Self-directed Individual Retirement Accounts (IRAs) have become a favorite
among investors looking to gain flexibility and increased control over
their retirement portfolios. In fact, investments in the products have
gone up by 25 to 50 percent over the past few years,
according to some estimates. Unfortunately, investors interested in adding flexibility for the sake
of higher yields are also taking on more risk, including the risk of investment
fraud - a fact some investors may not know.
While, the market for the flexible IRAs is small (a mere 2 percent of the
general IRA market), the products are quickly becoming a favorite among
Ponzi schemers and con artists. To help alert investors to the possibility
of fraud, the NASAA recently announced that complaints against the products
are on the rise. And, last month, the SEC issued an
investor alertthat warned investors interested in the products about the increased possibility
of fraud, such as the alleged fraud that occurred in the United American
In SEC v. United American Ventures, the SEC alleged that the defendants
"promised guaranteed returns in purported investments in medical
technologies and raised money by convincing investors to invest through
self-directed IRAs and steering them to custodians who offered the self-directed
IRAs." A little over one-third of the $10 million in bonds sold through
the alleged scheme came from funds in self-directed IRAs.
According to the SEC, fraud promoters are particularly drawn to self-directed
IRAs because they allow people to invest in unregistered securities while
the account trustees have not had the chance to investigate the investment
or individual promoting the investment.
To protect themselves, the SEC recommends investors watch out for the
following marketing tactics:
Misrepresentations regarding custodial responsibilities. Custodians of self-directed IRAs simply hold and administer assets, rather
than evaluating things like quality or legitimacy of the investment.
Exploitation of tax-deferred account characteristics, which can cause self-directed IRA investors to stay in a fraudulent scheme
longer than other investors because they do not want to pay the financial
penalties for early withdrawal.
According to the OIEA and NASAA,
Lack of information for alternative investments. Self-directed IRAs usually allow investors to hold alternative investments
such as real estate, mortgages, tax liens, precious metals, and
private placement securities. Unlike publicly traded securities, financial and other information
necessary to make a prudent investment decision may not be as readily
available for these alternative investments. Even when financial information
for these alternative investments is available, it may not be audited.
Furthermore, self-directed IRA custodians usually do not investigate the
accuracy of this financial information. This lack of available information
for alternative investments makes them a popular tool for fraud promoters' schemes.
For additional tips on how to avoid investment schemes, read our article
on scam-proofing your portfolio