Armanino Blog

Preventing and Detecting Elder Investor Exploitation

by Matthew Perreault
November 21, 2019

The mission of the Securities and Exchange Commission (SEC) is “to educate and empower investors so they can plan for a financially secure future.” In October, the SEC held a roundtable to help raise awareness about exploitation against a particularly vulnerable group of investors — the elderly. Older investors tend to lose more money to fraud scams and have less time to recover than younger people.

Educating the elderly about potential financial exploitation schemes is the first line of defense. In addition, trusted advisors — including lenders, CPAs, financial advisors and attorneys — can play a key role in identifying suspicious transactions and behaviors and recommending preventive measures. But every individual and even local businesses can help spread awareness about these risks to their loved ones, friends, employees and customers.

An epic problem

In his opening remarks, SEC Chairman Jay Clayton provided an astonishing statistic: Elder financial abuse and fraud costs older Americans $36.5 billion per year, according to the National Council on Aging. And that may actually be a conservative estimate, because many elderly victims are too ashamed to report their losses — or they mistakenly believe that they can’t get their money back.

Clayton reassured roundtable participants that the SEC’s enforcement division is “vigilant in pursuing bad actors and returning money to harmed investors.” The U.S. Department of Justice (DOJ) also has made elder fraud one of its highest priorities.

When the DOJ suspects fraudulent activity, it typically uses suspicious activity reports (SARs) to trace where the money is going, and to coordinate with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), the Federal Trade Commission, and other state and federal partners to identify and stop fraud schemes.

Schemes targeting elder investors

The Consumer Financial Protection Bureau (CFPB) recently issued a report on suspected elder financial exploitation. It found that financial exploitation is on the rise. Roughly half of elderly exploitation comes from an unknown individual, while about one-third of cases are committed by an individual in a position of trust.

According to the SEC, common examples of elderly investor scams include:

High pressure sales and free meal seminars. While these seminars aren’t necessarily improper, they’re sometimes used to pitch unsuitable products using high pressure sales tactics.

Pump-and-dump schemes. These often feature a microcap or penny stock that the fraudster hypes with false or misleading statements to artificially inflate the price. The fraudster sells his or her stock while the price is high, and then stops touting it. Investors are left with worthless or near worthless securities.

Shady investment advisor services. An investment advisor has a duty to serve the best interests of his or her clients. But some dishonest advisors use unauthorized and deceptive methods to generate greater bogus commissions or steal money outright.

Variable annuities. Though these can be a legitimate tax-deferred investment product, the SEC and FINRA are concerned about their growing popularity. They come with high commissions and substantial early-withdrawal penalties, so they’re generally unsuitable for most seniors.

“High-return” or “risk-free” investments. If an investment sounds too good to be true, it’s often a scam. The truth is that no investment is without some level of risk.

Gustav Eyler, director of the DOJ’s Consumer Protection Branch, said that he often encounters telephone-based fraud, tech support schemes or mass mailings, where the perpetrator is overseas. Jean Setzfand, Senior Vice President at AARP, noted that 4.8 billion robocalls were placed in the United States in August — and 45% were scams.

Preventive measures

During the afternoon, SEC roundtable discussions focused on how to design rules and deploy enforcement resources to prevent fraud from happening in the first place. Examples of ways the SEC is currently combating fraud include educational components, rulemaking efforts to close gaps, and SEC employees volunteering and conducting outreach at events.

SEC Commissioner Elad Roisman added that the SEC works closely with other regulatory agencies, self-regulatory organizations, FINRA and others to coordinate protection efforts. FINRA has taken steps to address the issue, including establishing a senior helpline, educational resources, and Rules 2165 and 4512. AARP also has a helpline for members who suspect fraud.

A custom approach

Educating seniors about investor fraud scams and preventive measures can be tricky. Lori Delagrammatikas, Executive Director of the National Adult Protective Services Association (NAPSA), explained that many elderly people don’t believe they could fall victim to investment fraud. Instead, they’re more likely to respond when an educational message is framed as a way to protect their friends and neighbors against fraud.

For more information about elderly investor fraud scams, contact your local Armanino expert. In addition to providing educational resources, he or she can help you report any suspicious transactions or behaviors to state or federal authorities.

What is the Senior Safe Act?

In 2018, Congress passed the Senior Safe Act. It defines elder financial exploitation as “the fraudulent or otherwise illegal, unauthorized, or improper actions by a caregiver, fiduciary, or other individual in which the resources of an older person are used by another for personal profit or gain.”

It also gives financial advisors and institutions some protection against lawsuits if they sound the alarm on suspicious activity in their elder clients’ accounts. Previously, many financial advisors and institutions didn’t report suspicious activity, because they were afraid of being sued by implicated individuals.

November 21, 2019

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