In hard times, swindlers profit

Rocky returns in the stock market and rumblings of a U.S. recession are putting many investors on edge — and possibly making them more vulnerable to scam artists.

Ken Ross, acting commissioner for the Michigan Office of Financial and Insurance Services, told me that he wants to head off one IRA scam that’s hit other states.

The scam artists roll out the TV or radio ads for so-called IRS-approved individual retirement accounts. Or the investment is touted as “IRA approved.”

There’s no such thing.

Typically, you’ll watch one of these ads, call an 800 number to get an idea of how to invest money for your individual retirement account and somebody tries to sell a high-cost investment such as a deal in ostrich farming, specialized mobile radio or real estate investment pools. In general, investors should watch out any time they hear about a “limited liability company” or a “general partnership.”

There have been reports of scams involving unregistered securities or fake promissory notes. Investors are promised high returns, say 30 percent or more in 18 months. But these are fake deals often promoted by fake brokers.

“The natural reaction is to try to maximize returns — especially in unstable times,” Ross said.

Yet Ross said it’s a red flag if someone is promising you double- or triple-digit returns.

When times are tight, a free lunch at an upscale restaurant, hotel or golf course might sound even more tempting.

Karen Tyler, president of the North American Securities Administrators Association, told me that regulators are concerned that some free lunches lead to unscrupulous sales tactics.

Tyler, who is also the North Dakota Securities Commissioner, said the lunches sound innocent enough, often billed as a workshop on a general topic, such as estate planning or living trusts.

“The bait is general education, but the switch is the sale of a product that very often is a high-fee, high-commission product,” Tyler said.

Senior investors may eat the lunch, see an adviser at a later date, and then bring their bank statements, brokerage statements and other paperwork to that meeting.

Soon, they end up withdrawing money from the bank or selling stocks to buy a high-commission, and possibly unsuitable, investment.

“In some cases, it could be fraud,” Tyler warned.

Gerri Walsh, vice president for investor education for the Financial Industry Regulatory Authority in Washington, D.C., said free lunches are a legitimate marketing strategy, but consumers need to be aware that the lunch might involve a sales pitch.

Seniors can avoid fraud by having a family member or trusted friend accompany them to an appointment, and contact state regulators to discuss a suspicious sales pitch.

Research any investment. Be sure to ask how much you’re paying in commissions or how much you would pay in fees if you need that money in two or three years.

X Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at stompor@freepress.com.