How to Protect Your Money from Theft by Dishonest Investment Advisers

Source: Washington State Department of Financial Institutions

Overview

With more people in charge of their investment portfolios than ever before, Washington State securities officials are warning investors of the increasing sophistication of investment advisers who steal money from unsuspecting clients.

Victims include everyone from the retired couple next door, to the hotshot young executive hoping to make a fast buck, to the doctor and his country-club friends. Recognizing that registered investment advisers are thinly regulated at the federal level, state securities agencies are moving aggressively to catch these swindlers and warn everyone that constant vigilance is the basic ingredient of being an investor in today's securities market.

Although most investment advisers are honest, those that are not see the burgeoning field of financial advice as a great way to line their own pockets. The danger is compounded by the average investor's desire for maximum return, the concern of retirees worried about outliving their savings, the increase in investment opportunities, and the growing number of individuals holding themselves out as qualified investment advisers nationwide.

The States Take Action

To date, all but two states require investment advisers to be licensed. (Ohio and Wyoming are the exceptions.) Most states require investment advisors to pass an examination, undergo background checks, renew their registration annually, and report changes in their businesses or addresses promptly. States also review an applicant's disciplinary history and financial stability prior to allowing the investment adviser to conduct business in a given jurisdiction.

Buyer Beware!

Whether due to a self-directed retirement plan, an inheritance, saving for a child's education, or other reasons, today more Americans than ever before find themselves in charge of their financial investments. Handling those investments are some of the most important decisions anyone can make. Although the vast majority of financial advisers are trustworthy, be on the look-out for those that are not. Being an investor requires education and attentiveness. Start asking questions before it's too late.

Recent Examples of Fraud and Abuse

The following cases are a sample of the new type of financial scams by self-proclaimed and registered small investment advisers that state securities enforcement officials are encountering:

One investment adviser, known widely due to his Saturday-morning radio show, induced his clients to turn over more than $4 million. He accomplished this by touting phony performance figures for a bogus mutual fund called the GTC Fund, which stood for "Good 'Til Canceled," that promised "maximum capital growth consistent with the preservation of capital." Unfortunately for the investors, he used the money to run a typical Ponzi scheme in which early investors were paid with later victims' money. The money also supported a lavish lifestyle that included his horse racing business and gambling junkets. He was finally arrested and was ultimately sentenced to eight years in jail.

A father and son, who were not registered as investment advisers, told clients of their accounting firm that they would pool investor funds and purchase various securities. Twelve investors ultimately provided $1.7 million. Investigators uncovered massive diversion of investor funds for the personal benefit of the father and son. Victims included an entire church congregation where one of them served as treasurer. Both men were found guilty in state and federal courts.

A registered investment adviser, who was the owner of a college planning service, advertised his expertise in repositioning assets for families seeking financial aid for their college-bound children. Offering fraudulent securities and trust agreements, he obtained $293,000 from 14 investors and used the money to pay for personal and business expenses including a luxury Mercedes with the license plate IPLAN4U. One of his victims was a 19-year-old man who lost $15,000 he had received after his father had died from cancer. He was convicted of one count of mail fraud, sentenced to 24 months in prison plus three years of probation, and ordered to make restitution.

A woman swindled $1.8 million from 80 individuals she recruited from her income tax preparation service. In league with her husband and son, the woman convinced her carefully selected clients that they would receive returns higher than certificates of deposit from nine separate limited partnerships in residential mortgage loans that she offered. After pleading guilty, she was convicted of securities fraud and money laundering and sentenced to 57 months in federal prison. Her former clients lost everything they invested.

A former pro football player and self-proclaimed investment adviser with a history of being disciplined for securities violation, was arrested after a joint investigation by state and federal agencies. The accused allegedly ran a Ponzi scheme in which early investors were paid with money provided by later ones, then encouraged to invest ever larger sums. Residents of several states may have been bilked out of as much as $30 million. The accused owned several luxury homes and an airplane, was an avid golfer and recruited many of his victims from a local country club.

Here's What You Can Do to Protect Yourself

1. Investigate the investment adviser and salesperson thoroughly.

First, call your state securities agency to find out if he or she is properly licensed to provide investment advice. If the individual also is licensed as a stockbroker, background information will be available through your state securities agency from the Central Registration Depository (CRD) -- a computerized reference system operated jointly by the North American Securities Administrators Association (NASAA) and the National Association of Securities Dealers (NASD). Call the Department of Financial Institutions Securities Division at 360-902-8760 or 1-877-RING DFI (1-877-746-4334) to check out the investment adviser or investment adviser representative.

2. Is the investment opportunity registered for sale in the state in which you live?

Call the Securities Division at 360-902-8760 or 1-877-RING DFI (1-877-746-4334) to find out. All investment opportunities must be registered or exempt. If one being recommended to you isn't registered or exempt, consider that a red warning flag to investigate further. Ask for written "disclosure" information. Review it carefully and make sure that you understand all of the risks involved. If you have questions, ask, and keep asking until you get an answer you understand. If you're pressured by an investment adviser to make a hasty decision, just say "no." After all, it is your money.

3. Always stay in charge of your money.

Protect your nest egg. If the world of investments baffles you, carve out time to educate yourself. Read one or more of the many magazines devoted to personal finance on a regular basis. Once you've made an investment, carefully review your account statement. Make sure you know where your money is being held. Generally, you should receive account statements from the custodian of the securities as well as from your investment adviser. Confirm that all transactions are ones you've authorized.

4. Remember that con artists are usually extremely polite.

Here's how you will probably be approached: A successful swindler will deliver a professional-sounding sales pitch that makes the flimsiest investment deal sound as safe as putting money in the bank. He or she will be extremely polite, dress in expensive clothes, and may work out of impressive offices with prestigious addresses. Many troll for prospects at houses of worship, country clubs, or senior centers. Others lull investors into complacency by first providing a sound financial service, then moving in for the kill. Before turning over any of your hard-earned money, call The Department of Financial Institutions Securities Division and check out the salesperson and the investment.

5. Keep greed in check.

If the return on an investment sounds too good to be true, it probably is. A legitimate adviser should find out about your financial needs and goals, as well as the level of risk you are comfortable with, then suggest a "suitable investment." Don't allow the promise of inflated returns to cloud your judgment. Many people secretly believe that a rags-to-riches story can become a reality for them -- if only they get the right break. Con artists play upon the dreamer in all of us. Don't let them sabotage your dreams.

6. Keep notes about phone conversations and meetings.

It's important to keep a record of your conversations and meetings between you and your investment adviser. Con artists operate in an atmosphere of trust that persuades people there is no need to keep careful records. But don't be fooled! Be sure to jot down the date, time, and place, as well. By keeping careful notes, you won't have to rely upon your memory if your adviser tells you something down the road that just doesn't seem right. If a lawsuit or dispute does occur, careful notes will set the record straight.

The Department of Financial Institutions (DFI) regulates and examines a variety of state chartered financial services. DFI also provides education and outreach to protect consumers from financial fraud. If you have a consumer question, or need to file a complaint, call 360-902-8760 or 1-877-RING DFI (1-877-746-4334).