result is people who are retired or soon-to-be retired are becoming desperate. This makes them vulnerable to investment fraud and abuse."

Bruenn said older investors are being targeted with increasingly cunning scams involving unregistered securities, promissory notes, charitable gift annuities, viatical settlements and Ponzi schemes all promising inflated returns.

Don't know these scams? You should. Here's how they work:

Unregistered securities.

If someone is trying to sell you stocks or bonds, make sure the securities are registered in your state. Check with your state regulator. There is a link on the online senior resource center at www.nasaa.org.

If you find out the securityis not registered, don't buy it. This means that the seller hasn't complied with the most basic state legal requirement. Crooks don't bother with following the law.

Promissory notes.

In its simplest form, this involves lending a business your money with a promise you'll get it back with some interest. Independent insurance agents who promise high returns with little or no risk often sell this type of debt instrument.

Last year, four Georgia-based scam artists were each sentenced to 17 1/2 years in prison for recruiting independent insurance agents to sell millions of dollars worth of bogus promissory notes. Investors were promised returns as high as 21 percent. Unfortunately for the investors, half of the money was used to pay commissions divided among company executives and sales agents.

Prime bank schemes.

Con artists use the word "prime" to describe the world's top banks. Such banks have nothing to do with these phony investments. Promoters falsely claim their high-yield investments are guaranteed or secured by some sort of collateral or insurance.

In July, a Chicago-area man was sentenced to 10 years in prison for a prime bank scheme in which he defrauded more than 400 investors of nearly $11 million. Investors were promised returns as high as 1,250 percent annually with no risk.

A word to the wise: If someone says he has a risk-free, high-yield investment, he's a lying lowlife out to steal your life savings.

Charitable gift annuities.

Regulators worry this will become the next big scam. The problem is many people can and do legitimately set up charitable gift annuities. This is a contract in which a charity, in return for a transfer of cash, marketable securities, property or other assets, agrees to pay the donor a fixed sum of money over a period.

In the scam version, a donor loses all of his or her money because the touted charity is bogus. In other instances, the so-called charity exists but much of the donated cash goes to the promoters.

In July, the Arizona Corporation Commission obtained a $4.3 million judgment against a Scottsdale company and two insurance agents who fraudulently sold charitable gift annuities to mostly older investors. The company received more than $1.3 million in commissions, about 30 percent of the amount invested in the annuities.

Viatical settlements.

This is a ghoulish but legitimate contract in which investors buy an interest in the death benefits of a severely or terminally ill person. The sooner the death, the more money the investor gets. Investors are routinely told this is a guaranteed way to make money. But viaticals are anything but safe and secure. Since it's impossible to predict when someone will die, these investments are extremely speculative.

Ponzi/pyramid schemes.

This scam is as old as dirt. Swindlers promise high returns to investors, but the only people who consistently make money are the promoters and maybe some original investors. New investor money pays old investors but eventually this house of cards falls apart.

Before you invest, go through the "investigate checklist" at www.nasaa.org. Investors are given a list of the questions to ask before handing over their money and then told to contact their state securities regulator, or other appropriate state agency, to verify the information. Do this and I guarantee you will be able to weed out the scoundrels.

A con artist's worst nightmare is an educated investor.