Category Archives: Investor Beware

The price of gold has had an amazing run over the past decade. But as gold investors are now learning, those days may be a thing of the past.

Gold investor Jon Norstog knows this reality first hand. A $29,000 investment that Norstog made in 2011 is now worth about $17,000, a 42% loss.

“I thought if worst came to worst and the government brought down the world economy, I would still have something that was worth something,” said Norstog, 67, in an April 2013 story by the New York Times.

For a countless number of investors like Norstog, the idea that rising gold prices are no longer a sure thing is a hard one to grasp. Making matters worse is the fact the financial industry seized on the idea that gold would always be the pinnacle of great investments – not to mention a forever safe haven – to market a growing range of gold investments, including government-minted coins, publicly traded commodity funds, and mining company stocks, according to the New York Times story.

But $5 billion that flowed into gold-focused mutual funds in 2009 and 2010, according to Morningstar, helped the funds reach a peak value of $26.3 billion. Since hitting a peak in April 2011, those funds have lost half of their value, the NYT reported.

Indeed, after gold prices reached incredible highs two years ago, they’ve fallen fast. The price of bullion soared to more than $1,900 an ounce in August 2011; on Aug. 6, 2013,  gold prices were less than $1,300 an ounce.

“Gold is very much a psychological market,” said William O’Neill, a co-founder of the research firm Logic Advisors, in the New York Times story. O’Neill told its investors to get out of all gold positions in December after recommending the investment for years. “Unless there is some unforeseen development, I think the market is going lower,” he said.

Every year, more investors watch helplessly as their retirement savings vanish because of investment fraud. Many of these individuals are elderly investors 65 years of age or older. According to researchers, scams from Ponzi schemes to frauds involving bogus private placements and promissory notes cost U.S. seniors $3 billion a year.

Just this week, the Securities and Exchange Commission (SEC) filed fraud charges against an Indiana man accused of stealing millions of dollars in retirement savings from clients. The SEC alleges that John K. Marcum of Noblesville, Indiana, and Guaranty Reserves Trust LLC used clients’ money for personal use and to fund a bounty hunter reality TV show.

Marcum Cos. LLC was named as a relief defendant in the SEC’s case. Marcum is the principal of both Guaranty Reserves and Marcum Cos.

“Marcum tricked investors into putting their retirement nest eggs in his hands by portraying himself as a talented trader who could earn high returns while eliminating the risk of loss,” said Timothy L. Warren, Acting Director of the SEC’s Chicago regional office, in a statement.  “Marcum tried to carry on his charade of success even after he squandered nearly all of the funds from investors.”

The SEC says that Marcum allegedly raised more than $6 million from at least 37 investors by selling investments in Guaranty Reserves Trust. Clients were allegedly told by Marcum that their principal was guaranteed and their proceeds would earn large returns from day trading. In addition, Marcum allegedly provided investors with account statements showing that he had used their money to achieve annual returns of more than twenty percent (20%), with no monthly losses. Marcum also reportedly told his clients that he would use their money to earn strong returns by day-trading in stocks.

In reality, Marcum did very little actual trading, and when he did, he suffered significant losses. Instead of day-trading, Marcum used his investors’ money as collateral for a $3 million line of credit for himself. Marcum turned to this line of credit to finance several start-up businesses, including a bridal store, a soul food restaurant and bounty hunter reality television show. Marcum also used investor money to finance his lavish lifestyle, which included luxury car payments, airline and sporting event tickets, expensive meals and hotel stays, the complaint states.

In the complaint, the SEC says that Marcum assisted many of his investors in setting up self-directed IRA accounts at several trust companies. The investors gave Marcum control of their assets by either rolling their existing IRA accounts into the newly-established self-directed IRA accounts, or by transferring their taxable assets directly to brokerage accounts which Marcum controlled.

Marcum and certain investors then co-signed promissory notes created by Marcum and issued by Guaranty Reserves Trust, which were then allegedly placed into the IRA accounts, the SEC says. The notes were securities and stated that the individual is making an “investment” with GRT. The promissory notes also repeatedly stated that the securities are “asset-backed,” “secured” and “guaranteed,” and promise the payment of interest based on “100% of the asset’s performance.”

Marcum’s scheme, which began in 2010, began to unravel in mid-2013, when certain investors began demanding distributions. Marcum could not comply, because virtually all of his investors’ money was gone. Faced with the reality of being unable to honor investor redemption requests, the SEC alleges that Marcum provided investors with a “recovery plan” that revealed his intention to solicit funds from new investors so that he could pay back his existing investors.

In June 2013, the SEC says Marcum had a phone conversation with three investors in which he admitted that he had misappropriated investor funds and was unable to pay investors back.  During this call, Marcum begged the investors for more time to recover their money, the SEC alleges. According to the complaint, Marcum offered to name these investors as beneficiaries on his life insurance policies, which he claimed included a “suicide clause” imposing a two-year waiting period for benefits.  Marcum suggested that if he was unsuccessful in returning investors’ money, he would commit suicide to guarantee they would eventually be repaid.

The SEC obtained an emergency court order to freeze the assets of Marcum and his company.

Incidents involving bad brokers or corrupt financial reps are becoming increasingly common. Most recently is the case of a mutual fund executive in Florida who promised investors early shares of Facebook and Groupon but instead used their money to buy himself lavish cars, a waterfront home and expensive jewelry.

The individual, John Mattera, was sentenced to 11 years in prison.

As reported June 21 by the Associated Press, U.S. District Judge Richard Sullivan ordered Mattera to forfeit $11.8 million. An additional restitution amount will be set within the next month.

“You’ve left a lot of wreckage in your past and you have to be punished for that. These crimes were just so selfish, so callous toward the victims,” said Judge Sullivan in addressing Mattera.

Mattera was arrested in November 2011 on charges of conning more than 100 people who invested millions of dollars with his British Virgin Islands-based Praetorian Global Fund Limited. He pleaded guilty in October to conspiracy, securities fraud, money laundering and wire fraud.

One of Mattera’s victims, Marisa Light Cain, was present at Mattera’s sentencing hearing. She stated that Mattera squandered the $100,000 she had saved to pay for college for her two sons.

Mattera has four previous convictions for similar crimes in Kentucky and Florida. He has been imprisoned since his guilty plea, a proceeding that was delayed by a day when he missed his flight from Florida. He also was found in contempt in a civil case brought by the Securities and Exchange Commission (SEC), according to the AP story.

The bottom line: Investment scams and fraudulent investments come in many forms. Falling victim to a scam can mean losing anywhere from a few hundred dollars to your life savings. At the end of the day, if the investment offer sounds too good to be true, it probably is.

Alternative mutual funds have exploded in popularity in recent years. But there is a dark side to alternative mutual funds. Last week, the Financial Industry Regulator (FINRA) warned investors about this very issue, cautioning them in an Investor Alert titled “Alternative Funds Are Not Your Typical Mutual Funds.” Among other things, the alert stressed the complex trading strategies and the unique characteristics and risks associated with alternative mutual funds.

“The strategies alternative mutual funds employ tend to fall on the complex end of the spectrum,” FINRA said in its Investor Alert. “Examples include hedging and leveraging through derivatives, short selling and ‘opportunistic’ strategies that change with market conditions as various opportunities present themselves.”

As their name implies, alternative mutual funds are quite different from their traditional counterparts. Alt funds typically use more exotic strategies, including options and leverage, as well as more complex asset mixes.  Alternative funds might invest in assets such as global real estate, commodities, leveraged loans, start-up companies and unlisted securities that offer exposure beyond traditional stocks, bonds and cash.

Some alt funds employ a single strategy. For instance, they may offer 100% exposure to currencies or distressed bonds. Some funds might employ a market-neutral or “absolute return” strategy that uses long and short positions in stocks to generate returns. Others may employ multiple strategies such as a combination of market-neutral strategies and various arbitrage strategies. Still others are structured as a fund containing numerous alternative funds or a special type of “fund of hedge funds,” according to FINRA.

Although the strategies and investments of alternative funds may appear similar to those of hedge funds, the two should not be confused, FINRA says. Alternative mutual funds are regulated under the Investment Company Act of 1940, which limits their operations in ways that do not apply to unregistered hedge funds. These protections include limits on illiquid investments; limits on leveraging; diversification requirements, including limits on how much may be invested in any one issuer; and daily pricing and redeemability of fund shares.

FINRA cautions investors who are considering investing in alternative mutual funds to carefully consider their investment objectives, performance history and fund manager of alternative funds before doing so.

A May 7 story by NPR highlights some of the ways in which bogus financial advisers use the “art of confusion” to siphon money from unsuspecting elder Americans. A contributing factor to this type of elder fraud is the myriad of senior designations that exist in the financial industry and the fact that it’s almost impossible to discern if an adviser’s designation actually translates into proper training and education to advise seniors about their investments.

NPR guest Stacy Canan, deputy assistant director at the Office for Older Americans, cites a recent study conducted by the Consumer Financial Protection Bureau on senior designations. The report found that more than 50 different senior designations currently are used today, with senior designees recommending or selling everything from securities, to investment opportunities, to financial products and annuities and long-term care insurance.

Meanwhile, consumers are more confused than ever by the array of designations and have no simple way to determine if the designations themselves required rigorous college-level coursework or simply showing up at a weekend seminar.

“Seniors in particular often mistakenly believe that their financial adviser is looking out for their best interest. That is rarely true. Often, they are trying to sell a particular product, or they may be using – advising or recommending a product that is perhaps suitable but not necessarily the best product. So that’s why we would encourage investors to ask, ask their adviser: Are you looking out for my best interest? What duty of care are you bound,” said Canan on NPR.

You can read the Consumer Financial Protection Bureau report on senior designations here.

A PBS documentary had harsh words for financial advisers, blaming them for many of the struggles facing Americans today as try to save for their retirement. In The Retirement Gamble, Frontline correspondent Martin Smith investigates what happened to retirement in America and the role that financial services companies may be playing in draining your savings year after year.

Among other things, producers of The Retirement Gamble cite fees that financial advisers charge investors in their 401(k)s – largely made up of mutual fund fees and commissions – as one of the biggest obstacles behind the retirement savings crisis.

The documentary also criticizes advisers for boosting their own income by steering investors into high-fee investments like actively managed mutual funds. In an April 24 article by Investment News, Helaine Olen, author of Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, says the term “financial adviser” means almost nothing in today’s investing world. “It could be a financial planner,” she says in the article. “Or it could be a broker who is a salesman.”

Indeed, a recent AARP study showed that 70% of mutual fund savers were unaware that they were paying any fees at all.

Teresa Ghilarducci, an economist at The New School, was equally condemning of financial services representatives and their firms. “Basically, your guy is out for himself to maximize his sales, and the way he does it is to be loyal to the mutual fund,” she said in the documentary. “They try to sell you the most profitable products.”

More on The Retirement Gamble can be found here.

Every year, consumers lose millions of dollars in bogus investment scams and Ponzi schemes. Now, a new Website aims to educate investors on how to avoid investment fraud, risky investments and unlicensed brokers.

The Website – BBB Smart Investing – was created through a partnership between the Better Business Bureau and the FINRA Investor Education Foundation. The site provides a wealth of tools, information and resources designed to help investors better protect and manage their money.

Consumer financial fraud is a serious problem in United States. According to the Federal Trade Commission and the Canadian Anti-Fraud Centre, consumers lost more than $1.5 billion to varioius types of scams in 2011. FINRA Foundation research shows that many investors are overconfident regarding their knowledge of financial management, particularly Baby Boomers who are often the target of investment scams.

One telephone survey found that 92% of individuals felt “somewhat” or “very confident” about managing their finances, with almost 80% describing themselves as “somewhat” or “very” knowledgeable about investing. But only 44% got a passing grade on a basic financial literacy knowledge test.

BBB Smart Investing hopes to help change that statistic, according to Carrie Hurt, President and CEO of the Council of Better Business Bureaus.

“This is a great partnership,” says Hurt. “Even though BBB has always investigated investment scams, this gives us a whole new portfolio of prevention tools to offer to consumers. The FINRA Foundation’s basic ‘Ask & Check’ message is exactly what consumers need to hear before they make investment decisions. We think this program will go a long way toward preventing investment scams that have become so much more prevalent in recent years as people more actively manage their own retirement funds.”

After years of building an investment portfolio, you’re presented with what appears to be a home-run financial opportunity. Before jumping in headfirst and betting your lifesavings, think twice.

Investment fraud is big business in an economic downturn, and can lure novice and sophisticated investors alike. In many cases, the victims are elderly.

All investments contain certain risks. Anyone who promises high returns with little or no risk is more than likely trying to scam you out of your money.

A recent article by Financial Highway offers several tips for spotting potential financial fraud schemes:

Pressure to invest immediately: Whenever someone is pressured to immediately turn over money regarding a potential investment “opportunity,” consider it a red flag. In any investment, it’s wise to research the company or investment advisor behind the investment pitch. Is the company legitimate? Are there arbitration filings or disciplinary actions against the broker? Is the person or company a member of the Financial Industry Regulatory Authority (FINRA)? To investigate the background of an investment firm or broker, check FINRA’s Broker Check Web site.

Lack of quality information about the investment:  When discussing investments, ask yourself if your questions are being answered thoroughly. Is the person offering comprehensive information about the financial product in question? Is he or she willing to provide physical documentation, such as a prospectus and other financial documents? If the answer is no, it could be a sign of a scam.

Flashy presentations that don’t hold up: According to the Financial Highway article, most fraudsters produce Web sites and marketing materials that on the surface appear professional but on closer inspection don’t add up. For instance, there may be a number of spelling and grammar mistakes or the description of the investment itself simply doesn’t make any sense.

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.

The retirement years should be golden years. Unfortunately, in a growing number of cases, many people are spending this time as victims of elder financial fraud abuse.

Elder financial fraud is on the rise. In 2009, MetLife Mature Market Institute released a report, Broken Trust: Elders, Family and Finances, showing that up to one million older Americans are victims of financial fraud each year. The abuse can occur anywhere – in the elderly person’s own home, in nursing homes, or other institutions. Perpetrators include family members, strangers, caregivers, even an investment advisor or financial institution.

“Elder financial abuse is becoming the crime of the 21^st century,” says Denise Voigt Crawford, past president of the North American Securities Administrators Association. The group estimates that one of out every five citizens over the age of 65 has been a victim of some type of financial scam.

In the coming years, elder financial abuse may become an even bigger problem. The number of people 65 and older in the U.S. will double by 2030 to 71 million, according to federal statistics.

Elder financial fraud involves the improper use of an elderly person’s funds or assets. Signs that abuse may be occurring include unexplained large bank or ATM withdrawals by an elderly person; check signatures that appear “off”; large checks written to cash and/or negotiated by the elder’s caregiver; checks that are signed by an elder but completed by someone else; new activity in accounts that previously have been inactive; expensive gifts from an elder to a caregiver; cashing an elderly person’s checks without his or her authorization; forging an elder’s signature; or misusing or stealing an older person’s money or possessions.