[Senate Hearing 109-494]
[From the U.S. Government Publishing Office]
S. Hrg. 109-494
NOT BORN YESTERDAY:
HOW SENIORS CAN STOP INVESTMENT FRAUD
=======================================================================
HEARING
before the
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
----------
WASHINGTON, DC
----------
MARCH 29, 2006
----------
Serial No. 109-20
Printed for the use of the Special Committee on Aging
NOT BORN YESTERDAY: HOW SENIORS CAN STOP INVESTMENT FRAUD
U.S. GOVERNMENT PRINTING OFFICE
28-187 WASHINGTON : 2006
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S. Hrg. 109-494
NOT BORN YESTERDAY:
HOW SENIORS CAN STOP INVESTMENT FRAUD
=======================================================================
HEARING
before the
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
WASHINGTON, DC
__________
MARCH 29, 2006
__________
Serial No. 109-20
Printed for the use of the Special Committee on Aging
SPECIAL COMMITTEE ON AGING
GORDON SMITH, Oregon, Chairman
RICHARD SHELBY, Alabama HERB KOHL, Wisconsin
SUSAN COLLINS, Maine JAMES M. JEFFORDS, Vermont
JAMES M. TALENT, Missouri RON WYDEN, Oregon
ELIZABETH DOLE, North Carolina BLANCHE L. LINCOLN, Arkansas
MEL MARTINEZ, Florida EVAN BAYH, Indiana
LARRY E. CRAIG, Idaho THOMAS R. CARPER, Delaware
RICK SANTORUM, Pennsylvania BILL NELSON, Florida
CONRAD BURNS, Montana HILLARY RODHAM CLINTON, New York
LAMAR ALEXANDER, Tennessee KEN SALAZAR, Colorado
JIM DEMINT, South Carolina
Catherine Finley, Staff Director
Julie Cohen, Ranking Member Staff Director
(ii)
C O N T E N T S
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Page
Opening Statement of Senator Herb Kohl........................... 1
Panel I
Ruth Mitchell, victim of Investment Fraud, Columbiana, OH........ 3
Barry Minkow, former scam artist, San Diego, CA.................. 9
Panel II
Patricia D. Struck, president, North American Securities
Administrators Association, Inc. (NASAA), Washington, DC....... 14
Elisse B. Walter, executive vice president, Regulatory Policy and
Oversight, National Association of Securities Dealers (NASD),
Washington, DC................................................. 49
Susan Ferris Wyderko, acting director, Division of Investment
Management, U.S. Securities and Exchange Commission (SEC),
Washington, DC................................................. 61
APPENDIX
Information submitted by the Fraud Discovery Institute........... 75
(iii)
NOT BORN YESTERDAY: HOW SENIORS CAN STOP INVESTMENT FRAUD
---------- --
WEDNESDAY, MARCH 29, 2006
U.S. Senate,
Special Committee on Aging,
Washington, DC.
The committee met, pursuant to notice, at 10:10 a.m., in
room SD-106, Dirksen Senate Office Building, the Hon. Herb Kohl
presiding.
Present: Senator Kohl.
OPENING STATEMENT OF SENATOR HERB KOHL,
Senator Kohl [presiding]. Good morning. I would like to
call this hearing to order at this time, and we welcome our
witnesses.
I would like to thank Chairman Smith, who will be here in a
minute, for working with me on today's hearing to shine a
bright light on the disturbing and growing problem of senior
investment fraud.
We have all heard stories of seniors losing their money
through one scam or another, things like foreign lotteries,
telemarketing schemes, identity theft. But today's seniors are
facing new risks. Many are struggling to meet rising health and
day-to-day living costs, bearing more risk in their pension
plans, and anticipating long-term care expenses. Too many are
finding that their savings are just not enough.
Faced with this shortfall, many seniors are turning to
investments to increase their retirement income. Some are
investing wisely and building the savings they need. But sadly,
others are proving too easy prey for con artists ready to steal
their hard-earned and harder to replace money.
Investment fraud is on the rise. My home State of Wisconsin
saw a 21 percent increase in the number of financial abuse
cases reported in 2004. Experts estimate that only 1 in 25
cases are reported Nation wide.
Today, our witnesses will describe the many faces of senior
investment fraud--investment seminars designed to steal
seniors' personal information, Ponzi schemes, trumped-up senior
specialists who have no special financial training, and
callable CDs, just to name a few. Regardless of the scam, the
outcome remains the same. Seniors lose their irreplaceable
retirement income.
You don't have to look too far to find an example near you.
In Wisconsin, we heard the story of a retired dairy farmer who
invested $85,000 in what he was told were gold coins with
promises of an 8 percent to 40 percent return on his
investment. Little did he know that he was being drawn into an
intricate interstate Ponzi scheme, and he will probably never
see his money again.
We have also heard from an attorney in Milwaukee who tells
the story of her client losing $40,000 to a questionable estate
planner who convinced a senior to invest in his business
venture. The business venture didn't exist, and the senior's
money was gone.
Let us make one thing clear. Investments are not a bad
thing for seniors. They can be useful retirement income
vehicles. It is the bad actors and the criminals who peddle
fraudulent investments that we must stop.
Today's hearing will be just a first step. One of the keys
to stopping senior scams is to educate seniors looking to
invest. To that end, I have developed a tip sheet to help
seniors know what to watch out for when investing and where to
turn for help. This handout will be available to Wisconsin
seniors through my office, and we encourage other States to use
it as a model to distribute to their seniors as well.
I also plan to continue working with our expert witnesses
on legislation to protect seniors from scam artists. We need to
tighten rules that require sellers of securities to disclose
their credentials and training, as well as any hidden fees or
high-risk investments that they sell. We should also make it
easy for seniors to check out specific sellers to ensure they
are reputable and to increase penalties for those who run these
scams.
We need to make sure that Federal and State law enforcement
officials have the training and the resources they need to
investigate and prosecute senior investment fraud. Finally, we
need to pass the Elder Justice Act, which includes key research
and training provisions to combat investment fraud.
As our population ages and seniors live longer, they will
look for ways to make their retirement income last as long as
they do. We need to make sure that they can invest wisely,
without the added worry that an unscrupulous advisor will run
off with their money.
If seniors take away one message from today's hearing, I
hope they will remember this. It took you a lifetime to save
your retirement income. So take just 5 more minutes to make the
call that could protect it.
We look forward to hearing from our witnesses, and we have
our first panel in front of us. Our first witness today is Mrs.
Ruth Mitchell from Columbiana, OH. Mrs. Mitchell is here to
tell us her story of how she and her husband were bilked out of
close to $100,000 of their retirement savings in an investment
Ponzi scheme.
After her, we will hear from Mr. Barry Minkow. Mr. Minkow
was charged and convicted of a variety of securities fraud in
the late 1980's. Following his almost 8 years in prison, Mr.
Minkow has worked with law enforcement and corporate America to
uncover and eliminate investment fraud. Mr. Minkow also serves
as senior pastor at Community Bible Church in San Diego, CA.
We welcome you both here today, and we look forward to your
testimony. First, Mrs. Mitchell.
STATEMENT OF RUTH MITCHELL, VICTIM OF INVESTMENT FRAUD,
COLUMBIANA, OH
Ms. Mitchell. Thank you. Good morning.
At this time, I would like to thank the Senate panel for
inviting me to testify about the fraudulent investment that we
became involved in 1994.
My husband, Len, and I lost $100,000 in a scam orchestrated
by Barry Korcan from Beaver, PA. Barry Korcan owned a large CPA
firm, and he had done my husband's corporate taxes and payroll
for over 20 years. My husband retired in 2004 at age 80. Barry
Korcan also did our personal taxes for 18 years.
In 1994, Barry Korcan started an investment company called
Guardian Investments and sold Len and I real estate bonds. We
were promised 8 percent interest on these bonds. We had decided
to downsize and build a smaller house than the one we had at
that time in Pennsylvania, and we moved to Ohio in 2002. At
that time, we were supposed to have had $100,000 in the bond
account.
We received quarterly statements and an interest check. It
is apparent now that the interest was either our own money or
someone else's money stolen from them. In February 2005, when
we had not received our interest check in January, we called
his office and several times were put off by the office staff,
and Barry Korcan would not come to the phone.
Finally, on Ash Wednesday of 2005, which fell in February,
we were told by the office staff that they did not know
anything about bonds or interest, and their office was shutting
down permanently that Friday. We were stunned.
We contacted a local Edward Jones agency, and the owner of
the agency worked with us for about 4 hours the day after Ash
Wednesday to find out what had happened and to try to transfer
the bonds to Edward Jones. He finally called the district
attorney's office in Beaver County, PA, and they advised him to
call the Beaver County detective agency.
We were then told it was a giant scam, and the government
was seizing everything that Barry and Heidi Korcan owned. He
stole $11.5 million from 39 victims. Almost all of the victims
were business people or doctors or other people who had the
funds to buy these bonds. You could only get in the bond
program with $30,000 or more.
We were devastated. I am 64 now, and my husband is 82. In
our lifetime, we can never make that money again. We own our
own home, free and clear, and we do not owe anyone a dime. But
not having that cushion is really frightening.
I was a lifelong figure skating instructor, and I have
recently gone back to work at teaching ice skating at the Ice
Zone in Boardman, OH, just to try to build a small cushion for
us.
Barry Korcan was also our neighbor. We bought our lot from
him in 1996. We realize now that he had been stealing from us
for 2 years when we paid him another $30,000 for this lot. He
sat at our table for dinner and was a guest at my husband's
surprise birthday party that I had for him--at a 75th surprise
birthday party I had for him at a local restaurant.
As a result of this theft, I was under my doctor's care for
depression and nerves for about 7 months. I lost a lot of
weight, and I could not eat or sleep. My husband was absolutely
crushed because he trusted Barry like a son. Finally, I began
to realize that the only way that I could heal was to help
other people in the same situation or to help other people in
becoming more careful about their investments.
I have given talks in the past on various subjects and,
most recently, gave a talk to the local AARP chapter in
Columbiana, OH. The Pennsylvania Securities and Exchange Office
from Pittsburgh worked with me and provided me with handouts
for the people, and the talk was really very well received.
I want to be able to talk to people not as an expert,
certainly, but as a ``been there, done that'' individual. I
seem to be able to heal a little by helping others to avoid
such a trap.
Barry Korcan will be sentenced on April 28 at 2 p.m. in the
Federal Court in Pittsburgh. We will be there for the
sentencing.
No matter what sentence he gets, it will not help us
recover our money or the other victims recover their money. I
can only hope that Len and I can heal completely and the other
victims will find some sort of peace or closure.
Thank you so much for your time.
[The prepared statement of Mrs. Mitchell follows:]
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Senator Kohl. Thank you, Mrs. Mitchell, for your moving
statement.
Mr. Minkow.
STATEMENT OF BARRY MINKOW, FORMER SCAM ARTIST, SAN DIEGO, CA
Mr. Minkow. Thank you, Senator Kohl.
It is a real privilege to be here this morning, and thank
you for having me.
I guess what I would like to say is the reason the problem
of investment fraud is happening on such a large scale, as
indicated in the written testimony, is there seems to be this
kind of perfect fraud storm, appreciating housing market. As a
former perpetrator, much to my shame, we would identify victims
by their ability to invest.
So now people who would normally not be ``targets,'' who
have equity in their homes in an appreciating housing market,
suddenly become targets. They are also not satisfied with the
current stock market returns in the last 5 or 6 years. That
creates a fear of not having enough, the fear of outliving your
money. There is, you know, under performing CDs.
So there is this environment for fraud. It is like this
perfect fraud storm. Low interest rates, can't put my money in
the bank and get any high returns. Kind of equity in the home
sitting there. Wall Street isn't working. That is the
environment where people will infiltrate and exploit. That is
what I am seeing both on the uncovering side and then, of
course, sadly and much to my shame, in the 1980's when I
perpetrated.
Some of the techniques we use, everything is on the table.
I cannot tell you in the last 20 years, from being the
perpetrator now to working undercover, I have never seen,
Senator Kohl, the unbelievable ``will do anything to defraud''
kind of approach. In my case, much to our shame, we created
some 20,000 fraudulent documents to fool the auditors. I am not
proud of that.
However, today, I am seeing--this came to me Friday. This
is an original check. This is an original check. I am glad to
show it to you. This is a sweepstake. An elder man in our
church came to me and said, ``This is a $2,900 check to me.''
He said, ``I called the bank, and it is good.''
The perpetrator of this sweepstakes fraud, and I have it
right here--the original document--ID theft an insurance
company, a life insurance company in Massachusetts. Printed
their account information on this check, and sent it to a guy,
saying ``you won.'' Once he deposits it, not only will it
bounce, but he was also asked to return a higher amount of
money.
I have never seen this kind of ID theft on an active
checking account, $2,900. Somebody who is not sophisticated
thinks, ``Yes, I won the Canadian lottery,'' even though they
probably never entered. It is just people will stop at nothing,
it would appear, to defraud--phony financial statements,
promises of outrageous returns.
The other thing is affinity seems to be a big problem. Mrs.
Mitchell mentioned that this person was a close friend.
Affinity in churches. The Securities and Exchange Commission--
don't believe me, just ask them or Karen Patterson at the
Department of Corporations in California how preeminent
affinity fraud is in church groups. You tend to put your guard
down when somebody from church comes to you with an investment
opportunity.
In the black community, it has been in Chicago Development
and Planning, a fraud we uncovered. Ware Enterprises, this guy
is doing 18 years in Florida. It was an affinity fraud,
especially at NFL players because he used to be someone who was
in that professional football arena.
This affinity thing is huge. That is why what I think Mrs.
Mitchell said about reverse affinity, somebody who is their age
saying, ``Yes, don't do this,'' may be effective as well.
We are seeing points of similarity in frauds, and we are
also seeing people that will go after the elderly and be a
comfort for them that they may not be getting from their son or
daughter. They will come in and be a friend, and they will take
your money. But they will provide that emotional need that may
not be--when you are elderly, maybe you are alone more, and
they will be that friend. They will also take the money. So
there is this vulnerable area as well.
I am trying to get everything in on time here. Also here is
what I think can be done. You mentioned in your opening
statement about proactive work with law enforcement, not
waiting. Traditional law enforcement is this. Wait until Mrs.
Mitchell comes with her fraud.
What we have tried to do is infiltrate ongoing financial
scams in progress before law enforcement knew about it so money
can be frozen and victims can get their money back.
Just a month ago, we were about to do that in the 12 Daily
Pro auto surfing scam. Fifty million dollars frozen, made the
front page of the Wall Street Journal. Now victims are going to
get recovery. This is a new approach.
Now the problem is, is the average person, when they think
a fraud is going on, goes to the FBI or they say, ``I think a
fraud is going on.'' They are like, ``We are understaffed. What
do you got?'' ``Well, I just think.''
The advantage of having been prosecuted by every law
enforcement branch in the Nation, me, I know what meets the
burden of proof that they need to prosecute. So we put 50-page
reports together identifying the fraud, pointing out the bank
accounts and records, auditing the sources and uses of cash,
bringing them the promoter's prospectus, and infiltrating the
fraud.
On my way here, I was on the phone doing a wiretap for the
FBI on an ongoing financial fraud promising 10 to 1 returns. So
it is a new, fresh approach.
I have got 10 seconds. You should see me at church when I
go long. It is really bad, Senator.
Also we want to increase the perception of detection and
increase the perception of prosecution. That is the only thing
that stops people from perpetrating crime is if they know there
is an increased likelihood that they will be caught.
I am sorry. I am out of time.
Senator Kohl. Thank you very much, Mr. Minkow.
Mrs. Mitchell, how has this terribly unfortunate loss of
your money changed your retirement plans? You indicated you
have had to go back to work. Is that what you said?
Ms. Mitchell. Yes, I am teaching ice skating. I teach both
figure skating and power skating for ice hockey, and I am doing
that about 4 times a week now, 4 days a week.
Senator Kohl. Who are you teaching?
Ms. Mitchell. At the Ice Zone in Boardman, OH. Did you ask
me where?
Senator Kohl. Who are you teaching?
Ms. Mitchell. Oh, who am I teaching? I am teaching little
kids through adults, and I am teaching hockey players. I have
had over 30 years experience at coaching. So I am pretty much
back in the groove again except for my age.
Senator Kohl. Are you enjoying that?
Ms. Mitchell. I am enjoying that. That actually helps to
heal me, too. But I just love to teach, and I love to teach
skating. I will also be starting a class for blind people. I
have worked with blind people on the ice for many years.
Senator Kohl. That is great.
Ms. Mitchell. It is hard on me because I am a little bit
older, but yet I seem to be accepted at that ice rink as being
an older coach. I was afraid they would think of me as just
being someone that was just too old. But the younger coaches
are sometimes looking at me for advice on how to handle this,
or how do you convey this message?
Senator Kohl. That is great.
Ms. Mitchell. I think it is probably going to work out. I
hope I can skate a few more years.
Senator Kohl. That is great.
Ms. Mitchell. For fun, I skate on a synchronized team. They
may kill me on that one, but---- [Laughter.]
Senator Kohl. Good for you.
Ms. Mitchell. Thank you.
Senator Kohl. If you could give a senior one piece of
advice regarding investments, what would it be?
Ms. Mitchell. The one piece of advice that I would give
seniors is a logo that I saw stamped on the Securities and
Exchange from Harrisburg on their envelopes, and it says,
``Investigate before you invest.'' We did not.
Also watch for a too lavish of a lifestyle, which Heidi and
Barry Korcan had too lavish of a lifestyle. I mean, they
hobnobbed with all of the Pittsburgh Steelers and the
Pittsburgh Penguins. Mike Webster lived two doors from us with
them before he passed away. Barry Korcan gave him money because
he had gotten into such financial straits.
Senator Kohl. Yes.
Ms. Mitchell. At a swimming party in our neighborhood,
Barry Korcan showed off all four of Mike Webster's Super Bowl
rings. He was in possession of them. So I would say watch for
lavish lifestyles, and don't be afraid to hurt someone's
feelings by asking them questions.
Senator Kohl. That is very important.
Ms. Mitchell. Like, ``Are you honest or aren't you
honest?'' Also call your Securities and Exchange Commission to
see if they are registered.
I understand there are three States in the United States
that don't require investment people to register. One of those
States is Ohio. One is Colorado, and someone said they thought
the other one was Wyoming, but I am not certain of that. But
there are still three States. But, of course, Barry wouldn't
have registered anyway.
Senator Kohl. You are saying, for certain, you must be
absolutely positive about who it is with whom you are
investing?
Ms. Mitchell. Absolutely. Check out every avenue.
As Securities and Exchange people from Pittsburgh have told
me that when they talk to seniors at expos or symposiums, they
can talk until they are blue in the face, and they know that
the point is not coming home because people are still sitting
there, saying, ``Oh, I have known this person for years. It
will be fine.'' That is not true. Look what happened to us.
Senator Kohl. Absolutely.
Ms. Mitchell. He did my husband's corporate taxes for 22
years and lived two doors from us.
Senator Kohl. Thank you.
Ms. Mitchell. You are welcome.
Senator Kohl. Mr. Minkow, what eventually led to the
discovery of the fraud that you were committing?
Mr. Minkow. The good work of an investigative reporter at
the Los Angeles Times uncovered May 22, 1987, that in the past
I had to keep cash-flow coming in to pay off the ``Ponzi
scheme,'' had done some credit card overcharging.
So, what happened was, is after that article was printed in
the LA Times, I had been on Oprah Winfrey. I had had a lot of
positive publicity. Now people started to--and I think it goes
to what Mrs. Mitchell was saying--critically look at me. While
I used to be able to get around the due diligence process, now
they wanted independent proof of profitability, and it
eventually led to my demise.
But the point there is not just who, but what the
investment was. Normally and regularly, people weren't earning
40 percent gross profit margins in the carpet cleaning
restoration business. While I had been able to kind of handle
that and the big publicity, young entrepreneur, once they
pointed a critical eye at me, I was through.
The number-one thing that we perpetrators can't stand,
Senator Kohl, is critical thinking. We want you to love us. We
want you to think the best of us. We want you to know that your
friend has been getting checks for 5 years on time, and that is
all the due diligence we want you to do.
As Mrs. Mitchell said, you have to go deeper than that. You
have to look at the industry, check out if the returns are
consistent that are being offered in that industry, and do more
due diligence. So, to your point. Sorry, long on that answer.
Sorry about that.
Senator Kohl. From your perspective, what are the red flags
that seniors should be looking for when they are thinking about
investing their retirement income?
Mr. Minkow. Yes. I think, No. 1, the regulation industry, I
think seniors and the investment public in general do not know
how to define a security under the Howey test, and you don't
have to be a lawyer to do it. Basically, people think
``security,'' they think, oh, stock or bond. A security is any
time I ask for investment money from Mrs. Mitchell and invest
it in widgets or the foreign currency markets or anything, and
I am guaranteeing her a certain return, that constitutes a
security.
Therefore, I need to be blue skied in every State I am
offering it. I need to be a licensed broker/dealer. If I am
offering her--and this is almost in every single case--
incentivizing the people that are in the deal financially by
bringing in their friends. That is how we promote these things.
So, we pay commissions. That is a red flag. Because unless
the person bringing in the new investment money is a licensed
broker/dealer, they can't receive commissions. So the whole
understanding of what a security is.
Second, normally and regularly test. Normally and
regularly. Despite all the nice people out there who have been
receiving returns, do people in this industry, are they able to
generate these kinds of returns? Don Scott, 79-year-old Don
Scott, who watched--he was in a factoring deal, and he said
they promised him 24 percent to 30 percent a year returns.
He happened to see me doing an interview where I said about
factoring, normally and regularly, people in this industry
can't afford a cost of capital of 30 percent annually. They
just don't have those kind of margins if it is legitimate.
Caused him to think critically about his investment. We
investigated it, uncovered it, and he got his money back.
So this objective thinking, not the subjective. ``My friend
brought him to me,'' that kind of thing. Knowing what a
security is. Watch this. Don't invest out of fear or greed. We
offer high returns because high returns blind objectivity. We
offer fear because we want people to think that they are going
to outlive their money, and we will stop at nothing.
Senator Kohl. Good. Well, we thank you very much for your
testimony, Mrs. Mitchell and Mr. Minkow. It has been very
helpful.
Mr. Minkow. Thank you.
Senator Kohl. I appreciate your being here today.
Mr. Minkow. Thank you, sir.
Senator Kohl. So we have a second panel. The first witness
on the second panel will be Patty Struck. She is the president
of the North American Securities Administrators Association.
Ms. Struck also happens to be from my home State of Wisconsin,
where she serves as administrator of the Division of Securities
with the Wisconsin Department of Financial Institutions.
She will share with us the State security administrator's
perspective on the growing problem of senior investment fraud.
Our second witness will be Elisse Walter, who is the
executive vice president for regulatory policy and oversight of
the National Association of Securities Dealers. NASD serves as
the primary private sector regulator of the securities
industry. Ms. Walter is here to share with us NASD's efforts to
combat senior investment fraud.
Finally, we will be hearing from Susan Wyderko of the
Securities and Exchange Commission. She is the acting director
of the Division of Investment Management for the SEC. Ms.
Wyderko will tell us what the SEC, which is the Federal
Government agency charged with regulating the securities
industry, what they are doing to stop senior investment fraud.
Thank you, all three of you, for being here. Ms. Struck.
STATEMENT OF PATRICIA D. STRUCK, PRESIDENT, NORTH AMERICAN
SECURITIES ADMINISTRATORS ASSOCIATION, INC. (NASAA),
WASHINGTON, DC
Ms. Struck. Senator Kohl and members of the Committee----
Senator Kohl. Do you want to turn on your button?
Ms. Struck. Senator Kohl and members of the Committee, I am
Patty Struck, and I am honored to be here to highlight the
activities of State securities regulators in protecting senior
citizens against investment fraud.
Our cases of senior investment fraud may not make national
headlines, but they are devastating to the victims and their
families. What would any of us do if it were our parents
turning over their retirement nest eggs to smooth-talking
senior specialists promoting unsuitable investments?
Seniors today are bombarded with pitches for financial
seminars. Cold callers, brokers, and insurance agents are all
pitching investments to seniors. Many of them are promising
higher returns and little or no risk. Unfortunately, in most of
the cases that we see, it is just the opposite--high risk and
no returns, just devastating losses.
Through seminars, publications, PSAs, and press interviews,
my fellow regulators stress how important it is for seniors to
call their State regulators, their State securities regulators,
as you suggest, Senator Kohl, if they have questions about an
investment opportunity or if they suspect they may have been
victims of fraud.
We have offices in every State, and a good example is the
one that Mrs. Mitchell was talking about, the one in
Pennsylvania. Our staffs are trained to respond to all
complaints. You can find a list of regulators on the NASAA Web
site at www.nasaa.org.
We are currently seeing a flood of troubling senior schemes
in three related areas--senior specialists, variable annuities,
and unlicensed or unregistered persons. Unfortunately, these
three problems often occur at the same time in some senior
investment seminars.
State securities regulators are receiving an increasing
number of complaints from investors who have been enticed into
attending seminars sponsored by certain senior specialists. It
is common practice for seniors to receive invitations to a
seminar, usually conducted with a meal. At the conclusion, they
are encouraged to contact the presenter with further questions.
Typically, the specialist will recommend that seniors sell
their stocks in their retirement plans and use the proceeds to
purchase variable annuities that the specialist offers. Many
senior specialists have little specialized financial training.
The NASD's professional designation data base is a useful
resource to check out an individual's professional status.
A fixture on NASAA's annual list of top scams involves the
sale of variable annuities to investors with little regard to
whether or not the product is suitable. While variable
annuities are legitimate investments, regulators are concerned
that many investors aren't being told about the potential of
exposure to market risk, surrender charges, and the steep sales
commissions that the agents are earning when they move
investors into variable annuities.
NASAA is encouraging changes in State laws that would allow
insurance regulators to continue to oversee the insurance
companies that sell variable annuities, while authorizing State
securities regulators to investigate complaints and take action
against the individuals who sell them.
Another problem facing seniors is that of unlicensed sales
people pitching securities that are unregistered. Many of the
enforcement cases in my written testimony illustrate this
twofold violation. NASAA believes the most effective weapon
against fraud is a dual approach. We combine aggressive
enforcement efforts with financial education to protect
investors from unscrupulous individuals.
We were pleased last week when Chairman Cox noted in his
speech to the Consumer Federation of America that the States
often coordinate their efforts with the SEC to capitalize on
the strengths of both State and Federal regulators.
In Wisconsin, Kenneth Hackbarth, an elder in his local
church, operated a Ponzi scheme that victimized a total of 117
friends, relatives, and senior parishioners of more than $6
million. Using a front called Homestead Investments, he told
investors their money was being used to buy, rehab, and sell
property and promised a 15 percent return.
The problem was Hackbarth never put any of the money into
real estate, but just used his investors' money to pay off
earlier investors, the hallmark of a Ponzi scheme. We worked
with the FBI, and a criminal action resulted in a conviction
and a 10-year prison sentence.
State securities regulators believe investor education is a
powerful weapon in the fight against investment fraud. A few
years ago, NASAA undertook a senior outreach initiative
designed to educate seniors to protect themselves from
investment fraud.
It involves programs and materials developed by securities
regulators at the State level, including brochures, videos, and
outreach seminars; an anti-fraud education program called
Seniors Against Investment Fraud, which began in California,
where senior volunteers conduct presentations in comfortable
familiar settings such as community centers, assisted living
facilities, and churches; and the Senior Investor Resource
Center on the NASAA Web site to serve as a gateway for
important investor protection information designed specifically
for seniors. The center was launched in 2003 and includes
common sense solutions to protect assets from investment fraud.
These are dangerous economic times for seniors. This
Committee's examination of investment fraud as it affects the
growing senior population is an important step in highlighting
the problem and working toward a solution.
Thank you so much for allowing me the opportunity to appear
here today.
[The prepared statement of Ms. Struck follows:]
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Senator Kohl. Thank you very much, Ms. Struck.
Ms. Walter.
STATEMENT OF ELISSE B. WALTER, EXECUTIVE VICE PRESIDENT,
REGULATORY POLICY AND OVERSIGHT, NATIONAL ASSOCIATION OF
SECURITIES DEALERS (NASD), WASHINGTON, DC
Ms. Walter. Thank you, Senator Kohl.
Good morning. I am Elisse Walter, executive vice president
of NASD.
On behalf of NASD, I would like to thank you and the
Committee for holding this hearing and for inviting us to
testify today about our work to protect investors, particularly
the elderly. This is a terribly important subject, and the
Committee is to be commended for addressing it.
We have prepared a more detailed and comprehensive written
statement and, with your permission, will submit it for
inclusion in the record.
NASD was founded more than 60 years ago as part of the
Government's response to the market crash of 1929 and the Great
Depression. The Federal Government designated NASD as the
private sector regulator for the securities industry with the
mission of protecting investors.
Under Federal law, every securities firm doing business
with the public must register with NASD. Our mission includes
writing rules that govern securities firms and their employees,
enforcing those rules, and sanctioning those who fail to
comply. On average, we bring more than 1,000 new disciplinary
actions every year, with sanctions ranging from censures to
fines and suspensions to expulsion from the industry.
Every year, we bring cases against those who have
specifically targeted the elderly. When we encounter fraud that
is outside our jurisdiction--for example, in cases involving
investment advisors--we refer cases to criminal authorities,
the States, and the SEC.
Senator Kohl, as you said in your opening statement, the
first step is education. So, in addition to enforcement, my
testimony today focuses on what we at NASD are doing to educate
investors so they can avoid problems before they occur.
In addition to our investor alerts, which alert the public
to current schemes, we also reach out to seniors through our
investment forum programs attended by more than 7,500
investors, including many older citizens. Last year, we opened
a new office in Boca Raton, FL, due to the growth of
problematic activity in that area targeted at retirees.
Our Investor Education Foundation has awarded grants
directed to senior concerns. For example, a grant to WISE
Senior Services, which is working in collaboration with the
AARP, to discern the reasons why the elderly are more
frequently victimized by investment fraud. Among other things,
they are exploring the theories of con artists for what makes
an easy target.
This fall, we are starting a multi-million dollar
advertising campaign to direct the public to the investor
education resources that we offer. For example, we think, as
you have heard today already, that everyone should know how
important it is to do their homework before they invest and
before they give their money to a broker.
NASD's BrokerCheck Program gives investors easy access to
background information about firms and individual stock
brokers. We encourage investors to use it to learn about the
conduct of those with whom they invest. Investors can access
these reports through our Web site, www.nasd.com, or a toll-
free telephone number, 800-289-9999.
We also encourage seniors and those who care for them to
use the NASD Web site, where we provide a wide range of tools
and resources, including the alerts I mentioned and other
publications directed to individual retail investors.
Awareness, prevention, and education are major deterrents
to investment fraud. Unless seniors are armed with the
education necessary to identify and thus avoid attempts at
financial exploitation, they can more easily fall prey to
fraud.
So what recourse do seniors have if they have been misled
or otherwise treated unfairly? Investors can lodge complaints
with NASD. Investigating these complaints is a big part of our
job. You can submit a complaint through our Web site or by
contacting one of our district office staff by phone or in
writing.
We review every customer complaint, and investors can seek
to recover their losses through filing a case in our
arbitration forum. NASD is the largest dispute resolution forum
in the securities industry. It handles 90 percent of the
securities arbitrations and mediations in the country.
Also, in our routine examinations of broker/dealer firms,
NASD focuses on sales practice issues, including compliance
with our requirement that a recommendation of a securities
transaction be appropriate for the investor to whom it is made.
This is especially important when it comes to seniors, who have
a more limited time horizon for their investments and who may
need access to their money for long-term care costs.
NASD also conducts sweeps, a series of targeted
examinations which may involve particular products, often those
that are disproportionately sold to the elderly. For example,
we recently began a sweep focusing on the suitability of
recommendations to exchange, withdraw funds, or take other
distributions from variable insurance products in order to fund
investments in equity indexed annuities and the associated
supervision of this activity.
Another area where we have focused our attention and
resources is sales seminars, which are often attended by
retirees and the elderly. These seminars--with titles like
``Asset Protection For Seniors,'' ``Common Sense Retirement
Strategies,'' ``Six Mistakes Retirees Make With Their
Finances,'' and ``Striking It Rich In Retirement''--sometimes
entail high-pressure sales tactics under the guise of a free
lunch or dinner.
We have brought a number of enforcement actions relating to
seminars, and we are joining with the SEC and Florida
securities regulators to review these seminars.
The entire financial industry depends on investor
confidence. NASD exists to bring integrity to the markets and
to protect investors. As we have all been reminded this
morning, lasting confidence must be based on good information
and sound regulation.
Thank you so much for this opportunity to testify, and I
would be happy to answer any questions you have.
[The prepared statement of Ms. Walter follows:]
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Senator Kohl. Thank you very much, Ms. Walter.
Now we will hear from Ms. Wyderko.
STATEMENT OF SUSAN FERRIS WYDERKO, ACTING DIRECTOR, DIVISION OF
INVESTMENT MANAGEMENT, U.S. SECURITIES AND EXCHANGE COMMISSION
(SEC), WASHINGTON, DC
Ms. Wyderko. Senator Kohl, on behalf of the Securities and
Exchange Commission, thank you for the opportunity to testify
today about our efforts to protect and educate investors,
including our Nation's senior citizens.
I am the director of the SEC's Office of Investor Education
and Assistance. My office is the front door of the commission
for individual investors. Nearly every day, my staff fields
telephone calls and receives letters and e-mails from seniors
or from the children and caregivers of seniors.
The subject of your hearing, financial fraud on the
elderly, is one that our chairman, our commissioners, and I
care about deeply. Some of the cases that we see are heart-
breaking. They involve seniors bilked out of all of their
savings at a time of their lives when they need it most and
can't recover.
In our experience, the two most common challenges senior
investors face involve avoiding outright scams and learning how
to fend off high-pressure sales pitches for legitimate, but
arguably unsuitable products. These include the ``free lunch''
seminars that encourage seniors to purchase variable annuities
and other complex manufactured products with contract riders
promising guaranteed death benefits.
So let me tell you what the SEC is doing to protect seniors
in the enforcement area, in our inspections, and from a
consumer education perspective. Over the last 2 years alone,
our Division of Enforcement has brought at least 26 enforcement
actions aimed specifically at protecting elderly investors.
Many of these actions were coordinated with State authorities.
One recent case involved a $144 million Ponzi scheme that
lured elderly victims in southern California to workshops with
the promise of free food. The fraudsters then bilked them out
of their retirement money by purporting to sell them safe,
guaranteed notes.
While it is important to catch wrongdoers and bring them to
justice, it is always better to prevent wrongdoing. So that is
why our examination staff, together with the NASD and the State
of Florida, will soon be conducting a series of examinations of
broker/dealers and advisors that lure seniors to attend sales
seminars, many times at fancy hotels and restaurants with the
promise of a free lunch.
Our examiners will be looking at the firms that sponsor
these seminars to see whether the sales seminars are
supervised, whether the sales people are making wild claims of
possible returns on an investment, and whether the risks that
are inherent in any investment are being appropriately
disclosed.
Now while enforcement and inspection activities are
important to stopping fraud and misleading sales practices, our
best defense against fraud is an educated investor. The
dominant theme of the SEC's investor education materials is,
``Investigate before you invest.'' We encourage individuals to
ask questions and fully understand any investment before
purchasing.
We publish clear and concise explanations of some of the
most complex products that are sold to a senior, such as
variable annuities and equity indexed annuities. We also
counsel investors to check out the background and credentials
of any securities salesperson or financial professional.
We stress that if a deal sounds too good to be true, it
usually is. We don't copyright any of our materials. We make
them freely available in both Spanish and English.
Now we know that many seniors and many children and
caregivers of seniors are using the Internet to search for
information on investing. That is why we recently created a
page on our Web site specifically aimed at senior citizens.
This page provides links to critical information on investments
commonly marketed to seniors. It also warns against the dangers
of listening to the sales pitches of cold callers.
Senior citizens who want to know more can ask for a copy of
our senior care package, which is a collection of our most
popular brochures for seniors.
In closing, I would like to thank this Committee for
recognizing the importance of the commission's efforts in
helping our Nation's seniors to rest more easily with their
investment decisions. I appreciate your inviting me to speak on
behalf of the commission, and I would be happy to answer any
questions you may have.
[The prepared statement of Ms. Wyderko follows:]
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Senator Kohl. Thank you, Ms. Wyderko.
Ms. Struck, it seems that, in most cases, by the time your
office receives a complaint, the senior's investment money is
long gone. What type of proactive investigations does your
office undertake to detect potential scams before they go too
far?
Ms. Struck. Thank you, Senator Kohl, for the opportunity to
answer these questions.
We have an exam program that allows our examiners to go
into the offices of securities professionals, and that is why
in my testimony I stressed the importance of including certain
products, such as variable annuities, as securities under our
State laws.
Because if we don't have the authority to regulate the
people selling those products, then we don't have the ability
to look at what is going on in their offices and make sure that
the sales practices that they are engaging in with investors,
including seniors, are fair and appropriate.
In addition, we are engaged in a number of educational
efforts. One of the newest ones that we are excited about, that
Wisconsin has just signed on for, is in conjunction with the
AARP, and that is called the Campaign for Safe and Wise
Investing.
What that will do is to take members of our staff, as well
as representatives of the AARP, into local communities
throughout the State to meet in comfortable surroundings with
investors to answer their questions and help provide education
for them, tips on how to protect themselves when they are
dealing with a financial professional.
Senator Kohl. How often do senior victims of investment
fraud recover the money that they lost?
Ms. Struck. It is very rare, unfortunately, for investors
ever to recover the money lost in an investment scheme. There
are occasions where money has been recovered, but most times by
the time--as in the situation that Mrs. Mitchell outlined or
the case that I outlined, Kenneth Hackbarth, the pastor from
Wisconsin--once the money has been spent on a lavish lifestyle
of the person collecting the money, it is too late, and there
is nothing left to gain back for investors.
Senator Kohl. Ms. Walter, disclosure of key information,
such as fees and penalties, is an important way to protect
seniors from unexpected losses. So how can we make it easier
for seniors to receive the information they need to make
informed decisions without overwhelming them with the piles of
documents and legalese that so often----
Ms. Walter. That is a very important question. The SEC
currently has outstanding a proposal specifically with respect
to mutual funds and certain other products, including variable
annuities, to provide point of sale disclosure. That means
short, to the point, plain English disclosure at the time or
right before an investor actually makes a decision to invest
that outlines those fees and penalties.
NASD put together an industry task force of experts in both
securities firms and mutual fund firms and has submitted
comments and a task force report to the SEC strongly supporting
that item. So that we put together a prototype disclosure
document that includes disclosure of fees and expenses, and we
also think it is important to include short, to the point,
plain English disclosure of the main features of an investment.
I know that proposal is on the SEC's agenda to move forward
with this year.
Senator Kohl. Ms. Walter, as we have learned today, making
sure an investment is suitable for an investor's specific
situation is very important. How does NASD enforce the
suitability rules it has in place for its member brokers and
dealers?
Ms. Walter. There are a number of avenues. As you have
heard, the States have an examination program. We have a
national examination program, and it consists of two main
parts. First, there are routine exams where we go in on a
periodic basis and examine the firms, and the length of time
between those exams is determined by the risk that firm
presents based on a number of different factors.
In addition, as I mentioned in my oral statement, we
investigate or we review every single customer complaint we
receive. So if a customer has a complaint, they can be assured
that someone at NASD will be looking at that.
We have sweeps, which, in addition to our normal exam
program, target specific areas where we think that there may be
a problem, whether there are specific types of conduct,
specific lines of business, and specific products.
When we bring enforcement actions, I certainly agree that
it is all too rare that people get their money back. But we
have made it a priority in our enforcement actions where there
are specific victims that have been identified, if there is
money, to order restitution so that when it is still available
and hasn't been absconded with, investors can perhaps get their
money back through that vehicle as well.
Senator Kohl. Thank you.
Ms. Wyderko, just a few days ago, SEC Chairman Cox said
that the agency is stepping up its efforts to protect elderly
investors from fraud. Can you tell us a little bit more about
what these efforts are? Aside from looking at sales seminars,
what else will these new efforts focus on?
Ms. Wyderko. Our efforts are going to be focused on a
double-barreled approach. As Patty Struck said, we also believe
that aggressive enforcement, coupled with aggressive investor
education, is the best way to go.
So our inspections folks will be working with other
regulators, the NASD and the State securities regulators, to go
look at seminars that are targeted to elderly Americans. I
think that is a very important place to begin. We will also be
looking at our enforcement cases and bringing them aggressively
where appropriate.
As Mr. Minkow said, we do see cases of affinity fraud,
where fraudsters go into a community and bring together people
with a certain attribute, whether it be a church affiliation or
elderly people or some other affiliation, and they try and bilk
them out of their savings in that fashion. So, we aggressively
go after cases of Ponzi schemes like that, affinity frauds
where we see them.
We are also working with State securities regulators and
others to disseminate investor education materials. This is
very important to the extent we can get the word out to elderly
Americans that it is OK to hang up on cold callers.
We need to get out the word to empower Americans to ask how
the securities salesperson is being paid, being compensated for
a transaction. We need to get the word out that it is not
embarrassing or inappropriate to ask questions about an
investment opportunity that you don't understand.
In this way, we can empower Americans to protect
themselves, which is really our best defense against fraud.
Senator Kohl. Mr. Minkow from our first panel stated that
investment scam artists aren't really concerned about being
caught because they know that regulatory and enforcement
agencies are not focused on them and don't have the resources
that they need to do their jobs. What are your thoughts on the
comments that he made?
Ms. Wyderko. I think we do have a lot of resources that we
are bringing to this problem, and I will note for the record
that he did go to prison.
Senator Kohl. That is pretty definitive. [Laughter.]
I would like to ask all three of you what is it about
people who are in their senior years makes them more vulnerable
to investment scam or, in fact, are they more vulnerable? Ms.
Struck.
Ms. Struck. It does seem that the older people get, the
more vulnerable they become. While I am not a physician or a
psychologist and I don't understand why that happens, my
friends and I talk about this all the time.
I ran into a friend who is an insurance regulator a couple
of weeks ago, and we were talking about just this question. She
said, ``Patty, I don't know what it is, but I am just so
terrified that it is going to happen to my mother.''
So while I can't explain it, it is something on which all
regulators, social scientists, journalists, and all reasonable
people seem to agree. It happens as people get older. They just
become more vulnerable.
Senator Kohl. Hmm. Do you agree with that, Ms. Walter?
Ms. Walter. I do. Part of the reason is because older
investors have gone through their wealth accumulation phase. So
they probably have more funds available than they had at any
other point in their lives.
We certainly agree that we don't have all the answers. That
is one of the reasons that we have funded this WISE Seniors
Services grant I mentioned earlier.
They, with AARP, are going to do research to determine
that, to try to determine if there is a specific fraud
vulnerability profile, not only just being older, but who in
particular do they target among the older citizens? So that we
can target our educational efforts and perhaps our regulatory
efforts as well to try to keep this from happening.
Senator Kohl. It is interesting because you think of one of
the profiles of older people is they become a little bit more
cautious, more conservative, more careful. Yet you are
suggesting that they are, Ms. Wyderko, more susceptible?
Ms. Wyderko. My theory is that our seniors in America grew
up in a different culture. They grew up being taught that it
was impolite to hang up on people. They grew up believing that
if someone said they were your friend, in fact, they were your
friend.
I believe that they grew up in a more trusting era of our
Nation's history, and that as the rules--the culture has moved
and the rules of the game have changed, that fraudsters are
taking advantage of our seniors and their trusting,
unwillingness to suspend their disbelief.
Senator Kohl. To each of you, we have heard today about the
issue of unregistered and unlicensed individuals selling
unregistered securities. So what do you all think is the best
way to address this problem? Ms. Struck.
Ms. Struck. Just to underscore the most important message
that we can deliver is this twofold way of addressing the
problem. One is through aggressive enforcement as the NASD, the
SEC, and State regulators bring to bear against this problem.
We need to aggressively enforce our laws.
The other way is through the programs that we have
described today that reach out and actually have an impact on
senior investors.
Senator Kohl. Ms. Walter.
Ms. Walter. Come back to the basic point that I think we
have all emphasized is that you need to know with whom you are
dealing. The very first thing someone needs to do when they
have located a potential advisor or financial consultant or
someone is offering them a deal that may be too good to be true
is to check out that person.
You can do that through NASD, and you can do it through
your State securities regulator. If, in fact, those systems
come up blank--there is no registration, either at the State
level or at the Federal level--that itself is a red flag.
We really, through our educational efforts, have to
encourage people to be very suspicious if they are dealing with
someone who isn't registered with a regulatory authority.
Senator Kohl. Do you agree with that, Ms. Wyderko?
Ms. Wyderko. I do. I would add that we all need to redouble
our efforts to get out the fundamental message that if an
investment opportunity sounds too good to be true, it most
definitely is too good to be true.
We all need to work together to share enforcement tips and
leads that we get. I know that we all keep data bases and share
complaints from customers, and we need to be aggressive in
following up on those.
Senator Kohl. Well, we thank you all very much for being
here today. Unfortunately, our Chairman, Gordon Smith, is stuck
in a markup this morning, and he won't have a chance to make
it.
Much work remains to be done, and I look forward to working
with you to put an end to seniors losing their hard-earned
retirement money to scams. As we have said today, we need to
continue to educate seniors about the traps and the snares that
they are facing. We also plan to work on common sense
legislation that will tighten the rules regarding who is
selling securities and how those securities are being sold.
In addition, we will be working to ensure that enforcement
and regulatory agencies have the resources and the training
they need to combat investment fraud.
So thank you so much for coming. I think you have added a
lot to the discussion, and we look forward to working with you.
This hearing is closed.
[Whereupon, at 11:06 a.m., the committee was adjourned.]
A P P E N D I X
----------
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