Monthly Archives: March 2012

R. Allen Stanford’s conviction for running a $7 billion Ponzi scheme is yet another reminder that investors need to keep their guard up when presented with investment opportunities that sound too good to be true.

Stanford was accused of defrauding some 30,000 investors from 113 countries over the course of 20 years with bogus certificates of deposit sold by his bank inAntigua. According to prosecutors, investors thought their funds were being invested into safe and conservative assets when in actuality their money was used to fund risky businesses, as well as Stanford’s lavish lifestyle.

Financial frauds like Stanford’s are far from a rarity. Fraud complaints to the Federal Trade Commission (FTC) have quadrupled during the past decade and are up 35% in the past three years alone, according to The Rise of Financial Fraud, from the Center for Retirement Research atBoston College. It’s likely, however, that financial fraud is much more pervasive in that it often goes unreported to authorities.

The elderly are particularly vulnerable to financial fraud. Many individuals who become victims suffer from dementia or are desperate to find ways to recoup the financial losses they suffered during the 2008 market downturn.

The Boston College report includes a list of red flags regarding potential financial fraud schemes, including investments that sound too good to be true, financial products that supposedly guarantee high rates of return but little risk, and proposals that include the “free-lunch” seminar.

A Feb. 29 article by CBS Money Watch reminds investors that when presented with a financial opportunity or proposal to be aware of the rates of return that are available with different types of investments. As of March 2, the Board of Governors of the Federal Reserve System shows these rates of return as the following:

– 0.52% for six-month CDs;
– Under 1% for Treasuries with durations of five years or less;
– Returns of 1.97% for 10-year Treasuries and 2.74% for 20-year Treasuries;
– 3.82% and 5.08% returns for corporate bonds, depending on the bond’s duration and quality; and
– Returns of 3.72% for state and local municipal bonds.

The Securities and Exchange Commission (SEC) wants investors who were scammed by R. Allen Stanford in a $7 billion fraud scheme to be treated as brokerage customers by the Securities Investor Protection Corporation (SIPC). If that happens, investors would stand a chance of getting some of their money back.

The SIPC works as an insurance fund, and is backed by member brokerages. While it isn’t designed to cover investment losses, it is supposed to provide a measure of protection for investors in the event that their brokerage goes bankrupt or fails because of alleged fraud. The protection amounts up to $500,000 per customer.

In the Stanford case, the SIPC has been unwilling to pay up, even though the SEC told it to do just that more than two years ago. The SIPC, however, says the protection provided to investors does not apply to those who were bilked by Stanford because the bogus certificates of deposit they bought were sold through Stanford’s bank in Antigua, rather than being held by the brokerage.

That technicality was the subject of a March 7 congressional hearing, in which legal analysts and lawmakers offered their thoughts on the issue, along with recommendations for improving the SIPC.

It’s an idea that may be long overdue following the recent rash of Ponzi schemes and failed private placement deals: Revisiting the protections afforded to investors by the Securities Investor Protection Corporation (SIPC).

The SIPC, which is the public corporation charged with aiding victims when their brokerages fail or file bankruptcy, took center stage on March 7 at a Congressional hearing titled The Securities Investor Protection Corporation: Past, Present, and Future.

Steven Caruso, a partner with Maddox, Hargett and Caruso, P.C. testified at the hearing. His recommendations for improving the SIPC include increasing investor protection from $500,000 to $1.3 million and indexing that amount to the rate of inflation moving forward.

Currently, brokers pay an annual premium to fund the SIPC. Should SIPC coverage be expanded in the future, however, these same brokers may be tapped for additional funds.

Proponents of the idea say it enhances accountability, forcing brokers to improve their due diligence of the products and investments they market and sell to clients.

During the March 7 hearing, Caruso also suggested that investment advisers and brokers/dealers be required to purchase insurance given that they are entrusted with billions of dollars in investment funds.

“There is no free lunch in this world,” Caruso said in a March 7 Investment News article.

“When we have a fiduciary who is out there as an investment professional, requiring insurance will go a long way to helping potential [fraud] victims.”