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.