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Don't eat that free lunch
Even post-Madoff, investors still fall prey to scams such as 'free lunch' seminars
By Robert Powell, MarketWatch
Last Update: 12:01 AM ET Nov 19, 2009
BOSTON (MarketWatch) -- Glancing through the headlines, it might seem like an epidemic. No, we're not talking swine flu; we're talking investment scams. Consider just a few recent headlines:
Denver duo bilks seniors in green scheme
Former life insurance agent denies scamming $2 million from seniors
Ex-Morgan Stanley rep barred for defrauding 97-year-old's charity
These cases serve as a reminder to make sure that you don't become a fool, separated needlessly from your hard-earned money. So what can you do? Consumer advocacy groups and regulators there's much you can do.
No such thing as a free lunch
A promoter promising high returns with little or no risk? That's the biggest red-flag warning for possible investment fraud, said Andres Castillo, who heads AARP's free-lunch monitor program. (At free-lunch seminars, attendees are promised a free lunch in return for listening to what is generally a product sales pitch.)
For instance, in the most recent case of its kind, the SEC charged four individuals and two companies involved in perpetrating a $30 million Ponzi scheme in which they persuaded more than 300 investors nationwide to participate in purported "green" investment opportunities.
The SEC alleged that "Wayde and Donna McKelvy, who were previously married and living in the Denver area, particularly targeted elderly investors or those approaching retirement age to finance such 'green' initiatives of Pennsylvania-based Mantria Corp. as a supposed 'carbon negative' housing community in rural Tennessee and a 'biochar' charcoal substitute made from organic waste."
According to the SEC, with the help of two other promoters (Mantria executives, we might note) the McKelvys convinced investors attending seminars or participating in Internet Webinars to liquidate their traditional investments such as retirement plans and home equity to instead invest in Mantria.
The alleged scam artists promised returns ranging from 17% to "hundreds of percent" annually. The actual returns were, sadly, closer to zero. Yes, Speed of Wealth, the firm headed by the McKelvys, was promoting an investment that had no revenue whatsoever. And more sadly still, it was easy to be taken by this deal. The Speed of Wealth seminars were heavily advertised on TV, and even featured former Bronco John Elway, according to published reports. Read the SEC's release about Speed of Wealth at this Web site.
Bring checklist, not checkbook
To be sure, not all free-lunch seminars -- such as those offered by Speed of Wealth -- are bad. But regulators and advocacy groups say you should never attend a free-lunch seminar without making sure you know exactly what you're getting into. The results of one recent study make it clear why.
Almost 6 million Americans age 55 and older have attended a free lunch or dinner seminar in the past three years, according to "Protecting Older Investors: 2009 Free Lunch Seminar Report," a survey just released by AARP and the North American Securities Administrators Association (NASAA).
And many seminars were nothing but venues to acquire clients, slaughterhouses for lambs if you will. To wit: 39% of those responding to the AARP/NASAA survey said they were solicited to buy financial products, 50% said they were asked to provide information about their finances, and 46% said the seminar presenter tried to make a follow-up appointment at their home.
Most troubling, however, is this: Six in 10 of these seminars reflect weak supervisory practices by firms and nearly one in four (23%) of the advisers holding these seminars recommended investments that didn't appear suitable for the client. You can read that full report at this Web site.
Castillo didn't go so far as to say you should never attend a free-lunch seminar, but he did say you should attend with a checklist in hand, a checklist that gives you the power to decipher fraudulent educational presentations. See a sample checklist at this AARP Web site.
In response to the growing number of free-lunch seminars offering information about investment opportunities, AARP in collaboration with NASAA launched in October 2008 the Free Lunch Monitor Program. You can learn more about that program at this Web site.
Answer this: Who, what, why?
Investigating the people doing the pitching and the products being pitched are the two most important things you can do to protect yourself from scams.
"Don't invest without doing those two things," Castillo said.
Indeed, you should investigate the licenses, credentials, and qualifications of the people and firms conducting the seminars. That's not as easy it sounds. People and firms are likely to be registered or licensed with multiple authorities, which makes it all the harder to do the required due diligence. For instance, a promoter might be an insurance agent (state regulated), a broker (Financial Industry Regulatory Authority), a registered investment adviser (SEC or state securities division), and a ChFC or some other designation regulated by yet another type of organization.
Castillo also said you need to investigate the products being pitched. Is it registered with the appropriate authorities? Again, this might not be the easiest of tasks. A variable annuity, for instance, is typically registered with federal and state authorities. But you wouldn't know that unless you knew that.
To be sure, doing these two things is hard work. But doing them could make all the difference between protecting your nest egg and having it cracked.
Use all the tools in the chest
There are other tools and resources that you should consider to protect yourself against fraud. For instance, the Alliance for Investor Education outlined 12 of the best Web-based resources for investors to educate themselves about investment fraud, particularly Ponzi schemes. The AIE's "Avoiding Madoff-Like Ponzi Schemes: What Investors Need to Know to Protect Themselves" is available at this Web site.
The FINRA Investor Education Foundation and ARRP have produced a 60-minute documentary that features the stories of victims and perpetrators, and uncovers "the persuasion tactics that con artists use to defraud their victims and the basic tools investors can use to defend against fraud." Learn more about "Tricks of the Trade: Outsmarting Investment Fraud" at this Web site.
Also, see this SEC site for tools and information.
And see this NASAA site, too.
At the end of the day, it would be nice if one didn't have to write such columns. It would be nice if unsuspecting seniors could trust the people to whom they give their life savings. In the meantime, this sort of warning will have to do.
Robert Powell is the editor of Retirement Weekly. Learn more about Retirement Weekly at this Web site.
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