July 17, 2006
Investment Fraud and Seniors
Posted by Lisa Fairfax

The SEC will be hosting a summit today aimed at discussion ways to fight securities and investment fraud targeting the elderly.  According to the SEC, senior fraud is of particular concern not only because 90% of the USA's net worth is in older households, but also because the victims of such fraud do not get a second chance to recoup their losses.

Securities experts refer to fraud targeting particular groups as “affinity fraud” because perpetrators use some affinity they have with a group in which the victim belongs to gain their trust, thereby making their fraud easier to commit.  The fraud is also harder to detect and hence to halt because often group members are reluctant to turn in “one of their own.”  I have written about affinity fraud elsewhere in the context of religious groups and ethnic groups.  However, perpetrators have found that similar tactics work with the elderly.

First, perpetrators focus on people who want to make their own financial decisions.  This is important for members of ethnic groups who feel that they have been left out of the system in some way.  It is also important for older people who want to demonstrate that they are self-reliant.  Unfortunately, it makes it easy to commit fraud against such people because it means they are less likely to go through traditional methods of researching their investment schemes.

Second, perpetrators often rely on religious appeals to gain victims trust.  In the context of ethnic groups, affinity fraud was most often perpetrated by people within their church community.  Similarly, securities analysts found that perpetrators will spend time praying with elderly victims or quoting scripture with them.

Third, these frauds are hard to combat because they very often go unreported.  In the case of ethnic or religious groups, this is very often because the victim does not want to betray a member of the group.  In the case of older people, analysts say victims fear that their family will view the fraud as an indicator that the victim cannot take care of himself.

Finally, the fraud is not confined to victims that are without financial savvy.  In fact, a recent study commissioned by the NASD reveals that elderly victims of fraud are likely to be more financially literate than non-victims.

On the one hand, the tactics used against groups are no different than those used in other frauds.  On the other hand, perpetrators have found targeting groups to be a successful way of conning victims, and hence this kind of targeted fraud has been on the rise.  Like the SEC, I believe this kind of group-focused fraud deserves greater attention.

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