The SEC (Securities and Exchange Commission) recently issued an official warning about the so-called ‘dangers’ of investments that some self directed qualified plan holders can fall into if they’re not careful. In a nutshell, the SEC warns, especially holders of IRAs, seeking alternative program investments to be cautious of investments that may just be plain-old Ponzi schemes.
Here’s a quote from the report:
“In particular, fraud promoters who want to engage in Ponzi schemes or other fraudulent conduct may exploit self directed IRAs 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.”
The SEC’s Investor Alert also stated there is an increase in the number of cases of fraud where the funding came from plans that were self directed.
The facts are that roughly 2-3% of all IRAs are self directed and less than 1% of those accounts are thought to have been associated in alleged scams or Ponzi-like activity. Hardly much to write home about, would you agree?. In fact, on its face, there is much more good than bad, but as you already know if you read this blog, good news rarely gets reported. There are a wide variety of solid investment opportunities available to people with self directed IRAs. Yet, self-directed IRAs has once again garnered the most media attention due to some schemes, most notably the Bernie Madoff, Ponzi scheme.
It is good to be warned by our government and others, but no one should be left with the impression that everyone who has a self directed account is somehow participating in a scheme or maybe involved in a risky or prohibited plan transaction or that everyone who is offering participation in an alternative investment is doing so in order prey on people’s retirement accounts and drag them into a Ponzi scheme.
In the court of public opinion with all the negative media reporting about people that may have lost part or all of their retirement, it maybe somewhat impossible for the uniformed reader or listener to differentiate between the legitimacy of self directed IRAs and the motives of investment promoters. But, I can assure you they are different things altogether. So, our purpose in writing this post is to make some distinctions and educate you about what you ought consider and what to stay away from when it comes to anyone trying to offer you an investment for your Individual Retirement Account.
No one here is trying to defend anyone and when anyone loses money due to a bad investment it is not a good thing, especially when someone who loses their hard-earned money in an investment. As a side-note, it is a stark reminder that when investing, it is not prudent to put all of your eggs in one basket in the event that an investment that looks promising in the beginning turns south on you in the end.
Remember everyone is innocent until they are proven guilty. However, before hearing all the facts what the media tends to do is sensationalize a story, spin or editorialize it rather than report it, vilify easy targets, pick winners and the losers, unofficially try the case as judge and jury for their version of the story in order to inappropriately inject confusion, fear and influence the public’s perception.
For example, perhaps the investment promoters just made bad investments or perhaps what started off with good intentions did not wind up as they intended due to unknown or changing market factors that occurred over the course of the investment; and what I mean by that is investments, which have a longer life-cycle have to generally endure additional market forces in order to remain profitable.
However, let’s level with each other. Whenever you put your money into an investment whether you invest within personal IRAs or your personal money you are ALWAYS putting your money at some level of risk. There is not a known investment that does not come with its own set of unique risks. If anyone claims otherwise, then you need to stay far from those promoters and wait for another opportunity. In fact, those that usually make more money than others know this and they are usually better at measuring risk beforehand and migrating risks and as they happen.
The fact that we are hearing about this now may also be since over the past several years there has been a general increase in the use of self directed IRAs to make investments due to the lack of liquidity in the real estate investment market
How To Snuff Out A Bad Investment Promoter Targeting IRAs?
Let’s get quickly back to the reason the SEC issued their warning in the first place. Remember here is what they said and I paraphrase: The likely reason investment promoters are now targeting self directed IRAs is because there are literally trillions of dollars in them right now, making these funds easily accessible and plentiful. We also agree with them, but keep in mind anyone with money these days can be the target or fall unawares into a bad investment.
You should be aware that there might be investment promoters out there dressed up as wolves in sheep’s clothing. There are a number of ways fraudulent promoters might attempt to sucker you into their deal. Here are just a few of the things they might say to tickle your ears so that you may be tempted to go with their program.
Sharpen your hearing and attune your ears to these things so you can avoid these bottom-feeders and continue investing using self directed IRAs without fear.
In order to lend additional credibility to their investment opportunity, investment promoters may say or they refer to the fact that:
- Their investments are in IRAs or IRS compliant in order to lend credibility to their investment.
- The IRS or the IRAs custodian allows their investment. Therefore, it has been check out or vetted already so there is really no reason for you to do so.
- Your retirement program custodian wouldn’t let you invest in their opportunity if it was bad deal.
- Their opportunity has been ‘checked out’ or ‘backed’ by all the national IRA custodians.
- The custodian so-and-so believes it’s a great investment. When this is not the role of the custodian in the first place. Read our article about the What Is The Role Of The Self Directed IRA Custodian?”
- The FDIC protects your investment up to $250,000.
- You will receive ‘guaranteed returns’ on the funds you have invested with them.
If an investment promoter says any of the above items, then you ought to think twice and possibly hold out for another opportunity. If in doubt, then be sure to get a second opinion and don’t be afraid to ask a ton of questions too such as “What’s in it for you?”, “How much are you making?” or “Is my investment secured by a tangible asset?” “What proof do I receive that the investment is secured?” What happens if the deal goes bad? What recourse do I have to have my funds returned in the event goes bad?
Here are some of the cases that the SEC cited in their warning article:
- SEC v. United American Ventures
- SEC v. Stinson
- SEC v. Durmaz
- State v. Smith and State vs. Snelling
- In re: Stephen Edward Gwin, et. al.
- Texas v. Warr Investment Group
Here is the full alert in PDF format for your reference:
Here is the non-PDF link on the www.investor.gov site:
One Last Note:
Just about the time people need to start taking more responsibility for their own retirement funds and educating themselves about how to invest wisely, they are told that perhaps self-directing their investments maybe a bad idea because of a few bad seeds or investments. In this economic environment, if you are looking to self direct your retirement, then you definitely need to be more thorough in your investigation and ask probing questions before you make an investment. In fact, more people should learn the benefits of self directed IRAs, but if things keep going this way, it seems like the good news will never each the masses and the ignorance will simply continue.