Laws Take On Financial Scams Against Seniors

The Wall Street Journal

May 19, 2009

States Increase the Penalties When Victims Are Elderly; Is Special Protection Needed?

Fed up with purported financial advisers preying on unwitting older people, investigators from the Arkansas Securities Department last year staged an undercover sweep of one of the hucksters' favorite showcases -- free lunch seminars.

The Arkansas sweep triggered several investigations of financial firms that are still under way. It also uncovered enough in the way of shady practices -- misleading claims, underplayed risk -- to prompt legislative action. This spring, Arkansas legislators passed a law, effective July 1, that doubles the civil penalties for financial securities violations when the victim is 65 or older. Though the state securities department can't bring criminal complaints, it can refer such cases to the attorney general's office.

Arkansas is one of a number of states that are passing or amending securities and criminal laws to impose "enhanced penalties" on people who commit financial crimes against seniors. Similar legislation is expected to be proposed in Congress next month by Democratic Sens. Bob Casey of Pennsylvania and Herb Kohl of Wisconsin, chairman of the Senate Special Committee on Aging.
you target an older person in Michigan, we're going to target you," says Ken Ross, commissioner of the Office of Financial and Insurance Regulation for the state, which also has passed legislation protecting the elderly.

Such laws, however, have drawn criticism from some legal experts who oppose singling out seniors for protection. These critics say the laws amount to reverse discrimination by implying that older people aren't sophisticated enough to keep from being taken in by sales pitches. Jonathan Macey, deputy dean of Yale Law School, says an enhanced penalty law regarding seniors isn't illegal or unconstitutional, but "I think it's just stupid. There are all kinds of vulnerable groups in society, like poorly educated recent immigrants, et cetera. The bad guys will just target them."

Regulators say that no investors are more vulnerable to scams than older people, who depend on their savings for a secure retirement. Since 2007, government regulators and securities industry officials have been cracking down on senior scams, including sending sleuths to monitor free-lunch seminars.

The events are generally pitched as educational events, with a free meal thrown in. But in Arkansas, state agents instead found that the dozens of seminars they attended all featured hard-sell pitches for financial products, many of which weren't appropriate for elderly investors. Presenters at about half of the seminars made misleading claims about potential investment returns, Arkansas regulators say. And at about a quarter of the events, products being pushed were ill-suited to older people, such as investments heavily exposed to swings in stock prices.

"Older Americans remain a primary target for unscrupulous individuals," says Heath Abshure, the Arkansas securities commissioner. "There has to be a deterrent to the effect that this is a class of people who rely on their investments day to day to pay their utilities, their doctors, and to buy their groceries," he says.

The Financial Industry Regulatory Authority, or Finra, the securities industry's self-regulatory body, brought 3,211 enforcement actions against financial firms and sales people for violations against seniors in the seven years through January. That compares with 1,753 actions related to people approaching retirement.

The frequency of scams is increasing in the recession, many financial experts say. Seizing on fear of stock-market turmoil, sales people and fraudsters are hawking investments that claim to be "low-risk," or a supposedly safe way to invest in the stock market and earn back losses. In fact, the products may be complex and have significant downsides.

Lavonne Selvog, an 82-year-old widow in South St. Paul, Minn., says seniors like her come from a different era and can be more vulnerable. Ms. Selvog says she was sold a complex annuity by a broker at a senior seminar, when she thought she was buying a certificate of deposit. "I had never been involved in handling the finances -- my husband did all that. I guess I was just too trusting of this fellow," she says. She says the investment restricted access to her nest egg so much that she couldn't afford to replace the drafty windows in her house.

Pending State Laws

Besides Arkansas and Michigan, Idaho also passed a senior-victim law in recent months that will go into effect this year. Six other states, including Maryland, Minnesota, Missouri, New Jersey, Rhode Island and West Virginia, have similar bills pending in their current legislative session.

Michigan's new law allows for an additional $500,000 penalty tacked onto securities violations involving seniors or people deemed unable to understand the transaction. The law was partly inspired by a 2008 investigation in which at least 12 people were charged with misappropriating funds from nursing-home residents in the state. Another 85 cases remain under investigation as part of that sweep.

Firms that have been cited for violations range from big financial giants to single-person offices. In October 2007, a unit of Allianz SE, the German financial company, agreed in a settlement with Minnesota's attorney general to review sales practices and to give refunds to as many as 7,000 Minnesota seniors that the state said may have been sold unsuitable annuities since 2001. Allianz also agreed to strengthen its process to determine suitability for customers over the age of 65. Ms. Selvog says she received a refund as part of the settlement. In a statement, Allianz said it "strongly denied all charges in the case."

Higher penalties imposed as a result of the new laws aren't expected to cut into potential restitution. Idaho's new law, for instance, says that if restitution for the victim is ordered by regulators, that must be paid before the enhanced penalty is paid. Some states, including Michigan, plan to use funds from their enhanced penalties for investor education aimed at seniors.

There is nothing illegal about financial advisers pitching products at seminars, but under securities and investor-protection laws, there are lines that these salespeople can't cross. Brokers must follow "suitability" standards, meaning they can't sell a product that doesn't make sense given a person's age, income, or liquidity needs. They can't misrepresent products. Sales materials and oral presentations must show a balanced picture, with both the risks and benefits of investing in the product. Any statements to investors that an investment is "safe as cash" or that it carries no market or credit risk "would raise serious questions under FINRA's advertising rules," according to the regulatory group.

A number of products sold to seniors have triggered investigations in recent months, including reverse mortgages, which can help senior tap equity into the home and be beneficial, but which can also include hidden costs. Also popular are deferred annuities, which promise future payments to the investor but which can lock up money for a decade or more.

Pitches in a Recession

Another popular pitch to older people in the recession, regulators say, is "adviser" services, in which a financial pro offers to meet one-on-one to review seniors' assets to see that they are well-situated for any market downturns while also positioned for a possible upturn. While seeking help from an adviser is often an a wise idea, recent scams and Ponzi schemes have shown that investors must be careful that the person isn't misappropriating money out of their account or shifting them into high-commission investments that aren't in their best interest. Investors should be vigilant about reviewing their account statements.

More Information on US Elder Rights Issues

Copyright © Global Action on Aging
Terms of Use  |  Privacy Policy  |  Contact Us