3 Retirement Rip-Offs

FINANCIAL HEALTH ISN'T just about having enough money to buy the goods and services you want; it's a state of mind. We use words like "freedom" and "independence" to describe what you can achieve through good planning because it's empowering to live within your means, keep out of debt and meet your goals. And that's why fraud is so debilitating: You not only lose money when you're ripped off, but you also lose confidence when you're betrayed. This is particularly true for older people. When seniors get scammed, they often experience acute confusion and shame along with the realization that, since they are beyond their working years, they won't have much chance to rebuild their retirement funds.

Unfortunately, while older Americans are wealthier and probably more financially knowledgeable than ever before, the perpetrators of financial abuse and fraud are more numerous and sophisticated than ever too. As a result, elder fraud, already quite rampant in the United States, is on the rise. While individuals age 60 and over make up about 15 percent of the U.S. population, rip-offs of seniors account for nearly half of all complaints received by state securities regulators, according to the North American Securities Administrators Association. The number of seniors victimized by financial abuse and fraud is 5 million a year and rising, according to the Securities and Exchange Commission.

When you look at the most common investment products and sales practices that scam artists use to defraud seniors, as tabulated by the SEC, NASAA and Financial Industry Regulatory Authority, they fall into three basic groups. First, there are vehicles so complicated that it's hard for inexperienced investors to tell whether their money is heading where it's supposed to or being used improperly. Examples include charitable-gift annuities and variable annuities, equity-indexed CDs, and company-issued promissory notes, all of which can be kosher, but all of which can also easily be manipulated by unscrupulous salespeople. For example, from 1997 to 2001, Robert Dillie used an entity called the Mid-America Foundation to sell at least $52.9 million in charitable-gift annuities to seniors. Dillie told investors that their funds would go into stocks, bonds and money-market accounts. In reality, he had diverted $19.2 million of the investors' money to a hidden account, which he used to blow more than $10 million in Las Vegas, buy himself a $1.6 million house and write himself hundreds of thousands of dollars in checks. (Dillie pleaded guilty to wire fraud, money laundering and transacting in proceeds from a criminal activity; he began serving a 121-month federal prison sentence in 2006.)

Second, there are schemes that promise unrealistically high returns or low risk by going outside regular investing (and regulatory) channels. These include "prime bank" instruments, which allegedly trade on overseas markets; "pump and dumps" of microcap or penny stocks; and my personal favorite, sale-and-leaseback contracts, in which investors are lured into buying faraway but supposedly profitable equipment, such as ATMs or Internet workstations. These machines often turn out to be ridiculously expensive, require service contracts or not exist at all. For instance, 10 years ago Phoenix Telecom, an Atlanta outfit, raised more than $74 million from more than 2,000 mostly elderly investors by selling them pay phones, then leasing back the phones for small monthly payments. Phoenix Telecom promised investors 15 percent annual returns but didn't tell them the company was losing money, had a negative net worth and was dependent on new customers to stay in business. (Phoenix Telecom agreed to an injunction without admitting or denying the SEC's allegations of selling unregistered securities.)