Ed and Ruthann Wolfe just wanted a safe place for their retirement savings. During his 32 years at the Rubbermaid plant in Wooster, Ohio, Ed had amassed more than $320,000 in his 401(k), all of it invested in low-risk Fidelity mutual funds.
After Newell bought Rubbermaid in 1999, early-retirement offers were made to more than 180 employees at the Wooster plant, including Ed, then 55. At the same time, many of his colleagues began attending investing seminars hosted by a Merrill Lynch broker, who was telling investors they could earn more money if they retired than if they stayed on the job. "There was a buzz going around the shop about how good this could be," recalls Ed. "We thought we couldn't afford not to do it."
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The Wolfes turned over their entire $320,000 in retirement savings to the broker, with instructions to keep their money in low-risk investments because they needed to start making withdrawals right away. So they weren't concerned when the stock market tumbled in 2001.
Then they began hearing from friends whose investments had declined in value. Ruthann called the broker and was shocked to find out that they'd have to stop withdrawing money or go broke. Their retirement stash, which the broker had invested in high-risk Internet and tech companies, had plunged to less than $100,000. "I felt it could be the end of the world," says Ed, who went back to work driving trucks for two and a half years.
Cases similar to that of Rubbermaid's retirees have been cropping up across the country. "In the past two years, we've had about 100 formal disciplinary actions involving seniors," says Mary Schapiro, chief executive of the Financial Industry Regulatory Authority, which oversees U.S. securities firms.
In one high-profile case settled last summer, NASD (Finra's predecessor) fined Citigroup Global Markets $3 million and ordered the company to pay $12.2 million to more than 200 former employees of BellSouth. The regulators said Citigroup failed to adequately supervise a team of brokers based in Charlotte, N.C., who used misleading sales materials -- promising 12% annual returns -- during dozens of seminars for BellSouth employees from 1994 to 2002. Instead, more than $12 million in former employees' accounts evaporated during the bear market. "These are people who were persuaded to take retirement early -- who didn't have to and probably shouldn't have -- based on these misrepresentations," says James Shorris, of Finra's enforcement division. Citigroup says it is "working on all fronts to prevent a similar situation from occurring again."
Baby-boomers nearing retirement, and their parents, make irresistible targets for this kind of scam. "When you're looking at $16 trillion in retirement accounts changing hands in the next 15 to 20 years, that's a big market share for anybody," says Alabama Securities Commission director Joseph Borg. In a sweep of "free lunch" financial seminars, the Securities and Exchange Commission found unethical business practices in nearly half. In addition to promises of over-the-top investment returns, the most common scams include Ponzi schemes and sales of unsuitable annuities.
Retirees are vulnerable because they're looking for ways to stretch their income. Plus, many seniors are afraid to ask questions, consult with their children or complain to regulators. "A lot of people think they'll lose their independence if they admit they were taken advantage of," says Barry Lanier, chief of the bureau of investigations for the Florida Department of Financial Services. When Finra surveyed senior investors last year, only 56% of the victims who admitted to being defrauded said they had reported the incident.
The money that seniors have amassed is "usually irreplaceable," says Jacob Zamansky, a securities lawyer in New York City. "They can't afford to lose the principal, so they generally need to be conservative. Anything that doesn't meet that investment objective should be viewed very suspiciously."
Ed Wolfe hired Zamansky in 2002. A year later, after his case went to arbitration, he was awarded $310,000, including legal expenses. About 75 of his Rubbermaid colleagues also received settlements from Merrill Lynch. "Financially, we're pretty much back on track," says Wolfe. "But mentally, I'll never be the same."
Ignore the Hype
Be suspicious of any sales pitch that promises unrealistic returns. "Anytime you're talking about average returns of greater than 12%, you're not in the ballpark," says Jim Eccleston, a securities lawyer in Chicago. In the BellSouth case, not only were investors led to believe they could earn about 12% per year, they were also told they could afford to withdraw 9% of their funds annually for 30 years.
Before doing business with a broker, check his or her background using Finra's BrokerCheck tool. Look for disciplinary actions taken against the broker, as well as red flags -- for example, the broker has frequently changed firms.
Just checking whether the broker has a securities license can keep you out of serious trouble. "Maybe one in ten of our cases involve a licensed stockbroker," says Colorado securities commissioner Fred Joseph. Many of the most notorious purveyors of bogus investments never held a license.
In Wolfe's case, keeping good records made a big difference in the outcome. So keep a copy of any mailings you receive from a broker or handouts you get at a sales presentation. Take notes during your conversations. Talk with the broker about your investment goals and ask him or her to summarize your discussion in writing, recommends Tom Grzymala, a certified financial planner and expert witness in securities cases. "I want to see the account information about what type of investor you are," he says.
Losing money in the stock market doesn't necessarily mean there's been wrongdoing or that a crime has been committed, says Tracy Stoneman, a Colorado securities lawyer and author of Brokerage Fraud: What Wall Street Doesn't Want You to Know. Securities law looks at whether the broker made investments that were suitable for you. To determine that, a broker needs to know your goals, risk tolerance, tax status and whether you need ready access to your money, says Schapiro.
In return, you should ask the broker to rate an investment's risk on a scale of 1 to 10 and to put the answer in writing. If the investment starts to lose value, ask for a written explanation. "Put the brokerage firm on notice that the losses make you uncomfortable," says Stoneman. Writing down your concerns and faxing them to the broker and his supervisor "is a wonderful protection tool," she says.
If you continue to have problems, don't hesitate to complain to the brokerage firm and your state securities regulator (find contact information at www.nasaa.org). But even the SEC and Finra generally can't recover your losses. For that, contact a securities lawyer (www.piaba.org) to take your case to arbitration.