Frieda White was the perfect target. Recently divorced, the 70-year-old hoped to supplement her monthly $1,196 fixed income by starting a small business out of her home. When Ms. White received an e-mail purportedly looking for eBay workers, she didn't see any harm in responding. Not long after White hit "reply," she received a phone call that would persuade her to take out a $5,365 loan on her Discover card to start her own business.
"A company called Bright Builders contacted me, and I told them I did not want to invest in anything because I didn't have the money," White says in a telephone interview from her home in Colorado Springs, Colo. "They told me they could figure it out so I didn't have to pay anything, and they transferred me to another smooth talker who had me believing I could do anything."
After providing her credit-card information, White says she received an information packet in the mail on how to start her business as well as a few phone calls on how to download more information. Since then, her attempts to recoup her money have failed. The company, based in Orem, Utah, did not return phone calls from the Monitor.
Like White, some seniors are driven by fears that they will outlive their savings. As a result, they hunt for ways to make their nest eggs last longer – and the more the elderly invest, the more the con artists pay attention. Government agencies, state attorneys general, and the Securities and Exchange Commission are taking note as well. Part of the solution, officials say, is teaching seniors how to spot the scammers. Another part is greater cooperation among various levels of law enforcement.
The SEC took a step in that direction last week when it hosted its first-ever Seniors Summit in Washington, D.C. State and federal regulators from across the country met to discuss ways to combat investment fraud as well as a new report on the tactics scammers use. The study, released by the NASD Investor Education Foundation, may help blunt what regulators worry will be an increasing trend: scammers targeting seniors.
"All these trends – a huge number of people suddenly turning older, the prospects of longer lives but fewer guarantees of financial security, and at the same time a substantial percentage of our national wealth in the hands of seniors – have the makings of a 'perfect storm,' " SEC Chairman Christopher Cox said at the summit.
Seniors account for nearly half of all investment complaints, according to state security regulators. During the next two decades, 75 million people will turn 60.
Some of the NASD report's findings are counterintuitive.
For example, most victims were more financially literate than nonvictims, suggesting that financial education is not the most effective way to combat senior fraud. Also, many victims were hesitant to prosecute the con artists because of the "friendly" relationship they had developed.
Others, like White, are too embarrassed to report the crime. She still hasn't told her son. Fraud is a highly underreported crime.
NASD also found that investment-fraud victims were more likely to have recently experienced a negative life event, like job loss or, as in White's case, divorce.
The report also suggests that instead of educating seniors about investments, seniors should be taught the different "social persuasion" tactics scammers use.
Focusing solely on financial literacy is like "teaching a new poker player about the difference between a three-of-a-kind and a full house and nothing about bluffing," says Doug Shadel, director of AARP in Washington State and coauthor of the study.
What is happening, says Chris Hansen, also of AARP, is a redefinition of financial literacy. After studying tape recordings of conversations between con artists and victims, the researchers identified the different ploys. Sometimes as many as 13 were used in one conversation.
Tactics include making the product sound scarce and making the person feel lucky to have even received the call. Another popular ploy is referred to as "commitment": White was told that if she didn't continue to invest, she would lose the $5,000 she had already invested. Scammers often pose as authority figures – doctors, lawyers, CEOs. According to the NASD study, one even said he was a Royal Canadian Mounted police officer.
Often the danger for seniors is not the product, which can be completely legitimate and legal, but the way it's packaged. Variable and equity-indexed annuities are of particular concern to regulators.
"We are concerned investors aren't always told about high surrender charges for early withdrawals, the potential exposure to market risk, and the steep sales commissions agents often earn when they move investors into these products," says Patricia Struck, president of the North American Securities Administrators Association Inc.
A surefire way to avoid a bad annuity contract is to make sure the seller is licensed by state regulators, says Ms. Struck.
Since states use different titles for their regulators, finding the right person to contact can be difficult. The NASAA's website (www.nasaa.org), has a link titled "contact your regulator," and the NASD has a hotline (800-289-9999) that can help investors determine whether sellers are licensed and whether there have been any complaints or legal action taken against their company.
The regulators' concerns resonate with John and Lorna Daniels of Arlington, Va., who attended the Seniors Summit. They say they are bombarded with telephone calls and slick offers of ways to invest their savings. They get calls from all over the world – Canada, Germany, the Netherlands. One fraud perpetrator even sent them a $49,000 check to get them to invest $20,000. Two weeks after the couple deposited the check, it failed to clear, Ms. Daniels says. The couple did not send in the $20,000.
One of the most consistent offers the couple has received is to attend a seminar and receive a free lunch. Mrs. Daniels says she quickly realized, "There is no such thing as a free lunch."
A new study by the NASD Investor Education Foundation describes the following 13 most popular tactics scammers use to get people to invest in their schemes:
Landscaping. Scammers create an environment that makes you feel as if there are no other options except the one they are telling you about. "You've won the lottery! To get your cash, follow these three easy steps...."
Friendship. You trust your friends without asking them tough questions, so scammers tell you about their children and ask about yours.
Comparison. Everybody loves a deal, so the criminal makes it sound like a deal by comparing it to a more expensive product. "The regular price of this rare coin was $300 and we are selling it to you for only $100."
Dependent. This ploy taps into people's desire to help. A con artist might plead: "I'm in trouble, my father has died, and I need your help."
Source Credibility. A con artist might attach the product to an established, credible source. "Warren Buffett said he is also investing in this property."
Social Consensus. Everyone else wants this, so it must be good. "The phone is ringing off the hook, other people want this opportunity if you don't."
Reciprocity. Scammers try to make their targets feel beholden to them. This is the idea behind "free lunch" seminars and the reason fraudulent companies send slick folders of "educational" materials.
Reactance. People don't always like to be told what to do. The con artist, sensing someone might might resist for the sake of resisting, might resort to reverse psychology.
Fear and Intimidation. Often used at the end of a scam to close the deal. "If you don't want to make up your mind right now, that's where I come in, I will make up your mind for you."
Phantom Fixation. The promise of guaranteed wealth. "This is a no-brainer, you will be guaranteed at least $3,000 a month."
Commitment. There's no turning back now, unless you want to lose everything you have already "invested."
Authority. The person you are speaking to is a "licensed" real estate investor, a CEO, or someone else in a position of power.
Scarcity. "You are lucky to have even received this call. There are only two spots left."
Before signing the dotted line on an investment, seniors should take some precautionary steps, says Doug Shadel, director of AARP for Washington State, and coauthor of "Weapons of Fraud," a publication that examines the world of scam artists. He offers the following advice for seniors:
•Make sure the person pitching the investment doesn't have any complaints against him or her. Call the NASD Investor Education Foundation's hotline at 800-289-9999 or try your local Chamber of Commerce to find your state securities regulator.
•Never invest on the spot. If you are at a free lunch seminar, on the phone, or approached at the door, take time to remove yourself from the situation and do research. If you are told that you'll miss your chance if you don't invest now, recognize that as a scam tactic and stand firm.
•Read all the materials sent to you as well as any information you can find about the company that is not distributed by the company itself.