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James Sullivan

The Next Madoff-Sized Financial Scam

Elderly investors have never been so vulnerable to financial abuse.

January 17, 2012
by James Sullivan, CPA, PFS

The FBI estimates that Americans lose $40 billion each year to investment fraud. As Pat Huddleston points out in his new book The Vigilant Investor this is “ … the equivalent of one Madoff-sized mega fraud every single year.” Many of the victims will be senior citizens who will lose their retirement nest eggs to financial scam artists. CPAs need to be aware of senior financial abuse and be prepared to educate their clients about the dangers. They must look for indications that their clients are victims. Clients who have elderly parents should also be educated to look for signs of financial elder abuse. Elderly financial abuse is growing rapidly, not only in the United States (U.S.) but around the world. Physicians are also being enlisted to look for signs of elder financial abuse among their patients. On other fronts of the war against financial fraud, the U.S. Securities Exchange Commission (SEC) and the North American Securities Administrators Association (NASAA) are warning individual retirement account (IRA) owners, especially elderly owners, against fraud aimed at self-directed accounts.

Doctors Join the Fight

The Investor Protection Trust (IPT) has created a program designed to train physicians on how to recognize financial abuse among their patients. The Elder Investment Fraud and Financial Exploitation (EIFFE) Prevention Program was developed at the Baylor College of Medicine’s Texas Consortium Geriatric Education Center. A copy of the clinician’s guide is available at the Investor Protection website. CPA Personal Financial Specialists (CPA/PFS) can use many of these same indicators to determine whether their own clients are vulnerable.

The EIFFE Prevention Program takes the position that the elderly patient’s financial health affects his or her overall health. In addition, the quality of proper nutrition and healthcare are both affected by household finances. The elderly are particularly susceptible to financial abuse because many aspects of normal aging and disease result in a loss or lessening of the ability to make financial decisions. As the number of elderly increases, so will the cases of elderly financial abuse (a copy of the patient education brochure is also available on the Investor Protection Trust website).

The guidelines provided to physicians include observations regarding the client’s history as well as the clinical observation. Indicators of vulnerability in the client’s history include social isolation, bereavement, dependence on another to provide care, financial responsibility for an adult child or spouse, substance abuse, depression or mental illness.

It is not unusual for adult children in their 30s, 40s or even 50s to be still financially dependent on their elderly parents either through loans (that are never paid back), outright cash gifts (that the parent cannot afford) or living with their parent for little or no rent (even when the parent could use the money).

What You Can Do

While a CPA/PFS must be careful not to wander beyond their area of expertise, the IPT encourages physicians to look for the following indicators of possible financial exploitation from their clinical observations:

  • Cognitive problems;
  • Fearful, distressed;
  • Suspicious, delusional;
  • Change in appearance, poor hygiene;
  • A caregiver who is overly protective;
  • A caregiver who dominates the client;
  • The inability to perform activities of daily living, including self-care, daily finances and medication management.

Questions for the patient include:

  • Do they frequently run out of money by the end of the month?
  • Do they frequently regret financial decisions they have made?
  • Do they have trouble paying bills because the bills are confusing?
  • Are they afraid to make financial decisions?
  • Are they confused about financial decisions being made for them?
  • Have they made gifts or loans that are more than they can afford?
  • Children, relatives or friends are pressuring them to give them money or make favorable changes to their will?
  • Is money disappearing from their accounts, which they can’t justify?

Concern regarding financial abuse of the elderly is not limited to the United States (U.S.). The Alzheimer’s Society of the United Kingdom recently released a report on the financial abuse of elderly with dementia (Short changed: Protecting People With Dementia From Financial Abuse is available on the Alzheimer’s website). Several types of financial abuse were identified; most are common in the United Kingdom (U.K.) as well as in the U.S. In the U.K., the researchers found that family caregivers often threaten to withdraw care unless the parent agrees to give them money.

The SEC and the NASAA Weigh In

In September of last year, the SEC and the NASAA issued Investor Alert: Self-Directed IRAs and the Risk of Fraud (PDF). The NASAA noted “… a recent increase in reports or complaints of fraudulent investment schemes that utilized a self-directed IRA as a key feature.”

Self-directed IRAs are held by a trustee or custodian that permits the owner to invest in a broader range of assets than is normally permitted. These broader set of investments may include real estate, promissory notes, tax lien certificates and private placement securities. The investor alert points out that these types of investments carry unique risks including lack of disclosure, liquidity and outright fraud. Approximately, $94 billion is held in self-directed IRAs — an attractive target for criminals.

Many of the fraudulent schemes begin with the perpetrators convincing the IRA owner to transfer their IRA into a self directed account. Once in the self-directed account, the owner is susceptible to Ponzi schemes (in which early investors are paid an attractive rate of return with the money of later investors when the number of later investors drops off, the Ponzi scheme collapses) or other fraudulent investments.

The CPA/PFS should warn their clients about responding to unsolicited investment offers, especially those that “… promote the use of a self-directed IRA.” The alert also recommends investors be wary of guaranteed returns (especially those that promise substantial returns with little or no risk). The alert specifically encourages investors to seek the advice of an unbiased investment professional. Recommend that clients seek your advice before making an investment.

The Education Challenge

Huddleston ends The Vigilant Investor with a plea for a national campaign to warn of the dangers of financial fraud. This is especially true for the elderly, an especially vulnerable group. As a trusted adviser you can lead the way on a client-by-client basis through newsletters, in correspondence and in face-to-face meetings. Whether the service you provide is tax return preparation only, financial planning or investment management, you can play a role in protecting the nest eggs your clients worked so hard to accumulate.

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James Sullivan, CPA, PFS, works with his wife, Janet, who is an elder law attorney in Naperville, IL.

* The AICPA’s Personal Financial Planning Section is the premier provider of information, tools, advocacy and guidance for CPAs who specialize in providing estate, tax, retirement, risk management and investment planning advice to individuals and closely held entities. The Personal Financial Planning Section is open to all Regular Members, Associate Members and Non-CPA Section Associate Members of the AICPA. If you are a CPA who wants to demonstrate your expertise in this subject matter, become a Personal Financial Specialist Credential holder. Visit www.aicpa.org/PFP to learn more.

** PFP Section members, including PFS credential holders will benefit from additional Eldercare resources in Forefield Advisor on the AICPA’s PFP website at aicpa.org/pfp.