Just because Bernard Madoff is behind bars doesn’t mean that you are safe from thousands of other financial villains who could rob you of your nest egg. These swindlers target everyone from the wealthy to regular folks with just a few hundred dollars to invest. They get even well-educated and very shrewd people to trust them. More than 7.3 million older Americans — one out of five over age 65 — have been victims of financial swindles, according to a survey conducted last year. To avoid falling prey to these con men, you have to know their tricks.
Bottom Line/Personal spoke with Thomas R. Ajamie, a lawyer who over the past two decades has recovered hundreds of millions of dollars for victims of financial fraud.
If you were a federal law-enforcement official nearing retirement in the past decade, chances are that you got financial advice from Kenneth Wayne McLeod. He gave hundreds of seminars to employees of the FBI, the Drug Enforcement Administration, US Customs and Immigration Enforcement, explaining how to get the most out of government retirement benefits. He also did charity work dispensing financial advice to families of law-enforcement agents killed in the line of duty. McLeod made his money signing up more than 1,000 clients with his money-management firm. F&S Asset Management Group oversaw more than $30 million, much of it in a tax-free government bond fund that McLeod ran, with promises of annual returns of 10%. In June 2010, McLeod was confronted by investigators from the Securities and Exchange Commission (SEC) and admitted that there was never any bond fund. He was running a classic Ponzi scheme, using new investor money to pay off old investors.
Lesson: If it sounds too good to be true, it probably isn’t true. Be skeptical of “high-reward/low-risk” investments, no matter how well-respected the investment manager is. In the low-interest-rate environment of the past few years, in which a 30-year Treasury bond has paid less than 4% annually, no bond investor could achieve a low-risk double-digit return. It’s a major red flag whenever an investment manager guarantees high returns or gets them consistently year after year, no matter what the financial markets or the economy is doing. Reason: High-return investments usually require substantial risk, which means that there will be lots of volatility — good years and bad years — if the investment is legitimate.
A deaf woman in Maine became aware of what seemed like a sensational investment opportunity through an online chat site that is very popular with deaf people around the country. For a $50 or $100 investment, the Internet-based operation promised returns of about 1.2% a day. This company invested in “viatical settlements” — purchases of life insurance policies from their owners at discounted prices before the policies matured. In six months, a $50 investment could be worth $134,000, according to the company. More than 14,000 people worldwide — most of them deaf — invested a total of more than $7 million.
The funds disappeared and were funneled into private accounts in New Zealand and Cyprus. The SEC does not have enough evidence to name any of the people behind the scheme but continues to investigate.
Lesson: Avoid investing in “rare opportunities” just because your friends, social-networking contacts and/or relatives have invested in them. Thieves know that the easiest way, by far, to create trust is through word of mouth from people with social, religious or cultural affiliations similar to your own.
Back in 1946, a Texas couple named Luke and Lillian Wentz had the good luck to invest $6,600 in Warren Buffett’s fledgling company. When Luke passed away more than a half-century later in 1997, Lillian, a retired schoolteacher, found herself with Berkshire Hathaway stock worth $24 million.
Not knowing how to handle that much money, she turned to an insurance firm that advertised in local newspapers throughout central Texas promising elderly folks that they could save a fortune on estate taxes. Readers were invited to the local Steak & Ale for a free steak dinner and a complimentary seminar from Underhill & Best on how to pass on more of their life savings to their heirs rather than the government. The agency representatives convinced Wentz that she needed to liquidate all her Berkshire Hathaway stock and use the money to purchase insurance and annuity products. Underhill & Best pocketed more than $2 million in fees and commissions for work that an estate-planning law firm could have accomplished for a fee of a few thousand dollars. Lillian died soon after, in 2002, and her grandsons had to sue Underhill & Best to recover some of the money lost in fees and potential gains.
Lesson: There really is no free lunch. Underhill & Best’s seminars were targeted at lonely seniors under the guise of educational and social events. The promoters promised free advice and door prizes to encourage attendance. A recent SEC investigation found that 60% of the firms offering similar free-meal seminars had acted improperly in ways ranging from making unsuitable recommendations to misrepresenting how the investment adviser would profit.
Many financial dine-and-learn seminars are costly to you because the information you get may not be tailored to your specific situation, and you may hear only about investments that carry exorbitant fees. Better: Many accredited financial planners offer free or low-cost one-on-one meetings. To find one, contact the National Association of Personal Financial Advisors, 847-483-5400, www.napfa.org.
Thousands of financially savvy investors who trusted Bernard L. Madoff Investment Securities LLC were fooled by what had appeared to be safeguards but really weren’t. For example, Madoff’s financial statements had been audited for nearly two decades by the small accounting firm Friehling & Horowitz, which filed audits every year with the SEC. David Friehling was even a past president of a chapter of the New York State Society of CPAs.
But Friehling wound up being paid millions of dollars in fees by Madoff, who was a longtime friend of his, without actually examining the investment fund’s bookkeeping. He ignored the fact that Madoff had full custody and control over the assets of his clients, which is how the crook was able to dip into their money so easily and keep his scheme undetected for so long. In 2009, Friehling pled guilty to nine criminal counts, including aiding and abetting investment-adviser fraud and obstructing tax law.
Lesson: Your investment manager always should be accountable to reputable third parties. When you invest, you are trusting your manager to make wise decisions with your money. But you still can check that he reports his actions and results honestly and accurately to you.
My two most important rules for not getting burned by a financial scammer…
