Self-Directed IRAs a Juicy Target for Scams

NASAA, retirement trade group tell investors how to fight fraud

The Retirement Industry Trust Association (RITA) and the North American Securities Administrators Association (NASAA) joined forces to conduct a webinar Wednesday on the risks of self-directed IRAs.

Tom Anderson, RITA president, founder and vice chairman of PENSCO Trust and Matt Kitzi, NASAA enforcement section chairman and Missouri securities commissioner, held forth on some of the opportunities presented by self-directed IRAs and how sometimes those opportunities can become pitfalls when exploited by fraudsters.

Former Texas Securities Commissioner Denise Voigt Crawford moderated the discussion, which covered the difference between conventional and self-directed IRAs, warning signs of possible fraud and what investors should do if they suspect fraud.

As a class, self-directed IRAs have been around for 30 years. Anderson explained that they are “functionally same as other IRAs, but the owner of the IRA or someone they designate makes all the financial decisions.”

Self-directed IRAs basically fall into two types, the first of which allows the IRA owner to choose nontraditional or alternative investments such as real estate; private equity, domestic and foreign; precious metals—“or just about anything outside the disallowed class,” according to Anderson. That lets the owner take advantage of specialized knowledge— for example, a real estate broker with years of experience might choose to invest in real estate rather than the stock market.

The second type of self-directed IRA uses more conventional options such as stocks, bonds and mutual funds, but again, the owner chooses among the investments rather than being restricted to a limited field of choice.

Kitzi said that the problems regulators have seen with self-directed IRAs have nothing to do with the fact that they are self-directed and everything to do with scam artists and products or investments that are not legitimate in one way or another.

Someone who is overly aggressive in pushing an investment should be a red flag, said Anderson. So should the “scarcity tactic,” in which the investor is told that there are only a limited number of shares available or the opportunity must be acted on within hours. Another warning sign is an overly optimistic estimate of returns, particularly without paperwork to back it up. Investors often fall for these, particularly if it’s an area about which they know little or nothing.

Not being provided paperwork is a warning sign in itself—if there’s no offer of documentation, such as a phone solicitation—as is being told that the IRS or the plan’s custodian has approved the investment. Neither custodians nor the IRS ever approve investments, stressed Anderson, and Kitzi agreed, adding that scam artists will often misrepresent custodian activities, suggesting that there’s an extra level of due diligence being done by the custodian when that is not what the custodian does.

If investors suspect fraud, both said they should do their homework and check up on the person offering the investment through everything from a Google search to calling references. Also, investors should check the FINRA website and see if the asset in question has been registered on the SEC’s EDGAR database.

Kitzi said the first thing they should do is suspend activity on their IRA, since often fraudsters will sneak in a document for the investor to sign that gives the scammer the right to access the account—which could be drained by the time the authorities catch up with the scammer.

They should also, he said, make a “call to their custodian or representative, and then call their state securities regulator and provide the information we ask for.” Time is of the essence. Anderson warned specifically against saying anything to the suspect, since that could trigger flight; a fraudster can get the windup and flee to Mexico—or, as in a case Kitzi related, to Guatemala. (The fraudster eventually ended up in custody anyway, but the investors’ money was spent by then.)

Kitzi also said a scammer could try to persuade an investor not to call in the authorities, saying that it will ruin the deal or that they want time to get their paperwork in order. They also sometimes claim that the investor can do nothing because he signed a waiver against calling in the authorities.

“If a promoter tells you you can’t call a regulator because you signed documents that waived your right to do that,” said Kitzi, “that’s not accurate. There’s no such thing as a waiver or release that applies to fraud.” But “people believe it,” he added. “They tell regulators to stop and back off and let the plan alone.”

More information on how to avoid scams and fraud in self-directed IRAs is available in the webinar’s recording, available at RITAUS.org, as well as at the main site and at NASAA.org.

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