Self-Directed IRAs a Juicy Target for Scams

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.