[Senate Hearing 109-494]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 109-494

                          NOT BORN YESTERDAY:
                 HOW SENIORS CAN STOP INVESTMENT FRAUD

=======================================================================

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               ----------                              

                             WASHINGTON, DC

                               ----------                              

                             MARCH 29, 2006

                               ----------                              

                           Serial No. 109-20



         Printed for the use of the Special Committee on Aging
       NOT BORN YESTERDAY: HOW SENIORS CAN STOP INVESTMENT FRAUD


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                                                        S. Hrg. 109-494
 
                          NOT BORN YESTERDAY:
                 HOW SENIORS CAN STOP INVESTMENT FRAUD

=======================================================================

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             MARCH 29, 2006

                               __________

                           Serial No. 109-20

         Printed for the use of the Special Committee on Aging




                       SPECIAL COMMITTEE ON AGING

                     GORDON SMITH, Oregon, Chairman
RICHARD SHELBY, Alabama              HERB KOHL, Wisconsin
SUSAN COLLINS, Maine                 JAMES M. JEFFORDS, Vermont
JAMES M. TALENT, Missouri            RON WYDEN, Oregon
ELIZABETH DOLE, North Carolina       BLANCHE L. LINCOLN, Arkansas
MEL MARTINEZ, Florida                EVAN BAYH, Indiana
LARRY E. CRAIG, Idaho                THOMAS R. CARPER, Delaware
RICK SANTORUM, Pennsylvania          BILL NELSON, Florida
CONRAD BURNS, Montana                HILLARY RODHAM CLINTON, New York
LAMAR ALEXANDER, Tennessee           KEN SALAZAR, Colorado
JIM DEMINT, South Carolina
                    Catherine Finley, Staff Director
               Julie Cohen, Ranking Member Staff Director

                                  (ii)

  


                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Herb Kohl...........................     1

                                Panel I

Ruth Mitchell, victim of Investment Fraud, Columbiana, OH........     3
Barry Minkow, former scam artist, San Diego, CA..................     9

                                Panel II

Patricia D. Struck, president, North American Securities 
  Administrators Association, Inc. (NASAA), Washington, DC.......    14
Elisse B. Walter, executive vice president, Regulatory Policy and 
  Oversight, National Association of Securities Dealers (NASD), 
  Washington, DC.................................................    49
Susan Ferris Wyderko, acting director, Division of Investment 
  Management, U.S. Securities and Exchange Commission (SEC), 
  Washington, DC.................................................    61

                                APPENDIX

Information submitted by the Fraud Discovery Institute...........    75

                                 (iii)

  


        NOT BORN YESTERDAY: HOW SENIORS CAN STOP INVESTMENT FRAUD

                              ----------                              --



                       WEDNESDAY, MARCH 29, 2006

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:10 a.m., in 
room SD-106, Dirksen Senate Office Building, the Hon. Herb Kohl 
presiding.
    Present: Senator Kohl.

            OPENING STATEMENT OF SENATOR HERB KOHL,

    Senator Kohl [presiding]. Good morning. I would like to 
call this hearing to order at this time, and we welcome our 
witnesses.
    I would like to thank Chairman Smith, who will be here in a 
minute, for working with me on today's hearing to shine a 
bright light on the disturbing and growing problem of senior 
investment fraud.
    We have all heard stories of seniors losing their money 
through one scam or another, things like foreign lotteries, 
telemarketing schemes, identity theft. But today's seniors are 
facing new risks. Many are struggling to meet rising health and 
day-to-day living costs, bearing more risk in their pension 
plans, and anticipating long-term care expenses. Too many are 
finding that their savings are just not enough.
    Faced with this shortfall, many seniors are turning to 
investments to increase their retirement income. Some are 
investing wisely and building the savings they need. But sadly, 
others are proving too easy prey for con artists ready to steal 
their hard-earned and harder to replace money.
    Investment fraud is on the rise. My home State of Wisconsin 
saw a 21 percent increase in the number of financial abuse 
cases reported in 2004. Experts estimate that only 1 in 25 
cases are reported Nation wide.
    Today, our witnesses will describe the many faces of senior 
investment fraud--investment seminars designed to steal 
seniors' personal information, Ponzi schemes, trumped-up senior 
specialists who have no special financial training, and 
callable CDs, just to name a few. Regardless of the scam, the 
outcome remains the same. Seniors lose their irreplaceable 
retirement income.
    You don't have to look too far to find an example near you. 
In Wisconsin, we heard the story of a retired dairy farmer who 
invested $85,000 in what he was told were gold coins with 
promises of an 8 percent to 40 percent return on his 
investment. Little did he know that he was being drawn into an 
intricate interstate Ponzi scheme, and he will probably never 
see his money again.
    We have also heard from an attorney in Milwaukee who tells 
the story of her client losing $40,000 to a questionable estate 
planner who convinced a senior to invest in his business 
venture. The business venture didn't exist, and the senior's 
money was gone.
    Let us make one thing clear. Investments are not a bad 
thing for seniors. They can be useful retirement income 
vehicles. It is the bad actors and the criminals who peddle 
fraudulent investments that we must stop.
    Today's hearing will be just a first step. One of the keys 
to stopping senior scams is to educate seniors looking to 
invest. To that end, I have developed a tip sheet to help 
seniors know what to watch out for when investing and where to 
turn for help. This handout will be available to Wisconsin 
seniors through my office, and we encourage other States to use 
it as a model to distribute to their seniors as well.
    I also plan to continue working with our expert witnesses 
on legislation to protect seniors from scam artists. We need to 
tighten rules that require sellers of securities to disclose 
their credentials and training, as well as any hidden fees or 
high-risk investments that they sell. We should also make it 
easy for seniors to check out specific sellers to ensure they 
are reputable and to increase penalties for those who run these 
scams.
    We need to make sure that Federal and State law enforcement 
officials have the training and the resources they need to 
investigate and prosecute senior investment fraud. Finally, we 
need to pass the Elder Justice Act, which includes key research 
and training provisions to combat investment fraud.
    As our population ages and seniors live longer, they will 
look for ways to make their retirement income last as long as 
they do. We need to make sure that they can invest wisely, 
without the added worry that an unscrupulous advisor will run 
off with their money.
    If seniors take away one message from today's hearing, I 
hope they will remember this. It took you a lifetime to save 
your retirement income. So take just 5 more minutes to make the 
call that could protect it.
    We look forward to hearing from our witnesses, and we have 
our first panel in front of us. Our first witness today is Mrs. 
Ruth Mitchell from Columbiana, OH. Mrs. Mitchell is here to 
tell us her story of how she and her husband were bilked out of 
close to $100,000 of their retirement savings in an investment 
Ponzi scheme.
    After her, we will hear from Mr. Barry Minkow. Mr. Minkow 
was charged and convicted of a variety of securities fraud in 
the late 1980's. Following his almost 8 years in prison, Mr. 
Minkow has worked with law enforcement and corporate America to 
uncover and eliminate investment fraud. Mr. Minkow also serves 
as senior pastor at Community Bible Church in San Diego, CA.
    We welcome you both here today, and we look forward to your 
testimony. First, Mrs. Mitchell.

    STATEMENT OF RUTH MITCHELL, VICTIM OF INVESTMENT FRAUD, 
                         COLUMBIANA, OH

    Ms. Mitchell. Thank you. Good morning.
    At this time, I would like to thank the Senate panel for 
inviting me to testify about the fraudulent investment that we 
became involved in 1994.
    My husband, Len, and I lost $100,000 in a scam orchestrated 
by Barry Korcan from Beaver, PA. Barry Korcan owned a large CPA 
firm, and he had done my husband's corporate taxes and payroll 
for over 20 years. My husband retired in 2004 at age 80. Barry 
Korcan also did our personal taxes for 18 years.
    In 1994, Barry Korcan started an investment company called 
Guardian Investments and sold Len and I real estate bonds. We 
were promised 8 percent interest on these bonds. We had decided 
to downsize and build a smaller house than the one we had at 
that time in Pennsylvania, and we moved to Ohio in 2002. At 
that time, we were supposed to have had $100,000 in the bond 
account.
    We received quarterly statements and an interest check. It 
is apparent now that the interest was either our own money or 
someone else's money stolen from them. In February 2005, when 
we had not received our interest check in January, we called 
his office and several times were put off by the office staff, 
and Barry Korcan would not come to the phone.
    Finally, on Ash Wednesday of 2005, which fell in February, 
we were told by the office staff that they did not know 
anything about bonds or interest, and their office was shutting 
down permanently that Friday. We were stunned.
    We contacted a local Edward Jones agency, and the owner of 
the agency worked with us for about 4 hours the day after Ash 
Wednesday to find out what had happened and to try to transfer 
the bonds to Edward Jones. He finally called the district 
attorney's office in Beaver County, PA, and they advised him to 
call the Beaver County detective agency.
    We were then told it was a giant scam, and the government 
was seizing everything that Barry and Heidi Korcan owned. He 
stole $11.5 million from 39 victims. Almost all of the victims 
were business people or doctors or other people who had the 
funds to buy these bonds. You could only get in the bond 
program with $30,000 or more.
    We were devastated. I am 64 now, and my husband is 82. In 
our lifetime, we can never make that money again. We own our 
own home, free and clear, and we do not owe anyone a dime. But 
not having that cushion is really frightening.
    I was a lifelong figure skating instructor, and I have 
recently gone back to work at teaching ice skating at the Ice 
Zone in Boardman, OH, just to try to build a small cushion for 
us.
    Barry Korcan was also our neighbor. We bought our lot from 
him in 1996. We realize now that he had been stealing from us 
for 2 years when we paid him another $30,000 for this lot. He 
sat at our table for dinner and was a guest at my husband's 
surprise birthday party that I had for him--at a 75th surprise 
birthday party I had for him at a local restaurant.
    As a result of this theft, I was under my doctor's care for 
depression and nerves for about 7 months. I lost a lot of 
weight, and I could not eat or sleep. My husband was absolutely 
crushed because he trusted Barry like a son. Finally, I began 
to realize that the only way that I could heal was to help 
other people in the same situation or to help other people in 
becoming more careful about their investments.
    I have given talks in the past on various subjects and, 
most recently, gave a talk to the local AARP chapter in 
Columbiana, OH. The Pennsylvania Securities and Exchange Office 
from Pittsburgh worked with me and provided me with handouts 
for the people, and the talk was really very well received.
    I want to be able to talk to people not as an expert, 
certainly, but as a ``been there, done that'' individual. I 
seem to be able to heal a little by helping others to avoid 
such a trap.
    Barry Korcan will be sentenced on April 28 at 2 p.m. in the 
Federal Court in Pittsburgh. We will be there for the 
sentencing.
    No matter what sentence he gets, it will not help us 
recover our money or the other victims recover their money. I 
can only hope that Len and I can heal completely and the other 
victims will find some sort of peace or closure.
    Thank you so much for your time.
    [The prepared statement of Mrs. Mitchell follows:]

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    Senator Kohl. Thank you, Mrs. Mitchell, for your moving 
statement.
    Mr. Minkow.

  STATEMENT OF BARRY MINKOW, FORMER SCAM ARTIST, SAN DIEGO, CA

    Mr. Minkow. Thank you, Senator Kohl.
    It is a real privilege to be here this morning, and thank 
you for having me.
    I guess what I would like to say is the reason the problem 
of investment fraud is happening on such a large scale, as 
indicated in the written testimony, is there seems to be this 
kind of perfect fraud storm, appreciating housing market. As a 
former perpetrator, much to my shame, we would identify victims 
by their ability to invest.
    So now people who would normally not be ``targets,'' who 
have equity in their homes in an appreciating housing market, 
suddenly become targets. They are also not satisfied with the 
current stock market returns in the last 5 or 6 years. That 
creates a fear of not having enough, the fear of outliving your 
money. There is, you know, under performing CDs.
    So there is this environment for fraud. It is like this 
perfect fraud storm. Low interest rates, can't put my money in 
the bank and get any high returns. Kind of equity in the home 
sitting there. Wall Street isn't working. That is the 
environment where people will infiltrate and exploit. That is 
what I am seeing both on the uncovering side and then, of 
course, sadly and much to my shame, in the 1980's when I 
perpetrated.
    Some of the techniques we use, everything is on the table. 
I cannot tell you in the last 20 years, from being the 
perpetrator now to working undercover, I have never seen, 
Senator Kohl, the unbelievable ``will do anything to defraud'' 
kind of approach. In my case, much to our shame, we created 
some 20,000 fraudulent documents to fool the auditors. I am not 
proud of that.
    However, today, I am seeing--this came to me Friday. This 
is an original check. This is an original check. I am glad to 
show it to you. This is a sweepstake. An elder man in our 
church came to me and said, ``This is a $2,900 check to me.'' 
He said, ``I called the bank, and it is good.''
    The perpetrator of this sweepstakes fraud, and I have it 
right here--the original document--ID theft an insurance 
company, a life insurance company in Massachusetts. Printed 
their account information on this check, and sent it to a guy, 
saying ``you won.'' Once he deposits it, not only will it 
bounce, but he was also asked to return a higher amount of 
money.
    I have never seen this kind of ID theft on an active 
checking account, $2,900. Somebody who is not sophisticated 
thinks, ``Yes, I won the Canadian lottery,'' even though they 
probably never entered. It is just people will stop at nothing, 
it would appear, to defraud--phony financial statements, 
promises of outrageous returns.
    The other thing is affinity seems to be a big problem. Mrs. 
Mitchell mentioned that this person was a close friend. 
Affinity in churches. The Securities and Exchange Commission--
don't believe me, just ask them or Karen Patterson at the 
Department of Corporations in California how preeminent 
affinity fraud is in church groups. You tend to put your guard 
down when somebody from church comes to you with an investment 
opportunity.
    In the black community, it has been in Chicago Development 
and Planning, a fraud we uncovered. Ware Enterprises, this guy 
is doing 18 years in Florida. It was an affinity fraud, 
especially at NFL players because he used to be someone who was 
in that professional football arena.
    This affinity thing is huge. That is why what I think Mrs. 
Mitchell said about reverse affinity, somebody who is their age 
saying, ``Yes, don't do this,'' may be effective as well.
    We are seeing points of similarity in frauds, and we are 
also seeing people that will go after the elderly and be a 
comfort for them that they may not be getting from their son or 
daughter. They will come in and be a friend, and they will take 
your money. But they will provide that emotional need that may 
not be--when you are elderly, maybe you are alone more, and 
they will be that friend. They will also take the money. So 
there is this vulnerable area as well.
    I am trying to get everything in on time here. Also here is 
what I think can be done. You mentioned in your opening 
statement about proactive work with law enforcement, not 
waiting. Traditional law enforcement is this. Wait until Mrs. 
Mitchell comes with her fraud.
    What we have tried to do is infiltrate ongoing financial 
scams in progress before law enforcement knew about it so money 
can be frozen and victims can get their money back.
    Just a month ago, we were about to do that in the 12 Daily 
Pro auto surfing scam. Fifty million dollars frozen, made the 
front page of the Wall Street Journal. Now victims are going to 
get recovery. This is a new approach.
    Now the problem is, is the average person, when they think 
a fraud is going on, goes to the FBI or they say, ``I think a 
fraud is going on.'' They are like, ``We are understaffed. What 
do you got?'' ``Well, I just think.''
    The advantage of having been prosecuted by every law 
enforcement branch in the Nation, me, I know what meets the 
burden of proof that they need to prosecute. So we put 50-page 
reports together identifying the fraud, pointing out the bank 
accounts and records, auditing the sources and uses of cash, 
bringing them the promoter's prospectus, and infiltrating the 
fraud.
    On my way here, I was on the phone doing a wiretap for the 
FBI on an ongoing financial fraud promising 10 to 1 returns. So 
it is a new, fresh approach.
    I have got 10 seconds. You should see me at church when I 
go long. It is really bad, Senator.
    Also we want to increase the perception of detection and 
increase the perception of prosecution. That is the only thing 
that stops people from perpetrating crime is if they know there 
is an increased likelihood that they will be caught.
    I am sorry. I am out of time.
    Senator Kohl. Thank you very much, Mr. Minkow.
    Mrs. Mitchell, how has this terribly unfortunate loss of 
your money changed your retirement plans? You indicated you 
have had to go back to work. Is that what you said?
    Ms. Mitchell. Yes, I am teaching ice skating. I teach both 
figure skating and power skating for ice hockey, and I am doing 
that about 4 times a week now, 4 days a week.
    Senator Kohl. Who are you teaching?
    Ms. Mitchell. At the Ice Zone in Boardman, OH. Did you ask 
me where?
    Senator Kohl. Who are you teaching?
    Ms. Mitchell. Oh, who am I teaching? I am teaching little 
kids through adults, and I am teaching hockey players. I have 
had over 30 years experience at coaching. So I am pretty much 
back in the groove again except for my age.
    Senator Kohl. Are you enjoying that?
    Ms. Mitchell. I am enjoying that. That actually helps to 
heal me, too. But I just love to teach, and I love to teach 
skating. I will also be starting a class for blind people. I 
have worked with blind people on the ice for many years.
    Senator Kohl. That is great.
    Ms. Mitchell. It is hard on me because I am a little bit 
older, but yet I seem to be accepted at that ice rink as being 
an older coach. I was afraid they would think of me as just 
being someone that was just too old. But the younger coaches 
are sometimes looking at me for advice on how to handle this, 
or how do you convey this message?
    Senator Kohl. That is great.
    Ms. Mitchell. I think it is probably going to work out. I 
hope I can skate a few more years.
    Senator Kohl. That is great.
    Ms. Mitchell. For fun, I skate on a synchronized team. They 
may kill me on that one, but---- [Laughter.]
    Senator Kohl. Good for you.
    Ms. Mitchell. Thank you.
    Senator Kohl. If you could give a senior one piece of 
advice regarding investments, what would it be?
    Ms. Mitchell. The one piece of advice that I would give 
seniors is a logo that I saw stamped on the Securities and 
Exchange from Harrisburg on their envelopes, and it says, 
``Investigate before you invest.'' We did not.
    Also watch for a too lavish of a lifestyle, which Heidi and 
Barry Korcan had too lavish of a lifestyle. I mean, they 
hobnobbed with all of the Pittsburgh Steelers and the 
Pittsburgh Penguins. Mike Webster lived two doors from us with 
them before he passed away. Barry Korcan gave him money because 
he had gotten into such financial straits.
    Senator Kohl. Yes.
    Ms. Mitchell. At a swimming party in our neighborhood, 
Barry Korcan showed off all four of Mike Webster's Super Bowl 
rings. He was in possession of them. So I would say watch for 
lavish lifestyles, and don't be afraid to hurt someone's 
feelings by asking them questions.
    Senator Kohl. That is very important.
    Ms. Mitchell. Like, ``Are you honest or aren't you 
honest?'' Also call your Securities and Exchange Commission to 
see if they are registered.
    I understand there are three States in the United States 
that don't require investment people to register. One of those 
States is Ohio. One is Colorado, and someone said they thought 
the other one was Wyoming, but I am not certain of that. But 
there are still three States. But, of course, Barry wouldn't 
have registered anyway.
    Senator Kohl. You are saying, for certain, you must be 
absolutely positive about who it is with whom you are 
investing?
    Ms. Mitchell. Absolutely. Check out every avenue.
    As Securities and Exchange people from Pittsburgh have told 
me that when they talk to seniors at expos or symposiums, they 
can talk until they are blue in the face, and they know that 
the point is not coming home because people are still sitting 
there, saying, ``Oh, I have known this person for years. It 
will be fine.'' That is not true. Look what happened to us.
    Senator Kohl. Absolutely.
    Ms. Mitchell. He did my husband's corporate taxes for 22 
years and lived two doors from us.
    Senator Kohl. Thank you.
    Ms. Mitchell. You are welcome.
    Senator Kohl. Mr. Minkow, what eventually led to the 
discovery of the fraud that you were committing?
    Mr. Minkow. The good work of an investigative reporter at 
the Los Angeles Times uncovered May 22, 1987, that in the past 
I had to keep cash-flow coming in to pay off the ``Ponzi 
scheme,'' had done some credit card overcharging.
    So, what happened was, is after that article was printed in 
the LA Times, I had been on Oprah Winfrey. I had had a lot of 
positive publicity. Now people started to--and I think it goes 
to what Mrs. Mitchell was saying--critically look at me. While 
I used to be able to get around the due diligence process, now 
they wanted independent proof of profitability, and it 
eventually led to my demise.
    But the point there is not just who, but what the 
investment was. Normally and regularly, people weren't earning 
40 percent gross profit margins in the carpet cleaning 
restoration business. While I had been able to kind of handle 
that and the big publicity, young entrepreneur, once they 
pointed a critical eye at me, I was through.
    The number-one thing that we perpetrators can't stand, 
Senator Kohl, is critical thinking. We want you to love us. We 
want you to think the best of us. We want you to know that your 
friend has been getting checks for 5 years on time, and that is 
all the due diligence we want you to do.
    As Mrs. Mitchell said, you have to go deeper than that. You 
have to look at the industry, check out if the returns are 
consistent that are being offered in that industry, and do more 
due diligence. So, to your point. Sorry, long on that answer. 
Sorry about that.
    Senator Kohl. From your perspective, what are the red flags 
that seniors should be looking for when they are thinking about 
investing their retirement income?
    Mr. Minkow. Yes. I think, No. 1, the regulation industry, I 
think seniors and the investment public in general do not know 
how to define a security under the Howey test, and you don't 
have to be a lawyer to do it. Basically, people think 
``security,'' they think, oh, stock or bond. A security is any 
time I ask for investment money from Mrs. Mitchell and invest 
it in widgets or the foreign currency markets or anything, and 
I am guaranteeing her a certain return, that constitutes a 
security.
    Therefore, I need to be blue skied in every State I am 
offering it. I need to be a licensed broker/dealer. If I am 
offering her--and this is almost in every single case--
incentivizing the people that are in the deal financially by 
bringing in their friends. That is how we promote these things.
    So, we pay commissions. That is a red flag. Because unless 
the person bringing in the new investment money is a licensed 
broker/dealer, they can't receive commissions. So the whole 
understanding of what a security is.
    Second, normally and regularly test. Normally and 
regularly. Despite all the nice people out there who have been 
receiving returns, do people in this industry, are they able to 
generate these kinds of returns? Don Scott, 79-year-old Don 
Scott, who watched--he was in a factoring deal, and he said 
they promised him 24 percent to 30 percent a year returns.
    He happened to see me doing an interview where I said about 
factoring, normally and regularly, people in this industry 
can't afford a cost of capital of 30 percent annually. They 
just don't have those kind of margins if it is legitimate. 
Caused him to think critically about his investment. We 
investigated it, uncovered it, and he got his money back.
    So this objective thinking, not the subjective. ``My friend 
brought him to me,'' that kind of thing. Knowing what a 
security is. Watch this. Don't invest out of fear or greed. We 
offer high returns because high returns blind objectivity. We 
offer fear because we want people to think that they are going 
to outlive their money, and we will stop at nothing.
    Senator Kohl. Good. Well, we thank you very much for your 
testimony, Mrs. Mitchell and Mr. Minkow. It has been very 
helpful.
    Mr. Minkow. Thank you.
    Senator Kohl. I appreciate your being here today.
    Mr. Minkow. Thank you, sir.
    Senator Kohl. So we have a second panel. The first witness 
on the second panel will be Patty Struck. She is the president 
of the North American Securities Administrators Association. 
Ms. Struck also happens to be from my home State of Wisconsin, 
where she serves as administrator of the Division of Securities 
with the Wisconsin Department of Financial Institutions.
    She will share with us the State security administrator's 
perspective on the growing problem of senior investment fraud.
    Our second witness will be Elisse Walter, who is the 
executive vice president for regulatory policy and oversight of 
the National Association of Securities Dealers. NASD serves as 
the primary private sector regulator of the securities 
industry. Ms. Walter is here to share with us NASD's efforts to 
combat senior investment fraud.
    Finally, we will be hearing from Susan Wyderko of the 
Securities and Exchange Commission. She is the acting director 
of the Division of Investment Management for the SEC. Ms. 
Wyderko will tell us what the SEC, which is the Federal 
Government agency charged with regulating the securities 
industry, what they are doing to stop senior investment fraud.
    Thank you, all three of you, for being here. Ms. Struck.

  STATEMENT OF PATRICIA D. STRUCK, PRESIDENT, NORTH AMERICAN 
     SECURITIES ADMINISTRATORS ASSOCIATION, INC. (NASAA), 
                         WASHINGTON, DC

    Ms. Struck. Senator Kohl and members of the Committee----
    Senator Kohl. Do you want to turn on your button?
    Ms. Struck. Senator Kohl and members of the Committee, I am 
Patty Struck, and I am honored to be here to highlight the 
activities of State securities regulators in protecting senior 
citizens against investment fraud.
    Our cases of senior investment fraud may not make national 
headlines, but they are devastating to the victims and their 
families. What would any of us do if it were our parents 
turning over their retirement nest eggs to smooth-talking 
senior specialists promoting unsuitable investments?
    Seniors today are bombarded with pitches for financial 
seminars. Cold callers, brokers, and insurance agents are all 
pitching investments to seniors. Many of them are promising 
higher returns and little or no risk. Unfortunately, in most of 
the cases that we see, it is just the opposite--high risk and 
no returns, just devastating losses.
    Through seminars, publications, PSAs, and press interviews, 
my fellow regulators stress how important it is for seniors to 
call their State regulators, their State securities regulators, 
as you suggest, Senator Kohl, if they have questions about an 
investment opportunity or if they suspect they may have been 
victims of fraud.
    We have offices in every State, and a good example is the 
one that Mrs. Mitchell was talking about, the one in 
Pennsylvania. Our staffs are trained to respond to all 
complaints. You can find a list of regulators on the NASAA Web 
site at www.nasaa.org.
    We are currently seeing a flood of troubling senior schemes 
in three related areas--senior specialists, variable annuities, 
and unlicensed or unregistered persons. Unfortunately, these 
three problems often occur at the same time in some senior 
investment seminars.
    State securities regulators are receiving an increasing 
number of complaints from investors who have been enticed into 
attending seminars sponsored by certain senior specialists. It 
is common practice for seniors to receive invitations to a 
seminar, usually conducted with a meal. At the conclusion, they 
are encouraged to contact the presenter with further questions.
    Typically, the specialist will recommend that seniors sell 
their stocks in their retirement plans and use the proceeds to 
purchase variable annuities that the specialist offers. Many 
senior specialists have little specialized financial training. 
The NASD's professional designation data base is a useful 
resource to check out an individual's professional status.
    A fixture on NASAA's annual list of top scams involves the 
sale of variable annuities to investors with little regard to 
whether or not the product is suitable. While variable 
annuities are legitimate investments, regulators are concerned 
that many investors aren't being told about the potential of 
exposure to market risk, surrender charges, and the steep sales 
commissions that the agents are earning when they move 
investors into variable annuities.
    NASAA is encouraging changes in State laws that would allow 
insurance regulators to continue to oversee the insurance 
companies that sell variable annuities, while authorizing State 
securities regulators to investigate complaints and take action 
against the individuals who sell them.
    Another problem facing seniors is that of unlicensed sales 
people pitching securities that are unregistered. Many of the 
enforcement cases in my written testimony illustrate this 
twofold violation. NASAA believes the most effective weapon 
against fraud is a dual approach. We combine aggressive 
enforcement efforts with financial education to protect 
investors from unscrupulous individuals.
    We were pleased last week when Chairman Cox noted in his 
speech to the Consumer Federation of America that the States 
often coordinate their efforts with the SEC to capitalize on 
the strengths of both State and Federal regulators.
    In Wisconsin, Kenneth Hackbarth, an elder in his local 
church, operated a Ponzi scheme that victimized a total of 117 
friends, relatives, and senior parishioners of more than $6 
million. Using a front called Homestead Investments, he told 
investors their money was being used to buy, rehab, and sell 
property and promised a 15 percent return.
    The problem was Hackbarth never put any of the money into 
real estate, but just used his investors' money to pay off 
earlier investors, the hallmark of a Ponzi scheme. We worked 
with the FBI, and a criminal action resulted in a conviction 
and a 10-year prison sentence.
    State securities regulators believe investor education is a 
powerful weapon in the fight against investment fraud. A few 
years ago, NASAA undertook a senior outreach initiative 
designed to educate seniors to protect themselves from 
investment fraud.
    It involves programs and materials developed by securities 
regulators at the State level, including brochures, videos, and 
outreach seminars; an anti-fraud education program called 
Seniors Against Investment Fraud, which began in California, 
where senior volunteers conduct presentations in comfortable 
familiar settings such as community centers, assisted living 
facilities, and churches; and the Senior Investor Resource 
Center on the NASAA Web site to serve as a gateway for 
important investor protection information designed specifically 
for seniors. The center was launched in 2003 and includes 
common sense solutions to protect assets from investment fraud.
    These are dangerous economic times for seniors. This 
Committee's examination of investment fraud as it affects the 
growing senior population is an important step in highlighting 
the problem and working toward a solution.
    Thank you so much for allowing me the opportunity to appear 
here today.
    [The prepared statement of Ms. Struck follows:]

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    Senator Kohl. Thank you very much, Ms. Struck.
    Ms. Walter.

   STATEMENT OF ELISSE B. WALTER, EXECUTIVE VICE PRESIDENT, 
   REGULATORY POLICY AND OVERSIGHT, NATIONAL ASSOCIATION OF 
           SECURITIES DEALERS (NASD), WASHINGTON, DC

    Ms. Walter. Thank you, Senator Kohl.
    Good morning. I am Elisse Walter, executive vice president 
of NASD.
    On behalf of NASD, I would like to thank you and the 
Committee for holding this hearing and for inviting us to 
testify today about our work to protect investors, particularly 
the elderly. This is a terribly important subject, and the 
Committee is to be commended for addressing it.
    We have prepared a more detailed and comprehensive written 
statement and, with your permission, will submit it for 
inclusion in the record.
    NASD was founded more than 60 years ago as part of the 
Government's response to the market crash of 1929 and the Great 
Depression. The Federal Government designated NASD as the 
private sector regulator for the securities industry with the 
mission of protecting investors.
    Under Federal law, every securities firm doing business 
with the public must register with NASD. Our mission includes 
writing rules that govern securities firms and their employees, 
enforcing those rules, and sanctioning those who fail to 
comply. On average, we bring more than 1,000 new disciplinary 
actions every year, with sanctions ranging from censures to 
fines and suspensions to expulsion from the industry.
    Every year, we bring cases against those who have 
specifically targeted the elderly. When we encounter fraud that 
is outside our jurisdiction--for example, in cases involving 
investment advisors--we refer cases to criminal authorities, 
the States, and the SEC.
    Senator Kohl, as you said in your opening statement, the 
first step is education. So, in addition to enforcement, my 
testimony today focuses on what we at NASD are doing to educate 
investors so they can avoid problems before they occur.
    In addition to our investor alerts, which alert the public 
to current schemes, we also reach out to seniors through our 
investment forum programs attended by more than 7,500 
investors, including many older citizens. Last year, we opened 
a new office in Boca Raton, FL, due to the growth of 
problematic activity in that area targeted at retirees.
    Our Investor Education Foundation has awarded grants 
directed to senior concerns. For example, a grant to WISE 
Senior Services, which is working in collaboration with the 
AARP, to discern the reasons why the elderly are more 
frequently victimized by investment fraud. Among other things, 
they are exploring the theories of con artists for what makes 
an easy target.
    This fall, we are starting a multi-million dollar 
advertising campaign to direct the public to the investor 
education resources that we offer. For example, we think, as 
you have heard today already, that everyone should know how 
important it is to do their homework before they invest and 
before they give their money to a broker.
    NASD's BrokerCheck Program gives investors easy access to 
background information about firms and individual stock 
brokers. We encourage investors to use it to learn about the 
conduct of those with whom they invest. Investors can access 
these reports through our Web site, www.nasd.com, or a toll-
free telephone number, 800-289-9999.
    We also encourage seniors and those who care for them to 
use the NASD Web site, where we provide a wide range of tools 
and resources, including the alerts I mentioned and other 
publications directed to individual retail investors.
    Awareness, prevention, and education are major deterrents 
to investment fraud. Unless seniors are armed with the 
education necessary to identify and thus avoid attempts at 
financial exploitation, they can more easily fall prey to 
fraud.
    So what recourse do seniors have if they have been misled 
or otherwise treated unfairly? Investors can lodge complaints 
with NASD. Investigating these complaints is a big part of our 
job. You can submit a complaint through our Web site or by 
contacting one of our district office staff by phone or in 
writing.
    We review every customer complaint, and investors can seek 
to recover their losses through filing a case in our 
arbitration forum. NASD is the largest dispute resolution forum 
in the securities industry. It handles 90 percent of the 
securities arbitrations and mediations in the country.
    Also, in our routine examinations of broker/dealer firms, 
NASD focuses on sales practice issues, including compliance 
with our requirement that a recommendation of a securities 
transaction be appropriate for the investor to whom it is made. 
This is especially important when it comes to seniors, who have 
a more limited time horizon for their investments and who may 
need access to their money for long-term care costs.
    NASD also conducts sweeps, a series of targeted 
examinations which may involve particular products, often those 
that are disproportionately sold to the elderly. For example, 
we recently began a sweep focusing on the suitability of 
recommendations to exchange, withdraw funds, or take other 
distributions from variable insurance products in order to fund 
investments in equity indexed annuities and the associated 
supervision of this activity.
    Another area where we have focused our attention and 
resources is sales seminars, which are often attended by 
retirees and the elderly. These seminars--with titles like 
``Asset Protection For Seniors,'' ``Common Sense Retirement 
Strategies,'' ``Six Mistakes Retirees Make With Their 
Finances,'' and ``Striking It Rich In Retirement''--sometimes 
entail high-pressure sales tactics under the guise of a free 
lunch or dinner.
    We have brought a number of enforcement actions relating to 
seminars, and we are joining with the SEC and Florida 
securities regulators to review these seminars.
    The entire financial industry depends on investor 
confidence. NASD exists to bring integrity to the markets and 
to protect investors. As we have all been reminded this 
morning, lasting confidence must be based on good information 
and sound regulation.
    Thank you so much for this opportunity to testify, and I 
would be happy to answer any questions you have.
    [The prepared statement of Ms. Walter follows:]

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    Senator Kohl. Thank you very much, Ms. Walter.
    Now we will hear from Ms. Wyderko.

STATEMENT OF SUSAN FERRIS WYDERKO, ACTING DIRECTOR, DIVISION OF 
INVESTMENT MANAGEMENT, U.S. SECURITIES AND EXCHANGE COMMISSION 
                     (SEC), WASHINGTON, DC

    Ms. Wyderko. Senator Kohl, on behalf of the Securities and 
Exchange Commission, thank you for the opportunity to testify 
today about our efforts to protect and educate investors, 
including our Nation's senior citizens.
    I am the director of the SEC's Office of Investor Education 
and Assistance. My office is the front door of the commission 
for individual investors. Nearly every day, my staff fields 
telephone calls and receives letters and e-mails from seniors 
or from the children and caregivers of seniors.
    The subject of your hearing, financial fraud on the 
elderly, is one that our chairman, our commissioners, and I 
care about deeply. Some of the cases that we see are heart-
breaking. They involve seniors bilked out of all of their 
savings at a time of their lives when they need it most and 
can't recover.
    In our experience, the two most common challenges senior 
investors face involve avoiding outright scams and learning how 
to fend off high-pressure sales pitches for legitimate, but 
arguably unsuitable products. These include the ``free lunch'' 
seminars that encourage seniors to purchase variable annuities 
and other complex manufactured products with contract riders 
promising guaranteed death benefits.
    So let me tell you what the SEC is doing to protect seniors 
in the enforcement area, in our inspections, and from a 
consumer education perspective. Over the last 2 years alone, 
our Division of Enforcement has brought at least 26 enforcement 
actions aimed specifically at protecting elderly investors. 
Many of these actions were coordinated with State authorities.
    One recent case involved a $144 million Ponzi scheme that 
lured elderly victims in southern California to workshops with 
the promise of free food. The fraudsters then bilked them out 
of their retirement money by purporting to sell them safe, 
guaranteed notes.
    While it is important to catch wrongdoers and bring them to 
justice, it is always better to prevent wrongdoing. So that is 
why our examination staff, together with the NASD and the State 
of Florida, will soon be conducting a series of examinations of 
broker/dealers and advisors that lure seniors to attend sales 
seminars, many times at fancy hotels and restaurants with the 
promise of a free lunch.
    Our examiners will be looking at the firms that sponsor 
these seminars to see whether the sales seminars are 
supervised, whether the sales people are making wild claims of 
possible returns on an investment, and whether the risks that 
are inherent in any investment are being appropriately 
disclosed.
    Now while enforcement and inspection activities are 
important to stopping fraud and misleading sales practices, our 
best defense against fraud is an educated investor. The 
dominant theme of the SEC's investor education materials is, 
``Investigate before you invest.'' We encourage individuals to 
ask questions and fully understand any investment before 
purchasing.
    We publish clear and concise explanations of some of the 
most complex products that are sold to a senior, such as 
variable annuities and equity indexed annuities. We also 
counsel investors to check out the background and credentials 
of any securities salesperson or financial professional.
    We stress that if a deal sounds too good to be true, it 
usually is. We don't copyright any of our materials. We make 
them freely available in both Spanish and English.
    Now we know that many seniors and many children and 
caregivers of seniors are using the Internet to search for 
information on investing. That is why we recently created a 
page on our Web site specifically aimed at senior citizens. 
This page provides links to critical information on investments 
commonly marketed to seniors. It also warns against the dangers 
of listening to the sales pitches of cold callers.
    Senior citizens who want to know more can ask for a copy of 
our senior care package, which is a collection of our most 
popular brochures for seniors.
    In closing, I would like to thank this Committee for 
recognizing the importance of the commission's efforts in 
helping our Nation's seniors to rest more easily with their 
investment decisions. I appreciate your inviting me to speak on 
behalf of the commission, and I would be happy to answer any 
questions you may have.
    [The prepared statement of Ms. Wyderko follows:]

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    Senator Kohl. Thank you, Ms. Wyderko.
    Ms. Struck, it seems that, in most cases, by the time your 
office receives a complaint, the senior's investment money is 
long gone. What type of proactive investigations does your 
office undertake to detect potential scams before they go too 
far?
    Ms. Struck. Thank you, Senator Kohl, for the opportunity to 
answer these questions.
    We have an exam program that allows our examiners to go 
into the offices of securities professionals, and that is why 
in my testimony I stressed the importance of including certain 
products, such as variable annuities, as securities under our 
State laws.
    Because if we don't have the authority to regulate the 
people selling those products, then we don't have the ability 
to look at what is going on in their offices and make sure that 
the sales practices that they are engaging in with investors, 
including seniors, are fair and appropriate.
    In addition, we are engaged in a number of educational 
efforts. One of the newest ones that we are excited about, that 
Wisconsin has just signed on for, is in conjunction with the 
AARP, and that is called the Campaign for Safe and Wise 
Investing.
    What that will do is to take members of our staff, as well 
as representatives of the AARP, into local communities 
throughout the State to meet in comfortable surroundings with 
investors to answer their questions and help provide education 
for them, tips on how to protect themselves when they are 
dealing with a financial professional.
    Senator Kohl. How often do senior victims of investment 
fraud recover the money that they lost?
    Ms. Struck. It is very rare, unfortunately, for investors 
ever to recover the money lost in an investment scheme. There 
are occasions where money has been recovered, but most times by 
the time--as in the situation that Mrs. Mitchell outlined or 
the case that I outlined, Kenneth Hackbarth, the pastor from 
Wisconsin--once the money has been spent on a lavish lifestyle 
of the person collecting the money, it is too late, and there 
is nothing left to gain back for investors.
    Senator Kohl. Ms. Walter, disclosure of key information, 
such as fees and penalties, is an important way to protect 
seniors from unexpected losses. So how can we make it easier 
for seniors to receive the information they need to make 
informed decisions without overwhelming them with the piles of 
documents and legalese that so often----
    Ms. Walter. That is a very important question. The SEC 
currently has outstanding a proposal specifically with respect 
to mutual funds and certain other products, including variable 
annuities, to provide point of sale disclosure. That means 
short, to the point, plain English disclosure at the time or 
right before an investor actually makes a decision to invest 
that outlines those fees and penalties.
    NASD put together an industry task force of experts in both 
securities firms and mutual fund firms and has submitted 
comments and a task force report to the SEC strongly supporting 
that item. So that we put together a prototype disclosure 
document that includes disclosure of fees and expenses, and we 
also think it is important to include short, to the point, 
plain English disclosure of the main features of an investment.
    I know that proposal is on the SEC's agenda to move forward 
with this year.
    Senator Kohl. Ms. Walter, as we have learned today, making 
sure an investment is suitable for an investor's specific 
situation is very important. How does NASD enforce the 
suitability rules it has in place for its member brokers and 
dealers?
    Ms. Walter. There are a number of avenues. As you have 
heard, the States have an examination program. We have a 
national examination program, and it consists of two main 
parts. First, there are routine exams where we go in on a 
periodic basis and examine the firms, and the length of time 
between those exams is determined by the risk that firm 
presents based on a number of different factors.
    In addition, as I mentioned in my oral statement, we 
investigate or we review every single customer complaint we 
receive. So if a customer has a complaint, they can be assured 
that someone at NASD will be looking at that.
    We have sweeps, which, in addition to our normal exam 
program, target specific areas where we think that there may be 
a problem, whether there are specific types of conduct, 
specific lines of business, and specific products.
    When we bring enforcement actions, I certainly agree that 
it is all too rare that people get their money back. But we 
have made it a priority in our enforcement actions where there 
are specific victims that have been identified, if there is 
money, to order restitution so that when it is still available 
and hasn't been absconded with, investors can perhaps get their 
money back through that vehicle as well.
    Senator Kohl. Thank you.
    Ms. Wyderko, just a few days ago, SEC Chairman Cox said 
that the agency is stepping up its efforts to protect elderly 
investors from fraud. Can you tell us a little bit more about 
what these efforts are? Aside from looking at sales seminars, 
what else will these new efforts focus on?
    Ms. Wyderko. Our efforts are going to be focused on a 
double-barreled approach. As Patty Struck said, we also believe 
that aggressive enforcement, coupled with aggressive investor 
education, is the best way to go.
    So our inspections folks will be working with other 
regulators, the NASD and the State securities regulators, to go 
look at seminars that are targeted to elderly Americans. I 
think that is a very important place to begin. We will also be 
looking at our enforcement cases and bringing them aggressively 
where appropriate.
    As Mr. Minkow said, we do see cases of affinity fraud, 
where fraudsters go into a community and bring together people 
with a certain attribute, whether it be a church affiliation or 
elderly people or some other affiliation, and they try and bilk 
them out of their savings in that fashion. So, we aggressively 
go after cases of Ponzi schemes like that, affinity frauds 
where we see them.
    We are also working with State securities regulators and 
others to disseminate investor education materials. This is 
very important to the extent we can get the word out to elderly 
Americans that it is OK to hang up on cold callers.
    We need to get out the word to empower Americans to ask how 
the securities salesperson is being paid, being compensated for 
a transaction. We need to get the word out that it is not 
embarrassing or inappropriate to ask questions about an 
investment opportunity that you don't understand.
    In this way, we can empower Americans to protect 
themselves, which is really our best defense against fraud.
    Senator Kohl. Mr. Minkow from our first panel stated that 
investment scam artists aren't really concerned about being 
caught because they know that regulatory and enforcement 
agencies are not focused on them and don't have the resources 
that they need to do their jobs. What are your thoughts on the 
comments that he made?
    Ms. Wyderko. I think we do have a lot of resources that we 
are bringing to this problem, and I will note for the record 
that he did go to prison.
    Senator Kohl. That is pretty definitive. [Laughter.]
    I would like to ask all three of you what is it about 
people who are in their senior years makes them more vulnerable 
to investment scam or, in fact, are they more vulnerable? Ms. 
Struck.
    Ms. Struck. It does seem that the older people get, the 
more vulnerable they become. While I am not a physician or a 
psychologist and I don't understand why that happens, my 
friends and I talk about this all the time.
    I ran into a friend who is an insurance regulator a couple 
of weeks ago, and we were talking about just this question. She 
said, ``Patty, I don't know what it is, but I am just so 
terrified that it is going to happen to my mother.''
    So while I can't explain it, it is something on which all 
regulators, social scientists, journalists, and all reasonable 
people seem to agree. It happens as people get older. They just 
become more vulnerable.
    Senator Kohl. Hmm. Do you agree with that, Ms. Walter?
    Ms. Walter. I do. Part of the reason is because older 
investors have gone through their wealth accumulation phase. So 
they probably have more funds available than they had at any 
other point in their lives.
    We certainly agree that we don't have all the answers. That 
is one of the reasons that we have funded this WISE Seniors 
Services grant I mentioned earlier.
    They, with AARP, are going to do research to determine 
that, to try to determine if there is a specific fraud 
vulnerability profile, not only just being older, but who in 
particular do they target among the older citizens? So that we 
can target our educational efforts and perhaps our regulatory 
efforts as well to try to keep this from happening.
    Senator Kohl. It is interesting because you think of one of 
the profiles of older people is they become a little bit more 
cautious, more conservative, more careful. Yet you are 
suggesting that they are, Ms. Wyderko, more susceptible?
    Ms. Wyderko. My theory is that our seniors in America grew 
up in a different culture. They grew up being taught that it 
was impolite to hang up on people. They grew up believing that 
if someone said they were your friend, in fact, they were your 
friend.
    I believe that they grew up in a more trusting era of our 
Nation's history, and that as the rules--the culture has moved 
and the rules of the game have changed, that fraudsters are 
taking advantage of our seniors and their trusting, 
unwillingness to suspend their disbelief.
    Senator Kohl. To each of you, we have heard today about the 
issue of unregistered and unlicensed individuals selling 
unregistered securities. So what do you all think is the best 
way to address this problem? Ms. Struck.
    Ms. Struck. Just to underscore the most important message 
that we can deliver is this twofold way of addressing the 
problem. One is through aggressive enforcement as the NASD, the 
SEC, and State regulators bring to bear against this problem. 
We need to aggressively enforce our laws.
    The other way is through the programs that we have 
described today that reach out and actually have an impact on 
senior investors.
    Senator Kohl. Ms. Walter.
    Ms. Walter. Come back to the basic point that I think we 
have all emphasized is that you need to know with whom you are 
dealing. The very first thing someone needs to do when they 
have located a potential advisor or financial consultant or 
someone is offering them a deal that may be too good to be true 
is to check out that person.
    You can do that through NASD, and you can do it through 
your State securities regulator. If, in fact, those systems 
come up blank--there is no registration, either at the State 
level or at the Federal level--that itself is a red flag.
    We really, through our educational efforts, have to 
encourage people to be very suspicious if they are dealing with 
someone who isn't registered with a regulatory authority.
    Senator Kohl. Do you agree with that, Ms. Wyderko?
    Ms. Wyderko. I do. I would add that we all need to redouble 
our efforts to get out the fundamental message that if an 
investment opportunity sounds too good to be true, it most 
definitely is too good to be true.
    We all need to work together to share enforcement tips and 
leads that we get. I know that we all keep data bases and share 
complaints from customers, and we need to be aggressive in 
following up on those.
    Senator Kohl. Well, we thank you all very much for being 
here today. Unfortunately, our Chairman, Gordon Smith, is stuck 
in a markup this morning, and he won't have a chance to make 
it.
    Much work remains to be done, and I look forward to working 
with you to put an end to seniors losing their hard-earned 
retirement money to scams. As we have said today, we need to 
continue to educate seniors about the traps and the snares that 
they are facing. We also plan to work on common sense 
legislation that will tighten the rules regarding who is 
selling securities and how those securities are being sold.
    In addition, we will be working to ensure that enforcement 
and regulatory agencies have the resources and the training 
they need to combat investment fraud.
    So thank you so much for coming. I think you have added a 
lot to the discussion, and we look forward to working with you.
    This hearing is closed.
    [Whereupon, at 11:06 a.m., the committee was adjourned.]


                            A P P E N D I X

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