Fraud is one of the most rapidly expanding growth industries in America today.  It is most tragic when the elderly are involved because they have spent most of their lives accumulating their assets and now, in their golden years are unable to enjoy the fruits of their labors.  Even worse, many senior citizens have difficulty making ends meet financially because their pension and social security payments are inadequate for their needs.  When their savings are taken from them, they are left vulnerable and suffer greatly.

Unfortunately, billions of dollars are lost each year by senior citizen victims of fraud. The con artist knows that senior citizens are the group least likely to contact appropriate authorities or attorneys.  Commonly, they are severely embarrassed that they were conned and keep the crime secret.  Sometimes they are scared of reprisal which they believe may follow their report of fraud.  Widowed or newly divorced women are particularly at risk.  They may have spent most of their lives married, with their husbands handling family finances. All too often, con artists focus on them for this reason.  Furthermore, their emotional vulnerability and the presence of a lump sum divorce, insurance or other settlement check prove enticing to the less than scrupulous.  It is heartbreaking when a widowed or divorced woman comes to my office requesting my help because she did not know how to handle her finances and was victimized during a difficult time by someone she thought she could trust.

Katherine’s has just such a story. Katherine, age 85, met with me because she lost a substantial amount of money in her securities account.  She was first introduced to her stock broker when he telephoned her. She had told her stock broker she wanted to invest in stocks that would generate dividends.  The stock broker instead placed her in risky securities. We sued the stock broker and the brokerage firm in an NASD arbitration in order to recover Katherine money.  The brokerage firm ultimately settled the case prior to the arbitration hearing.

Once someone has lost money due to fraud, there are two ways to help them recover their monies.  One is a civil law suit.  The other is criminal prosecution.  There are several federal statutes available to fraud victims depending on the type of fraud perpetrated. These federal statutes provide for restitution from the defendant to the victim as part of the criminal prosecution process.

Since many individuals invest their lump sum insurance, divorce, or other settlements or monies in the stock market, the following points may be helpful regarding a potential relationship with an investment firm.

Potential Investors Must Pay Attention to the New Account Form. Brokerage firms require that a customer sign a new account form when opening an account.  New account forms must be read carefully before they are signed because they impose many terms and restrictions on the investor.  The investor should not rely on any verbal representations made by the broker regarding these forms. Notably, new account forms contain an arbitration clause. This arbitration clause requires that you bring any dispute with the brokerage firm before an arbitration panel, usually either the National Association of Securities Dealers or the New York Stock Exchange. The dispute cannot be brought before a jury or any court because the investor has waived that right.

Potential Investors Must Know Their Investment Objectives.  Part of the new account form requests information about investment objectives.  The investment objectives determine how much risk the investor is willing to take.  The representative categories include “income,” “growth,” “capital appreciation,” “speculation” and “trading.”  The investor should make sure that the investment objectives checked on the new account form match the type and degree of risk he or she wishes to take. Again, the investor should not rely on any verbal representations made by the broker.

Potential investors need to understand what margin trading entails.  Margin trading allows the investor to purchase additional stock by having the brokerage firm loan some of the money necessary to buy that stock.  When trading using a margin account, in order to break even, the return on stock investment must be greater than the combined cost of the commissions plus the margin interest charged. Generally, senior citizens on a fixed income looking for income producing or equity types of investments should not be trading in a margin account.

Be careful in choosing a stock broker or other investment advisor.

Avoid cold calls.  Many victims of investment fraud were solicited on the telephone by stock brokers who obtained their names from mailing lists, death notices, telephone books and other sources. This is known as “cold calling” and while these victims would never have considered going to a doctor, lawyer or other professional who contacted them in this way, they thought nothing of choosing a stockbroker in this fashion.

Obtain and review references.  The vast majority of stock brokers are hardworking professionals who want to assist their clients in planning for the future.  In choosing a stock broker, one may obtain references from family and friends.  Several stock brokers should be interviewed to see who the investor feels most comfortable with.  Inquire as to their educational and professional background, investment experience, investment philosophy and areas of expertise.  Consider asking for additional references from the stockbroker as well as whether he or she has been named in any disciplinary actions.

Obtain a free disciplinary report. Bad apples in the brokerage industry are an embarrassment and liability to the industry as they give stock brokers a bad name and weaken investor confidence. Obtain a free report about the disciplinary history of brokerage firms and stock brokers by contacting the NASD at 800 289-9999.

Be aware of stock broker incentives. Remember, for the most part, stock brokers are paid by how often they buy and sell investments unless they are under a one fee plan type account.  Also know that a stock broker may be receiving a bonus for selling certain investments.

Obtain a copy of the commission schedule.  Note that even with low commissions, overall costs may be higher if purchase or sell orders are not rapidly processed and thereby result in sub-optimal buy or sell prices.

Other fraud tips may also be of interest. Never send a check to an address other than the address listed on the confirmation or the monthly statement.  The check should be made only to the brokerage firm.  Never make a check payable to the stock broker.

Remember that investments always entail some degree of risk.  Be aware of that. As a former enforcement attorney with the NASD prosecuting stock brokers for investment fraud and now representing victims of fraud, I can say that the best rule of thumb is that if an investment opportunity looks too good to be true--avoid it or have an unbiased professional review the potential investment.

If you or someone you know is a victim of investment fraud contact an attorney who handles investment fraud matters. A complaint can also be forwarded to the NASD for investigation. The telephone number of the Philadelphia branch is 215 665-1180.

Debra G. Speyer is an attorney practicing law in Center City, Philadelphia who concentrates her practice in the areas of investment fraud, elder fraud and elder law.  She is chair of the Elder Law Committee of the Philadelphia Bar Association and is on the board of directors of the Senior Citizens Judicare Project.  She was recently listed in Philadelphia Magazine in its Best Lawyers issue for Elder Law.  She can be contacted at 215 238-1980.

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