As investors recover from the economic meltdown of 2007 through 2009, they are anxious to find attractive investment returns. Unfortunately, most are unaware of the army of scam artists, reckless advisers and inept bunglers who will promise those returns but deliver only financial devastation. Budget crises at the regulatory agencies and sheer demographics have created a perfect storm that threatens to make us forget Bernard Madoff. But credit unions can shelter their members with an active approach to education and commitment to member protection.
Teach members about the scope of the challenge. The securities industry and professional investment criminals have been anticipating this time in history for decades. Beginning in May 2011 and continuing for 19 years thereafter, 10,000 baby boomers will turn 65 every day. Shortly thereafter they will retire and move their 401(k) balances to self-directed accounts. Financial advisers and scam artists will battle for those assets like NBA centers. Especially given the uncertainty surrounding Social Security, credit union members must start now to protect their personal savings.
Teach members how to investigate brokers and unregistered investments. The age-old axiom, "If it sounds too good to be true, it probably is," is dangerously ineffective as protection against investment fraud. First, the word "probably" leaves room for the possibility that the investment under consideration might just be the exception. Of course, it isn't. But the bigger problem with that axiom is that it leads investors to believe that the chief identifying characteristic of a scam is the promise of outsized profits. While that continues to be true for unskilled investment scammers, the most dangerous con artists know that ridiculous promises only scare away prospective victims. At Investor's Watchdog we say, "If it sounds too good to be true, you are probably talking to an amateur scam artist."
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Far too many consumer reporters refer investors to the Financial Industry Regulatory Authority's free BrokerCheck for information on prospective brokers. But BrokerCheck is woefully inaccurate. A more meaningful investigation begins with information from state securities regulators, moves next to a courthouse records search that can reveal bankruptcies, civil lawsuits and criminal violations, and then to independent verification of educational credentials and work history.
Unregistered investments pose a tremendous risk to credit union members. Because they pay big commissions, brokers love selling them. But unregistered investments are a primary vehicle for fraud. A thorough investigation requires not only investigation through state securities regulators and a courthouse records search but also an examination of any offering documents by a qualified securities attorney with experience investigating fraud.
Credit unions should consider sponsoring seminars to teach their members about proper due diligence techniques and the subtle red flags that only an experienced investigator is apt to recognize. Show members the future of investment fraud. The future of investment fraud is technologically savvy. Scammers are already using social media to hype worthless stocks in pump and dump scams. Future frauds will target investors with professionally designed websites and active Facebook and Twitter accounts.
Future frauds will take advantage of the headlines. America has always done innovation very well. There are small technology and biomedical companies around today that will, in five years, be the darlings of Wall Street. Unfortunately, mingled in with them are companies with nothing behind them besides a shell corporation, phony press releases and brokers willing to enter fraudulent orders to convince investors that there is broad interest in the stock.
Organized crime–with the resources to bribe attorneys and auditors–will play a bigger role in the future. Gangs from China and Russia have already made off with billions of American savings. With the baby boomers moving into retirement, the hunting has never been better in America.
Thoroughly investigate brokers who work through the credit union. Credit unions that partner with brokerage firms to offer their members investment advice must vet every broker who works with credit union members or risk having that broker destroy the credit union's reputation. Credit unions should insist on veto authority over any broker assigned by the brokerage firm to work with members and should require mandatory training for those brokers on how to spot fraud.
Pat Huddleston is CEO of Investor's Watchdog LLC.
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