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.)

For more SmartMoney Magazine features, turn to the August issue.

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.)

Third, there are investments marketed specifically for helping the transition to retirement but that are really all about generating fees and commissions for the people who sell them. "Senior investment adviser services" and "senior planning" have spread rapidly around the country, but not all advisers and planners act in the best interests of their clients even when they meet at the workplace. From 1994 to 2002, for example, a team of rogue Citigroup brokers based in Charlotte, N.C., led by Jeffrey Sweitzer and Matthew Muller, held more than 40 seminars for BellSouth employees. Thanks to these presentations, FINRA says, more than 400 employees opened 1,100 accounts with the brokers. And as a result of misleading information Sweitzer and Muller dispensed, many of the employees retired early, cashed out their BellSouth pensions and 401(k) accounts, and invested the proceeds with the brokers without understanding the costs or risks involved. (Last year FINRA ordered Citigroup to pay $12.2 million in restitution to the now-former BellSouth employees; Sweitzer and Muller were fined and suspended.)

This type of misbehavior has been around for a long time, and so has the basic advice for avoiding it: Cut down on unsolicited offers by putting your name on the national Do Not Call Registry (1-888-382-1222). Don't believe any sales pitch that promises guaranteed high returns or risk-free rewards. Only invest in a product after you fully understand how it works. Before you hand anyone a check, check them out first. (You can start at www.finra .org/InvestorInformation, where you can look up the background of current and former securities firms and brokers.) And when you get offers to go to lunches held by financial-services companies, just say no; all too often, "retirement seminars" and "senior workshops" ram inappropriate sales pitches as well as a free meal down your throat. (When national and state regulators examined "free lunch" seminars in 2006 and 2007, they found that 57 percent used misleading or exaggerated advertising and sales materials.)

But in trying to protect seniors from financial abuse, it's also important to understand just what we're up against as a society. An entirely new industry of information brokers has sprung up in recent years, in which companies cull data from public records, commercial transactions and credit reports, then sell it to other firms that are looking for particular kinds of new customers. "Microtargeting enables the identification of individuals for telemarketing, mail and e-mail," says Chris Hoofnagle, senior fellow at the Berkeley Center for Law and Technology. "One can very easily go online and find lists of people who are elderly, living in single-person households and have a history of being opportunity seekers, a demographic more vulnerable to fraudulent marketing."

Consumers have almost no privacy rights when it comes to the sale of their personal data; if your elderly aunt gives her Social Security number to a cold-calling broker, she may as well be posting it on Craigslist. In response, Sen. Hillary Clinton (D-N.Y.) has called for giving victims of financial abuse the right to sue companies that have sold personal data to perpetuate fraud. Unfortunately, Clinton's presidential campaign had itself rented out mailing lists to InfoUSA, one of the country's biggest information brokers. And InfoUSA has paid at least $3.3 million in consulting fees (including $400,000 last year) to Bill Clinton, while its CEO, Vinod Gupta, has given generously and helped raise millions more for the Clintons' political campaigns and projects over the past 10 years. Methinks reform will have to be sponsored by someone else.

The growing financial and political power of the information brokers holds an important lesson: Not only should we encourage common sense and good decisions among seniors we know; we also need to limit the flow, or at least the use, of personal information that makes seniors such widespread targets of financial abuse.

Also See:
What's Wrong with Variable Annuities
Ready, Set, Retire!
Timing Your Retirement