Who are the scam victims?

A study released Monday shows that victims of investment fraud aren't who you thought they were.

Published July 18, 2006

Which senior is the more likely investment scam victim: a widow who never handled the family money or a married man who's familiar with finances?

If you guessed the widow, you'd be wrong, according to a study released Monday by the NASD Investor Education Foundation.

"Victims of senior investment fraud are not who we so often assume them to be," said NASD vice chairwoman Mary Schapiro, one of the panelists at a "Seniors Summit" at the U.S. Securities and Exchange Commission headquarters in Washington on Monday to examine the issue.

The study showed investment fraud victims are better educated, wealthier and more financially literate than nonfraud victims. They are more likely to be men and more likely to be married. And they are highly reluctant to admit they've been victimized.

No one knows how much investment fraud occurs. AARP uses the big round number of $40-billion a year in combined investment, telemarketing and charitable-giving fraud. Regulators won't even guess at the number.

However, it's certain that most investment fraud involves people who are 50 and older.

"The reason people victimize seniors is that's where the money is," said Linda Thomsen, SEC director of enforcement. "There's an enormous concentration of wealth among senior citizens."

Retirees are particularly vulnerable because they often receive retirement plan payouts they need to invest to generate income to cover their living expenses.

With baby boomers turning 60, the SEC has decided it is time to turn its attention to seniors' vulnerability to con artists and their pitches.

"Those who would rob older Americans of their retirement nest eggs steal more than hopes and dreams - they erode the trust on which our entire financial system and economy depend," said SEC Chairman Christopher Cox, who called Monday's summit together. "That makes protecting seniors an urgent priority."

The SEC already has stepped up enforcement in one area, the free lunch seminars investment advisers use to target seniors. However, Cox and other regulators say they want to do more to stop fraud.

"Before we can devise workable solutions for senior investment fraud, we must first determine how and why the problem occurs," Schapiro said.

The NASD foundation conducted the study in cooperation with WISE Senior Services and AARP Foundation. The study analyzed recorded sales spiels to identify the specific tactics that con artists use to talk older people out of their money.

In some instances, it may have been the victims' personalities that made them vulnerable, said Anthony Pratkanis, psychology professor at the University of California at Santa Cruz, who led the study.

He said those who had been defrauded were less likely to consult brokers or family members for advice.

"They're not going to the reliable kinds of sources, but instead shooting from the hip, relying on their own experiences," he said.

Pratkanis said the victims also may have been at a more vulnerable place in their lives. They were more likely than nonfraud victims to have recently suffered an event such as a serious health problem or loss of a job.

"It says if your family members or friends have these experiences, be on the alert because they're especially vulnerable," Pratkanis said.

The findings call into question the current approach to investor education of plying seniors with facts.

"It shows investor education is not the answer," said SEC Commissioner Roel Campos. He noted that many who are well-educated are the most susceptible to some of these scams. "It goes to psychological or social vulnerability. How do you fight that?"

Pratkanis said education efforts should expand their focus from financial literacy to the persuasion techniques con artists use. He said teaching investors the nuts and bolts of investing and leaving out persuasion techniques is "like teaching a new poker player the difference between three of a kind and a full house and nothing about the bluffing."

One of the more interesting aspects of the study was the extreme reluctance of scam victims to admit they had been victimized. The victims included in the survey were selected because researchers verified they had lost at least $1,000 in an investment scam. However, only a fourth of them would admit that to survey takers.

Pratkanis said he thinks many rationalized their loss as a "bad deal" to preserve their self esteem: "They can't admit they've been taken."

The study showed that different types of scams have different types of victims. The study also researched victims of lottery scams and found them to be less educated, less wealthy and more likely to be women than investment scam victims. Lottery scam victims mail in money after being told they've won a lottery.

In Florida there are differences in the victims even among investment scams, officials said.

"We have many different kinds of fraud cases and the profiles differ within them," said Glenn Gordon, associate regional director for the SEC in Miami. "We've brought a number of cases targeting affinity frauds involving churches and immigrant groups. Often those are people who are making one of their first investments. We've also brought plenty of cases where doctors were among the main victims."

Clearwater lawyer Joel Goodman, who represents many investors who have been defrauded, said his typical clients are elderly couples who usually are not college educated.

"These are not people who were looking for high returns in the stock market," he said. "They're looking for CD-like safety."

They have fallen for pay telephone and ATM scams that promised them steady income "secured" by ownership of the equipment. They got taken by promissory notes supposedly securing medical equipment being purchased by doctors. They lost hundreds of millions of dollars in viatical scams - buying interests in life insurance policies on people who were supposedly on the verge of death.

But Goodman said focusing on education will accomplish little.

"The problem is not with the victims," he said. "The problem is with the assailants. The people who are the wrongdoers are the brokerage firms who license the individual brokers who promote these scams."

He said the SEC and the NASD need to do a better job of policing the industry and expelling brokers who hurt investors rather than giving them brief suspensions and fines. In addition, the insurance industry needs to do a better job of overseeing its agents, who have been deeply involved in viatical and promissory-note scams.

The regulators say investors need to be their own first line of defense. Even the most successful investigations rarely recover all the money.

"It just goes to demonstrate, at least in my mind, that law enforcement is the last resort here and education is enormously important," said SEC enforcement director Thomsen.

Helen Huntley can be reached at hhuntley@sptimes.com or 727 893-8230.