By Jason Zweig and Mary Pilon | Dec. 18, 2010 12:01 a.m. ET
Image credit: Rembrandt, “Jeremiah Lamenting the Destruction of Jerusalem” (1630), Rijksmuseum
A grim category of crime is on the rise: senior-on-senior financial fraud.
According to regulators and prosecutors, there has been a significant increase recently in the number of cases in which older investors have been taken advantage of by elderly scam artists.
“That’s a definite new trend,” says Denise Voigt Crawford, the Texas securities commissioner. “We’re seeing more cases of older people ripping off other older people. Someone joked that seniors ripping off their peers is becoming ‘the new retirement plan.'”
In Texas, John F. Langford, 76 years old, is expected to go on trial in Amarillo next year on charges that he fraudulently sold about $6 million in promissory notes and what he called “private annuities” to a circle of his fellow senior citizens. “We dispute all the state’s allegations,” says Mr. Langford’s attorney, Tim Pirtle.
In Louisiana, meanwhile, Judith Zabalaoui, 73, pleaded guilty in February 2009 to five counts of mail fraud and is now serving an eight-year prison sentence after persuading at least 35 clients, many of them elderly, to invest in two nonexistent companies that promised “safe” returns of 13% to 26%. She had clients sign a power of attorney, giving her access to their funds — and spent more than $3 million of their money on her own expenses, including clothing and vacations, according to court documents.
Many financial planners who got into the business during the bull market of the early 1980s are senior citizens themselves now. With their own wealth ravaged by the bear market of the past decade, many of these people can no longer afford to retire. That, say regulators, may be prompting some older financial advisers to engage in riskier and less ethical behavior.
Elderly investors are natural targets in part because they may be more susceptible to fraud. A 2008 study by researchers at the Georgia Institute of Technology found that older adults are significantly worse than younger people at detecting whether someone who may have stolen money is telling the truth.
What’s more, according to research by Harvard University economist David Laibson and his colleagues, the typical person’s ability to make astute financial decisions peaks at about age 53, then wanes with each passing year; another study found that investing ability takes a steep drop after age 70.
Brian Knutson, a neuroscientist at Stanford University, has monitored the brain activity of dozens of older investors. “When they encounter a risk,” says Prof. Knutson, “they will be more likely than younger people to focus on the upside of that risk.” That can lead older investors to play down the downside.
According to Mara Mather, a psychologist at the University of California, Santa Cruz, older adults also seek less data than younger people do when making complex decisions — and will go out of their way to avoid negative information or confrontations. This “high avoidance,” Prof. Mather says, can lead older investors to get sucked further into a scam, throwing good money after bad.
Some older financial advisers use their age as a selling point, telling clients they understand the challenges that older investors face. In many instances, say prosecutors, unscrupulous advisers also tout their professional designations, or credentials, as further evidence of their expertise.
Professional credentials have exploded in popularity among financial advisers in recent years. Some credentials are difficult to obtain, but many of the newer ones can be gotten easily — often with minimal study and just a few hundred dollars.
The Wall Street Journal has identified more than 200 credentials available to financial-services professionals, including at least six with the word “senior” in their name: certified senior adviser; certified senior consultant; certified senior specialist; certified senior financial planner; chartered senior financial planner; and chartered adviser for senior living.
Mr. Langford, the Texas adviser, marketed himself by telling prospective clients that he was a certified senior adviser and even showing them the number on his membership certificate, says Ludie Stone, 89, who invested $211,000. “That gave me confidence,” she says. The Society of Certified Senior Advisors permanently revoked Mr. Langford’s designation in October 2008 after receiving a complaint, a spokesman says.
Some advisers find that credentials are so effective in winning new clients that they don’t even need to keep the designation current.
The certified financial planner designation, for example, is among the industry’s most stringent and respected. It requires a bachelor’s degree, 15 credit hours of college-level courses in certain subjects, 10 hours of exams over two days, adherence to an ethical code and 30 hours of continuing education every two years in order to qualify for biannual renewal.
Yet Ms. Zabalaoui, the Louisiana adviser, marketed herself as a CFP, say clients, even though her credential lapsed in 2000. Among the burned investors were Rex and Jackie Hall, an Albany, La., couple ages 58 and 60, respectively, who lost $24,000. Mr. Hall says his wife met Ms. Zabalaoui at a seminar and was impressed. “When you see the letters [CFP] after her name,” Mr. Hall says, “you assume she has an enhanced position.”
It is important for older investors to run financial decisions past a younger relative or someone who can resist the emotional pull of the situation, says Prof. Knutson. In some states, such as Alabama, “sentinels” trained by securities regulators seek to attend any free lunch or dinner seminars hosted by financial advisers. If the sentinels see anything awry, they report it to state or federal investigators.
At the very least, older investors should never attend such events unless they are accompanied by a trusted younger friend or family member. And younger relatives should periodically ask their older family members whether they have been pitched any products or services by financial advisers, say regulators and consumer advocates.
The husband-and-wife team of Thomas and Susan Cooper, ages 69 and 67, respectively, have hosted several such seminars over the years. Securities regulators in Illinois allege that the couple improperly sold annuities to 15 elderly clients. Last week, testimony concluded in administrative hearings through which the state is seeking to revoke the investment-adviser registrations of the Coopers and their firm.
The Coopers, according to the state’s investigation, generated more than $400,000 in commissions in the first half of 2008 by persuading clients to buy fixed indexed annuities. According to the state’s investigation, the Coopers’ clients incurred more than $125,000 in early-surrender charges when they exchanged out of existing insurance products.
“The state’s allegations are completely unfounded, and its numbers are inaccurate and not proven,” says the Coopers’ attorney, Thomas Kelty. “The state failed miserably to prove any of its allegations.” A decision is expected in the case early next year.
Mrs. Cooper is a CFP. George Keller, a 69-year-old retired factory worker, says the professional credential raised his comfort level. “Oh my goodness, yes, I was impressed by that,” recalls Mr. Keller of their first meeting, an informational seminar the Coopers hosted over dinner at the Hilton Garden Inn in Kankakee in 2006.
“Her husband, Tom, stood up before we ate and gave a very solid, God-honoring prayer,” Mr. Keller says. According to Mr. Keller, the Coopers had asked several of their existing clients to attend the dinner. “Some were friends of ours,” he recalls.
“We felt that because [the Coopers] were close to our age, they would understand and would have dealt with a lot of the problems that we face at our age: health setbacks and that sort of thing,” he says. “Isn’t that supposed to be a plus — to get somebody who understands your problems?”
According to Mr. Keller and state investigators, the Coopers prematurely switched him out of an insurance policy and into a fixed indexed annuity. That allegedly earned the Coopers a commission of $3,519 while costing Mr. Keller roughly $27,000 in insurance death benefits and a surrender penalty of more than $1,100.
Mr. Keller says he realized something had gone wrong when he noticed that his insurance death benefit had dropped to less than $5,000. Even so, Mr. Keller says he “felt bad about pushing this” with investigators.
As with many senior-on-senior fraud cases, a sense of loyalty kept the alleged victims from complaining even after losses were sustained. Illinois investigators say they had to subpoena many of the alleged victims to gather information from them. Mr. Kelty, the Coopers’ attorney, says that during testimony in the hearing, “to a person, they testified that they were satisfied, fully informed and have no complaints whatsoever against the Coopers.”
“We were feeling guilty,” recalls Mr. Keller about raising his complaint in the first place. “We thought we’d somehow started it.”
Source: The Wall Street Journal, https://www.wsj.com/articles/SB10001424052748704098304576021600313140180
Scientific Research Network on Decision Neuroscience and Aging (interdisciplinary group of researchers studying, among other topics, financial decisions and aging)
Stanford University’s Life-Span Development Laboratory (research on how decision-making changes as people age)
Carolyn Yoon et al., “Cognition, Persuasion and Decision Making in Older Consumers”
Natalie L. Denburg et al., “The Ability to Decide Advantageously Declines Prematurely in Some Normal Older Persons”
Meeting Report, “Research Issues in Elder Mistreatment and Abuse and Financial Fraud” (National Institute of Aging / National Academy of Sciences, 2010)
Financial Industry Regulatory Authority investor alert, “Investor Alert: Free Lunch Investment Seminars — Avoiding the Heartburn of a Hard Sell”
North American Securities Administrators Association, “Senior Investor Alert: Free Meal Seminars”
“Protecting Senior Investors: Report of Examinations of Securities Firms Proving ‘Free Lunch’ Sales Seminars” (Securities and Exchange Commission, North American Securities Administrators Association, Financial Industry Regulatory Authority)