Insurance agents top list of investment scammers

Insurance agents have received top billing on a list of investment scam artists. The list was publicized last week by securities regulators and law enforcement officials at a press conference about changing trends in investment scams.

The bad-guy agents were in good company. “Large national household-name brokerage firms” were involved in many complaints about “callable” certificates of deposit, according to Securities and Exchange Commission lawyer Geraldine Walsh.

Ms. Walsh, special counsel to the director of the SEC’s office of investor education and assistance, would not divulge the names of any of the firms, saying that no action had been taken against them.

“Securities fraud is changing,” said Deborah Bortner, director of securities for the state of Washington and president of the North American Securities Administrators Association in Washington, D.C.

“It’s expanding out of the boiler room onto Main Street. The hustler that was at the other end of the telephone is often at the other end of the pew on Sunday or across your coffee table in your living room.”

She said many new risky products are being sold through trusted financial advisers to senior citizens looking for guaranteed returns.

Recently, state securities regulators took action against a number of individuals, many of them independent life insurance agents selling fraudulent investments in pay telephones, Ms. Bortner said.

A Florida insurance agent took about $17 million from 200 investors, she said.

agents in spotlight

In Indiana, 11 of the 16 cease-and-desist orders issued in the first quarter were against insurance agents, she added. In the state of Washington, 40% of the large securities fraud cases involve licensed insurance agents, she said. “Every state securities regulator I’ve spoken to has the same story,” she said.

Many agents are pleading ignorance, and some invested their own or relatives’ money in fraudulent investments, Ms. Bortner said. But “self-deception is no excuse for financial professionals who failed to investigate the viability of these investments,” she said. “Their due diligence should be more than, `How much is my commission?”‘ Commissions often run as high as 30%, she said.

Three of the top 10 investment scams compiled by the securities administrators group “seem to focus on insurance agents” as sellers, said Scott Lane, assistant director of the division of enforcement at the Pennsylvania Securities Commission.

Often the scams are sold as business opportunities such as sale-lease agreements involving pay telephones, which have proved to be money-losing ventures for many investors. Other scams involve the sale of promissory notes and viatical contracts, he said.

“Each investment focuses on building a sales force made up primarily of insurance agents,” said Mr. Lane. The agents are usually told that the products are not securities, and that no securities license is needed to sell them. Often no disclosures are made concerning the financial position of the companies backing the products.

Ms. Walsh reported that the SEC is receiving an increasing number of complaints from older people about being misled into buying “callable” certificates of deposit by brokers associated with banks. The agency received 333 such complaints last year, more than the combined number from the previous five years, and a fivefold increase from 1999.

misleading pitch

Most of the people who buy the CDs are being told by the brokers that they can get their principal back in a year. However, when they try to redeem the CDs, which often won’t mature for 10 to 30 years, they find that only the bank has the right to call them, Ms. Walsh said.

The investors have told the SEC that they were misled when they purchased the CDs, she said.

“They’re telling us that they were never told by their broker that the CDs would not have a maturity date until decades away,” she said. “They’re telling us that the brokers did say that the CDs were risk free and that the investors could get their money back whenever they wanted to without a penalty.”

Often the only way investors can redeem their principal is to sell the CDs in the secondary market at losses of 20% to 30%, Ms. Walsh said.

In many cases, correct information about the CDs was disclosed in voluminous information given to the investors when they bought the product, but they did not read it, she said.

The regulators made a plea for tougher penalties against financial advisers who sell inappropriate and bad investments, and they said they were attempting to coordinate their activities with law enforcement agencies and insurance regulators.