Individual Investors Must Exercise Caution When Investing in Self-Directed IRAs
Over the years, our law firm has seen numerous cases where promoters of
fraudulent schemes steer investors to opening self-directed IRAs. Most
IRA custodians only allow approved stocks, bonds, mutual funds and CDs.
A self-directed IRA custodian allows those types of investments in addition
to real estate, notes, private placements, and much more.
Fraudsters often use self-directed IRAs in particular because they permit
investors to hold unregistered securities and the custodians or trustees
of these accounts likely have not investigated the securities or the background
of the promoter.
According to the North American Securities Administrators Association (NASAA)
While self-directed IRAs can be a safe way to invest retirement funds,
investors should be mindful of potential fraudulent schemes when considering
a self-directed IRA. Importantly, investors must understand that the custodians
and trustees of self-directed IRAs always claim to have limited duties
to investors. In fact, the custodians and trustees for these accounts
will generally not evaluate the quality or legitimacy of an investment
and its promoters.
In a recent prominent case, a company and its partners perpetrated a
Ponzi scheme in which at least $20 million was raised from more than 120 investors.
In particular, the Ponzi scheme promoters promised safe, guaranteed returns
in supposed investments in foreign bonds. They raised money by convincing
investors to invest in self-directed IRAs and steered them to custodians
who offered the self-directed IRAs. In reality, the bonds were a sham,
but the investors were lulled into believing the investments were legitimate
in part because of the legitimate looking account statements they received
from the IRA custodian.
In many cases, fraud promoters explicitly state that self-directed IRA
custodians investigate and validate any investment in a self-directed
IRA. In reality, this may not be the case. While laws vary, in some instances
self-directed IRA custodians may claim that they are responsible only
for holding and administering the assets in a self-directed IRA. Self-directed
IRA custodians generally will not claim to have evaluated the quality
or legitimacy of any investment in the self-directed IRA or its promoters.
Furthermore, most custodial agreements between a self-directed IRA custodian
and an investor explicitly state that the self-directed IRA custodian
has no responsibility for investment performance. While this language
may be overcome in certain circumstances, it can create a barrier for
defrauded investors who are trying to recover their losses.
As with every investment, investors who are being steered toward a self-directed
IRA should undertake their own evaluation of the merits of a proposal.
They should also check with regulators about the background and history
of an investment and its promoters before making a decision.
If you have lost money in a fraudulent investment or scheme involving a
self-directed IRA or a third-party custodian or trustee, or have information
about one of these scams, please
contact one of our experienced investment fraud lawyers today.