S. HRG. 109–494

NOT BORN YESTERDAY:

HOW SENIORS CAN STOP INVESTMENT FRAUD

HEARING

BEFORE THE

SPECIAL COMMITTEE ON AGING 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

WASHINGTON, DC

MARCH 29, 2006

Serial No. 109–20

(

Printed for the use of the Special Committee on Aging 

NOT BORN YESTERDAY: HOW SENIORS CAN STOP INVESTMENT FRAUD 

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28–187 PDF 2006

S. HRG. 109–494

NOT BORN YESTERDAY:

HOW SENIORS CAN STOP INVESTMENT FRAUD

HEARING

BEFORE THE

SPECIAL COMMITTEE ON AGING 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

WASHINGTON, DC

MARCH 29, 2006

Serial No. 109–20

Printed for the use of the Special Committee on Aging

(

SPECIAL COMMITTEE ON AGING 

GORDON SMITH, Oregon, Chairman 

RICHARD SHELBY, Alabama 

SUSAN COLLINS, Maine 

JAMES M. TALENT, Missouri 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

LARRY E. CRAIG, Idaho 

RICK SANTORUM, Pennsylvania 

CONRAD BURNS, Montana 

LAMAR ALEXANDER, Tennessee 

JIM DEMINT, South Carolina 

HERB KOHL, Wisconsin 

JAMES M. JEFFORDS, Vermont 

RON WYDEN, Oregon 

BLANCHE L. LINCOLN, Arkansas 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

BILL NELSON, Florida 

HILLARY RODHAM CLINTON, New York 

KEN SALAZAR, Colorado 

CATHERINE FINLEY, Staff Director 

JULIE COHEN, Ranking Member Staff Director 

(II) 

C O N T E N T S 

Page 

Opening Statement of Senator Herb Kohl ............................................................. 1

PANEL I 

Ruth Mitchell, victim of Investment Fraud, Columbiana, OH ............................ 3

Barry Minkow, former scam artist, San Diego, CA .............................................. 9

PANEL II 

Patricia D. Struck, president, North American Securities Administrators 

Association, Inc. (NASAA), Washington, DC ..................................................... 14

Elisse B. Walter, executive vice president, Regulatory Policy and Oversight, 

National Association of Securities Dealers (NASD), Washington, DC ............ 49

Susan Ferris Wyderko, acting director, Division of Investment Management, 

U.S. Securities and Exchange Commission (SEC), Washington, DC ............... 61

APPENDIX 

Information submitted by the Fraud Discovery Institute .................................... 75

(III) 

(1)

NOT BORN YESTERDAY: HOW SENIORS CAN 

STOP INVESTMENT FRAUD 

WEDNESDAY, MARCH 29, 2006 

U.S. SENATE, SPECIAL COMMITTEE ON AGING, Washington, DC. 

The committee met, pursuant to notice, at 10:10 a.m., in room 

SD–106, Dirksen Senate Office Building, the Hon. Herb Kohl 

presiding. 

Present: Senator Kohl. 

OPENING STATEMENT OF SENATOR HERB KOHL, 

Senator KOHL [presiding]. Good morning. I would like to call this 

hearing to order at this time, and we welcome our witnesses. 

I would like to thank Chairman Smith, who will be here in a 

minute, for working with me on today’s hearing to shine a bright 

light on the disturbing and growing problem of senior investment 

fraud. 

We have all heard stories of seniors losing their money through 

one scam or another, things like foreign lotteries, telemarketing 

schemes, identity theft. But today’s seniors are facing new risks. 

Many are struggling to meet rising health and day-to-day living 

costs, bearing more risk in their pension plans, and anticipating 

long-term care expenses. Too many are finding that their savings 

are just not enough. 

Faced with this shortfall, many seniors are turning to investments to increase their retirement income. Some are investing 

wisely and building the savings they need. But sadly, others are 

proving too easy prey for con artists ready to steal their hardearned and harder to replace money. 

Investment fraud is on the rise. My home State of Wisconsin saw 

a 21 percent increase in the number of financial abuse cases reported in 2004. Experts estimate that only 1 in 25 cases are reported Nation wide. 

Today, our witnesses will describe the many faces of senior investment fraud—investment seminars designed to steal seniors’ 

personal information, Ponzi schemes, trumped-up senior specialists 

who have no special financial training, and callable CDs, just to 

name a few. Regardless of the scam, the outcome remains the 

same. Seniors lose their irreplaceable retirement income. 

You don’t have to look too far to find an example near you. In 

Wisconsin, we heard the story of a retired dairy farmer who invested $85,000 in what he was told were gold coins with promises 

of an 8 percent to 40 percent return on his investment. Little did 

2

he know that he was being drawn into an intricate interstate Ponzi 

scheme, and he will probably never see his money again. 

We have also heard from an attorney in Milwaukee who tells the 

story of her client losing $40,000 to a questionable estate planner 

who convinced a senior to invest in his business venture. The business venture didn’t exist, and the senior’s money was gone. 

Let us make one thing clear. Investments are not a bad thing for 

seniors. They can be useful retirement income vehicles. It is the 

bad actors and the criminals who peddle fraudulent investments 

that we must stop. 

Today’s hearing will be just a first step. One of the keys to stopping senior scams is to educate seniors looking to invest. To that 

end, I have developed a tip sheet to help seniors know what to 

watch out for when investing and where to turn for help. This 

handout will be available to Wisconsin seniors through my office, 

and we encourage other States to use it as a model to distribute 

to their seniors as well. 

I also plan to continue working with our expert witnesses on legislation to protect seniors from scam artists. We need to tighten 

rules that require sellers of securities to disclose their credentials 

and training, as well as any hidden fees or high-risk investments 

that they sell. We should also make it easy for seniors to check out 

specific sellers to ensure they are reputable and to increase penalties for those who run these scams. 

We need to make sure that Federal and State law enforcement 

officials have the training and the resources they need to investigate and prosecute senior investment fraud. Finally, we need to 

pass the Elder Justice Act, which includes key research and training provisions to combat investment fraud. 

As our population ages and seniors live longer, they will look for 

ways to make their retirement income last as long as they do. We 

need to make sure that they can invest wisely, without the added 

worry that an unscrupulous advisor will run off with their money. 

If seniors take away one message from today’s hearing, I hope 

they will remember this. It took you a lifetime to save your retirement income. So take just 5 more minutes to make the call that 

could protect it. 

We look forward to hearing from our witnesses, and we have our 

first panel in front of us. Our first witness today is Mrs. Ruth 

Mitchell from Columbiana, OH. Mrs. Mitchell is here to tell us her 

story of how she and her husband were bilked out of close to 

$100,000 of their retirement savings in an investment Ponzi 

scheme. 

After her, we will hear from Mr. Barry Minkow. Mr. Minkow was 

charged and convicted of a variety of securities fraud in the late 

1980’s. Following his almost 8 years in prison, Mr. Minkow has 

worked with law enforcement and corporate America to uncover 

and eliminate investment fraud. Mr. Minkow also serves as senior 

pastor at Community Bible Church in San Diego, CA. 

We welcome you both here today, and we look forward to your 

testimony. First, Mrs. Mitchell. 

3

STATEMENT OF RUTH MITCHELL, VICTIM OF INVESTMENT 

FRAUD, COLUMBIANA, OH 

Ms. MITCHELL. Thank you. Good morning. 

At this time, I would like to thank the Senate panel for inviting 

me to testify about the fraudulent investment that we became involved in 1994. 

My husband, Len, and I lost $100,000 in a scam orchestrated by 

Barry Korcan from Beaver, PA. Barry Korcan owned a large CPA 

firm, and he had done my husband’s corporate taxes and payroll 

for over 20 years. My husband retired in 2004 at age 80. Barry 

Korcan also did our personal taxes for 18 years. 

In 1994, Barry Korcan started an investment company called 

Guardian Investments and sold Len and I real estate bonds. We 

were promised 8 percent interest on these bonds. We had decided 

to downsize and build a smaller house than the one we had at that 

time in Pennsylvania, and we moved to Ohio in 2002. At that time, 

we were supposed to have had $100,000 in the bond account. 

We received quarterly statements and an interest check. It is apparent now that the interest was either our own money or someone 

else’s money stolen from them. In February 2005, when we had not 

received our interest check in January, we called his office and several times were put off by the office staff, and Barry Korcan would 

not come to the phone. 

Finally, on Ash Wednesday of 2005, which fell in February, we 

were told by the office staff that they did not know anything about 

bonds or interest, and their office was shutting down permanently 

that Friday. We were stunned. 

We contacted a local Edward Jones agency, and the owner of the 

agency worked with us for about 4 hours the day after Ash 

Wednesday to find out what had happened and to try to transfer 

the bonds to Edward Jones. He finally called the district attorney’s 

office in Beaver County, PA, and they advised him to call the Beaver County detective agency. 

We were then told it was a giant scam, and the government was 

seizing everything that Barry and Heidi Korcan owned. He stole 

$11.5 million from 39 victims. Almost all of the victims were business people or doctors or other people who had the funds to buy 

these bonds. You could only get in the bond program with $30,000 

or more. 

We were devastated. I am 64 now, and my husband is 82. In our 

lifetime, we can never make that money again. We own our own 

home, free and clear, and we do not owe anyone a dime. But not 

having that cushion is really frightening. 

I was a lifelong figure skating instructor, and I have recently 

gone back to work at teaching ice skating at the Ice Zone in 

Boardman, OH, just to try to build a small cushion for us. 

Barry Korcan was also our neighbor. We bought our lot from him 

in 1996. We realize now that he had been stealing from us for 2 

years when we paid him another $30,000 for this lot. He sat at our 

table for dinner and was a guest at my husband’s surprise birthday 

party that I had for him—at a 75th surprise birthday party I had 

for him at a local restaurant. 

As a result of this theft, I was under my doctor’s care for depression and nerves for about 7 months. I lost a lot of weight, and I 

4

could not eat or sleep. My husband was absolutely crushed because 

he trusted Barry like a son. Finally, I began to realize that the only 

way that I could heal was to help other people in the same situation or to help other people in becoming more careful about their 

investments. 

I have given talks in the past on various subjects and, most recently, gave a talk to the local AARP chapter in Columbiana, OH. 

The Pennsylvania Securities and Exchange Office from Pittsburgh 

worked with me and provided me with handouts for the people, 

and the talk was really very well received. 

I want to be able to talk to people not as an expert, certainly, 

but as a ‘‘been there, done that’’ individual. I seem to be able to 

heal a little by helping others to avoid such a trap. 

Barry Korcan will be sentenced on April 28 at 2 p.m. in the Federal Court in Pittsburgh. We will be there for the sentencing. 

No matter what sentence he gets, it will not help us recover our 

money or the other victims recover their money. I can only hope 

that Len and I can heal completely and the other victims will find 

some sort of peace or closure. 

Thank you so much for your time. 

[The prepared statement of Mrs. Mitchell follows:]

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Senator KOHL. Thank you, Mrs. Mitchell, for your moving statement. 

Mr. Minkow. 

STATEMENT OF BARRY MINKOW, FORMER SCAM ARTIST, SAN 

DIEGO, CA 

Mr. MINKOW. Thank you, Senator Kohl. 

It is a real privilege to be here this morning, and thank you for 

having me. 

I guess what I would like to say is the reason the problem of investment fraud is happening on such a large scale, as indicated in 

the written testimony, is there seems to be this kind of perfect 

fraud storm, appreciating housing market. As a former perpetrator, 

much to my shame, we would identify victims by their ability to 

invest. 

So now people who would normally not be ‘‘targets,’’ who have 

equity in their homes in an appreciating housing market, suddenly 

become targets. They are also not satisfied with the current stock 

market returns in the last 5 or 6 years. That creates a fear of not 

having enough, the fear of outliving your money. There is, you 

know, under performing CDs. 

So there is this environment for fraud. It is like this perfect 

fraud storm. Low interest rates, can’t put my money in the bank 

and get any high returns. Kind of equity in the home sitting there. 

Wall Street isn’t working. That is the environment where people 

will infiltrate and exploit. That is what I am seeing both on the uncovering side and then, of course, sadly and much to my shame, in 

the 1980’s when I perpetrated. 

Some of the techniques we use, everything is on the table. I cannot tell you in the last 20 years, from being the perpetrator now 

to working undercover, I have never seen, Senator Kohl, the unbelievable ‘‘will do anything to defraud’’ kind of approach. In my case, 

much to our shame, we created some 20,000 fraudulent documents 

to fool the auditors. I am not proud of that. 

However, today, I am seeing—this came to me Friday. This is an 

original check. This is an original check. I am glad to show it to 

you. This is a sweepstake. An elder man in our church came to me 

and said, ‘‘This is a $2,900 check to me.’’ He said, ‘‘I called the 

bank, and it is good.’’ 

The perpetrator of this sweepstakes fraud, and I have it right 

here—the original document—ID theft an insurance company, a 

life insurance company in Massachusetts. Printed their account information on this check, and sent it to a guy, saying ‘‘you won.’’ 

Once he deposits it, not only will it bounce, but he was also asked 

to return a higher amount of money. 

I have never seen this kind of ID theft on an active checking account, $2,900. Somebody who is not sophisticated thinks, ‘‘Yes, I 

won the Canadian lottery,’’ even though they probably never entered. It is just people will stop at nothing, it would appear, to defraud—phony financial statements, promises of outrageous returns. 

The other thing is affinity seems to be a big problem. Mrs. Mitchell mentioned that this person was a close friend. Affinity in 

churches. The Securities and Exchange Commission—don’t believe 

me, just ask them or Karen Patterson at the Department of CorVerDate 0ct 09 2002 15:49 Jul 25, 2006 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 H:\DOCS\28187.TXT SAGING1 PsN: JOYCE
10

porations in California how preeminent affinity fraud is in church 

groups. You tend to put your guard down when somebody from 

church comes to you with an investment opportunity. 

In the black community, it has been in Chicago Development and 

Planning, a fraud we uncovered. Ware Enterprises, this guy is 

doing 18 years in Florida. It was an affinity fraud, especially at 

NFL players because he used to be someone who was in that professional football arena. 

This affinity thing is huge. That is why what I think Mrs. Mitchell said about reverse affinity, somebody who is their age saying, 

‘‘Yes, don’t do this,’’ may be effective as well. 

We are seeing points of similarity in frauds, and we are also seeing people that will go after the elderly and be a comfort for them 

that they may not be getting from their son or daughter. They will 

come in and be a friend, and they will take your money. But they 

will provide that emotional need that may not be—when you are 

elderly, maybe you are alone more, and they will be that friend. 

They will also take the money. So there is this vulnerable area as 

well. 

I am trying to get everything in on time here. Also here is what 

I think can be done. You mentioned in your opening statement 

about proactive work with law enforcement, not waiting. Traditional law enforcement is this. Wait until Mrs. Mitchell comes with 

her fraud. 

What we have tried to do is infiltrate ongoing financial scams in 

progress before law enforcement knew about it so money can be 

frozen and victims can get their money back. 

Just a month ago, we were about to do that in the 12 Daily Pro 

auto surfing scam. Fifty million dollars frozen, made the front page 

of the Wall Street Journal. Now victims are going to get recovery. 

This is a new approach. 

Now the problem is, is the average person, when they think a 

fraud is going on, goes to the FBI or they say, ‘‘I think a fraud is 

going on.’’ They are like, ‘‘We are understaffed. What do you got?’’ 

‘‘Well, I just think.’’ 

The advantage of having been prosecuted by every law enforcement branch in the Nation, me, I know what meets the burden of 

proof that they need to prosecute. So we put 50-page reports together identifying the fraud, pointing out the bank accounts and 

records, auditing the sources and uses of cash, bringing them the 

promoter’s prospectus, and infiltrating the fraud. 

On my way here, I was on the phone doing a wiretap for the FBI 

on an ongoing financial fraud promising 10 to 1 returns. So it is 

a new, fresh approach. 

I have got 10 seconds. You should see me at church when I go 

long. It is really bad, Senator. 

Also we want to increase the perception of detection and increase 

the perception of prosecution. That is the only thing that stops people from perpetrating crime is if they know there is an increased 

likelihood that they will be caught. 

I am sorry. I am out of time. 

Senator KOHL. Thank you very much, Mr. Minkow. 

11

Mrs. Mitchell, how has this terribly unfortunate loss of your 

money changed your retirement plans? You indicated you have had 

to go back to work. Is that what you said? 

Ms. MITCHELL. Yes, I am teaching ice skating. I teach both figure 

skating and power skating for ice hockey, and I am doing that 

about 4 times a week now, 4 days a week. 

Senator KOHL. Who are you teaching? 

Ms. MITCHELL. At the Ice Zone in Boardman, OH. Did you ask 

me where? 

Senator KOHL. Who are you teaching? 

Ms. MITCHELL. Oh, who am I teaching? I am teaching little kids 

through adults, and I am teaching hockey players. I have had over 

30 years experience at coaching. So I am pretty much back in the 

groove again except for my age. 

Senator KOHL. Are you enjoying that? 

Ms. MITCHELL. I am enjoying that. That actually helps to heal 

me, too. But I just love to teach, and I love to teach skating. I will 

also be starting a class for blind people. I have worked with blind 

people on the ice for many years. 

Senator KOHL. That is great. 

Ms. MITCHELL. It is hard on me because I am a little bit older, 

but yet I seem to be accepted at that ice rink as being an older 

coach. I was afraid they would think of me as just being someone 

that was just too old. But the younger coaches are sometimes looking at me for advice on how to handle this, or how do you convey 

this message? 

Senator KOHL. That is great. 

Ms. MITCHELL. I think it is probably going to work out. I hope 

I can skate a few more years. 

Senator KOHL. That is great. 

Ms. MITCHELL. For fun, I skate on a synchronized team. They 

may kill me on that one, but—— [Laughter.] 

Senator KOHL. Good for you. 

Ms. MITCHELL. Thank you. 

Senator KOHL. If you could give a senior one piece of advice regarding investments, what would it be? 

Ms. MITCHELL. The one piece of advice that I would give seniors 

is a logo that I saw stamped on the Securities and Exchange from 

Harrisburg on their envelopes, and it says, ‘‘Investigate before you 

invest.’’ We did not. 

Also watch for a too lavish of a lifestyle, which Heidi and Barry 

Korcan had too lavish of a lifestyle. I mean, they hobnobbed with 

all of the Pittsburgh Steelers and the Pittsburgh Penguins. Mike 

Webster lived two doors from us with them before he passed away. 

Barry Korcan gave him money because he had gotten into such financial straits. 

Senator KOHL. Yes. 

Ms. MITCHELL. At a swimming party in our neighborhood, Barry 

Korcan showed off all four of Mike Webster’s Super Bowl rings. He 

was in possession of them. So I would say watch for lavish lifestyles, and don’t be afraid to hurt someone’s feelings by asking 

them questions. 

Senator KOHL. That is very important. 

12

Ms. MITCHELL. Like, ‘‘Are you honest or aren’t you honest?’’ Also 

call your Securities and Exchange Commission to see if they are 

registered. 

I understand there are three States in the United States that 

don’t require investment people to register. One of those States is 

Ohio. One is Colorado, and someone said they thought the other 

one was Wyoming, but I am not certain of that. But there are still 

three States. But, of course, Barry wouldn’t have registered anyway. 

Senator KOHL. You are saying, for certain, you must be absolutely positive about who it is with whom you are investing? 

Ms. MITCHELL. Absolutely. Check out every avenue. 

As Securities and Exchange people from Pittsburgh have told me 

that when they talk to seniors at expos or symposiums, they can 

talk until they are blue in the face, and they know that the point 

is not coming home because people are still sitting there, saying, 

‘‘Oh, I have known this person for years. It will be fine.’’ That is 

not true. Look what happened to us. 

Senator KOHL. Absolutely. 

Ms. MITCHELL. He did my husband’s corporate taxes for 22 years 

and lived two doors from us. 

Senator KOHL. Thank you. 

Ms. MITCHELL. You are welcome. 

Senator KOHL. Mr. Minkow, what eventually led to the discovery 

of the fraud that you were committing? 

Mr. MINKOW. The good work of an investigative reporter at the 

Los Angeles Times uncovered May 22, 1987, that in the past I had 

to keep cash-flow coming in to pay off the ‘‘Ponzi scheme,’’ had done 

some credit card overcharging. 

So, what happened was, is after that article was printed in the 

LA Times, I had been on Oprah Winfrey. I had had a lot of positive 

publicity. Now people started to—and I think it goes to what Mrs. 

Mitchell was saying—critically look at me. While I used to be able 

to get around the due diligence process, now they wanted independent proof of profitability, and it eventually led to my demise. 

But the point there is not just who, but what the investment 

was. Normally and regularly, people weren’t earning 40 percent 

gross profit margins in the carpet cleaning restoration business. 

While I had been able to kind of handle that and the big publicity, 

young entrepreneur, once they pointed a critical eye at me, I was 

through. 

The number-one thing that we perpetrators can’t stand, Senator 

Kohl, is critical thinking. We want you to love us. We want you to 

think the best of us. We want you to know that your friend has 

been getting checks for 5 years on time, and that is all the due diligence we want you to do. 

As Mrs. Mitchell said, you have to go deeper than that. You have 

to look at the industry, check out if the returns are consistent that 

are being offered in that industry, and do more due diligence. So, 

to your point. Sorry, long on that answer. Sorry about that. 

Senator KOHL. From your perspective, what are the red flags 

that seniors should be looking for when they are thinking about investing their retirement income? 

13

Mr. MINKOW. Yes. I think, No. 1, the regulation industry, I think 

seniors and the investment public in general do not know how to 

define a security under the Howey test, and you don’t have to be 

a lawyer to do it. Basically, people think ‘‘security,’’ they think, oh, 

stock or bond. A security is any time I ask for investment money 

from Mrs. Mitchell and invest it in widgets or the foreign currency 

markets or anything, and I am guaranteeing her a certain return, 

that constitutes a security. 

Therefore, I need to be blue skied in every State I am offering 

it. I need to be a licensed broker/dealer. If I am offering her—and 

this is almost in every single case—incentivizing the people that 

are in the deal financially by bringing in their friends. That is how 

we promote these things. 

So, we pay commissions. That is a red flag. Because unless the 

person bringing in the new investment money is a licensed broker/

dealer, they can’t receive commissions. So the whole understanding 

of what a security is. 

Second, normally and regularly test. Normally and regularly. Despite all the nice people out there who have been receiving returns, 

do people in this industry, are they able to generate these kinds 

of returns? Don Scott, 79-year-old Don Scott, who watched—he was 

in a factoring deal, and he said they promised him 24 percent to 

30 percent a year returns. 

He happened to see me doing an interview where I said about 

factoring, normally and regularly, people in this industry can’t afford a cost of capital of 30 percent annually. They just don’t have 

those kind of margins if it is legitimate. Caused him to think critically about his investment. We investigated it, uncovered it, and he 

got his money back. 

So this objective thinking, not the subjective. ‘‘My friend brought 

him to me,’’ that kind of thing. Knowing what a security is. Watch 

this. Don’t invest out of fear or greed. We offer high returns because high returns blind objectivity. We offer fear because we want 

people to think that they are going to outlive their money, and we 

will stop at nothing. 

Senator KOHL. Good. Well, we thank you very much for your testimony, Mrs. Mitchell and Mr. Minkow. It has been very helpful. 

Mr. MINKOW. Thank you. 

Senator KOHL. I appreciate your being here today. 

Mr. MINKOW. Thank you, sir. 

Senator KOHL. So we have a second panel. The first witness on 

the second panel will be Patty Struck. She is the president of the 

North American Securities Administrators Association. Ms. Struck 

also happens to be from my home State of Wisconsin, where she 

serves as administrator of the Division of Securities with the Wisconsin Department of Financial Institutions. 

She will share with us the State security administrator’s perspective on the growing problem of senior investment fraud. 

Our second witness will be Elisse Walter, who is the executive 

vice president for regulatory policy and oversight of the National 

Association of Securities Dealers. NASD serves as the primary private sector regulator of the securities industry. Ms. Walter is here 

to share with us NASD’s efforts to combat senior investment fraud. 

14

Finally, we will be hearing from Susan Wyderko of the Securities 

and Exchange Commission. She is the acting director of the Division of Investment Management for the SEC. Ms. Wyderko will tell 

us what the SEC, which is the Federal Government agency charged 

with regulating the securities industry, what they are doing to stop 

senior investment fraud. 

Thank you, all three of you, for being here. Ms. Struck. 

STATEMENT OF PATRICIA D. STRUCK, PRESIDENT, NORTH 

AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION, 

INC. (NASAA), WASHINGTON, DC 

Ms. STRUCK. Senator Kohl and members of the Committee——

Senator KOHL. Do you want to turn on your button? 

Ms. STRUCK. Senator Kohl and members of the Committee, I am 

Patty Struck, and I am honored to be here to highlight the activities of State securities regulators in protecting senior citizens 

against investment fraud. 

Our cases of senior investment fraud may not make national 

headlines, but they are devastating to the victims and their families. What would any of us do if it were our parents turning over 

their retirement nest eggs to smooth-talking senior specialists promoting unsuitable investments? 

Seniors today are bombarded with pitches for financial seminars. 

Cold callers, brokers, and insurance agents are all pitching investments to seniors. Many of them are promising higher returns and 

little or no risk. Unfortunately, in most of the cases that we see, 

it is just the opposite—high risk and no returns, just devastating 

losses. 

Through seminars, publications, PSAs, and press interviews, my 

fellow regulators stress how important it is for seniors to call their 

State regulators, their State securities regulators, as you suggest, 

Senator Kohl, if they have questions about an investment opportunity or if they suspect they may have been victims of fraud. 

We have offices in every State, and a good example is the one 

that Mrs. Mitchell was talking about, the one in Pennsylvania. Our 

staffs are trained to respond to all complaints. You can find a list 

of regulators on the NASAA Web site at www.nasaa.org. 

We are currently seeing a flood of troubling senior schemes in 

three related areas—senior specialists, variable annuities, and unlicensed or unregistered persons. Unfortunately, these three problems often occur at the same time in some senior investment seminars. 

State securities regulators are receiving an increasing number of 

complaints from investors who have been enticed into attending 

seminars sponsored by certain senior specialists. It is common 

practice for seniors to receive invitations to a seminar, usually conducted with a meal. At the conclusion, they are encouraged to contact the presenter with further questions. 

Typically, the specialist will recommend that seniors sell their 

stocks in their retirement plans and use the proceeds to purchase 

variable annuities that the specialist offers. Many senior specialists 

have little specialized financial training. The NASD’s professional 

designation data base is a useful resource to check out an individual’s professional status. 

15

A fixture on NASAA’s annual list of top scams involves the sale 

of variable annuities to investors with little regard to whether or 

not the product is suitable. While variable annuities are legitimate 

investments, regulators are concerned that many investors aren’t 

being told about the potential of exposure to market risk, surrender 

charges, and the steep sales commissions that the agents are earning when they move investors into variable annuities. 

NASAA is encouraging changes in State laws that would allow 

insurance regulators to continue to oversee the insurance companies that sell variable annuities, while authorizing State securities 

regulators to investigate complaints and take action against the individuals who sell them. 

Another problem facing seniors is that of unlicensed sales people 

pitching securities that are unregistered. Many of the enforcement 

cases in my written testimony illustrate this twofold violation. 

NASAA believes the most effective weapon against fraud is a dual 

approach. We combine aggressive enforcement efforts with financial education to protect investors from unscrupulous individuals. 

We were pleased last week when Chairman Cox noted in his 

speech to the Consumer Federation of America that the States 

often coordinate their efforts with the SEC to capitalize on the 

strengths of both State and Federal regulators. 

In Wisconsin, Kenneth Hackbarth, an elder in his local church, 

operated a Ponzi scheme that victimized a total of 117 friends, relatives, and senior parishioners of more than $6 million. Using a 

front called Homestead Investments, he told investors their money 

was being used to buy, rehab, and sell property and promised a 15 

percent return. 

The problem was Hackbarth never put any of the money into 

real estate, but just used his investors’ money to pay off earlier investors, the hallmark of a Ponzi scheme. We worked with the FBI, 

and a criminal action resulted in a conviction and a 10-year prison 

sentence. 

State securities regulators believe investor education is a powerful weapon in the fight against investment fraud. A few years ago, 

NASAA undertook a senior outreach initiative designed to educate 

seniors to protect themselves from investment fraud. 

It involves programs and materials developed by securities regulators at the State level, including brochures, videos, and outreach 

seminars; an anti-fraud education program called Seniors Against 

Investment Fraud, which began in California, where senior volunteers conduct presentations in comfortable familiar settings such as 

community centers, assisted living facilities, and churches; and the 

Senior Investor Resource Center on the NASAA Web site to serve 

as a gateway for important investor protection information designed specifically for seniors. The center was launched in 2003 

and includes common sense solutions to protect assets from investment fraud. 

These are dangerous economic times for seniors. This Committee’s examination of investment fraud as it affects the growing senior population is an important step in highlighting the problem and 

working toward a solution. 

Thank you so much for allowing me the opportunity to appear 

here today. 

16

[The prepared statement of Ms. Struck follows:]


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Senator KOHL. Thank you very much, Ms. Struck. 

Ms. Walter. 

STATEMENT OF ELISSE B. WALTER, EXECUTIVE VICE PRESIDENT, REGULATORY POLICY AND OVERSIGHT, NATIONAL 

ASSOCIATION OF SECURITIES DEALERS (NASD), WASHINGTON, DC 

Ms. WALTER. Thank you, Senator Kohl. 

Good morning. I am Elisse Walter, executive vice president of 

NASD. 

On behalf of NASD, I would like to thank you and the Committee for holding this hearing and for inviting us to testify today 

about our work to protect investors, particularly the elderly. This 

is a terribly important subject, and the Committee is to be commended for addressing it. 

We have prepared a more detailed and comprehensive written 

statement and, with your permission, will submit it for inclusion in 

the record. 

NASD was founded more than 60 years ago as part of the Government’s response to the market crash of 1929 and the Great Depression. The Federal Government designated NASD as the private 

sector regulator for the securities industry with the mission of protecting investors. 

Under Federal law, every securities firm doing business with the 

public must register with NASD. Our mission includes writing 

rules that govern securities firms and their employees, enforcing 

those rules, and sanctioning those who fail to comply. On average, 

we bring more than 1,000 new disciplinary actions every year, with 

sanctions ranging from censures to fines and suspensions to expulsion from the industry. 

Every year, we bring cases against those who have specifically 

targeted the elderly. When we encounter fraud that is outside our 

jurisdiction—for example, in cases involving investment advisors—

we refer cases to criminal authorities, the States, and the SEC. 

Senator Kohl, as you said in your opening statement, the first 

step is education. So, in addition to enforcement, my testimony 

today focuses on what we at NASD are doing to educate investors 

so they can avoid problems before they occur. 

In addition to our investor alerts, which alert the public to current schemes, we also reach out to seniors through our investment 

forum programs attended by more than 7,500 investors, including 

many older citizens. Last year, we opened a new office in Boca 

Raton, FL, due to the growth of problematic activity in that area 

targeted at retirees. 

Our Investor Education Foundation has awarded grants directed 

to senior concerns. For example, a grant to WISE Senior Services, 

which is working in collaboration with the AARP, to discern the 

reasons why the elderly are more frequently victimized by investment fraud. Among other things, they are exploring the theories of 

con artists for what makes an easy target. 

This fall, we are starting a multi-million dollar advertising campaign to direct the public to the investor education resources that 

we offer. For example, we think, as you have heard today already, 

that everyone should know how important it is to do their homeVerDate 0ct 09 2002 15:49 Jul 25, 2006 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 H:\DOCS\28187.TXT SAGING1 PsN: JOYCE
50

work before they invest and before they give their money to a 

broker. 

NASD’s BrokerCheck Program gives investors easy access to 

background information about firms and individual stock brokers. 

We encourage investors to use it to learn about the conduct of 

those with whom they invest. Investors can access these reports 

through our Web site, www.nasd.com, or a toll-free telephone number, 800–289–9999. 

We also encourage seniors and those who care for them to use 

the NASD Web site, where we provide a wide range of tools and 

resources, including the alerts I mentioned and other publications 

directed to individual retail investors. 

Awareness, prevention, and education are major deterrents to investment fraud. Unless seniors are armed with the education necessary to identify and thus avoid attempts at financial exploitation, 

they can more easily fall prey to fraud. 

So what recourse do seniors have if they have been misled or otherwise treated unfairly? Investors can lodge complaints with 

NASD. Investigating these complaints is a big part of our job. You 

can submit a complaint through our Web site or by contacting one 

of our district office staff by phone or in writing. 

We review every customer complaint, and investors can seek to 

recover their losses through filing a case in our arbitration forum. 

NASD is the largest dispute resolution forum in the securities industry. It handles 90 percent of the securities arbitrations and mediations in the country. 

Also, in our routine examinations of broker/dealer firms, NASD 

focuses on sales practice issues, including compliance with our requirement that a recommendation of a securities transaction be appropriate for the investor to whom it is made. This is especially important when it comes to seniors, who have a more limited time horizon for their investments and who may need access to their 

money for long-term care costs. 

NASD also conducts sweeps, a series of targeted examinations 

which may involve particular products, often those that are disproportionately sold to the elderly. For example, we recently began 

a sweep focusing on the suitability of recommendations to exchange, withdraw funds, or take other distributions from variable 

insurance products in order to fund investments in equity indexed 

annuities and the associated supervision of this activity. 

Another area where we have focused our attention and resources 

is sales seminars, which are often attended by retirees and the elderly. These seminars—with titles like ‘‘Asset Protection For Seniors,’’ ‘‘Common Sense Retirement Strategies,’’ ‘‘Six Mistakes Retirees Make With Their Finances,’’ and ‘‘Striking It Rich In Retirement’’—sometimes entail high-pressure sales tactics under the 

guise of a free lunch or dinner. 

We have brought a number of enforcement actions relating to 

seminars, and we are joining with the SEC and Florida securities 

regulators to review these seminars. 

The entire financial industry depends on investor confidence. 

NASD exists to bring integrity to the markets and to protect investors. As we have all been reminded this morning, lasting confidence 

must be based on good information and sound regulation. 

51

Thank you so much for this opportunity to testify, and I would 

be happy to answer any questions you have. 

[The prepared statement of Ms. Walter follows:]

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Senator KOHL. Thank you very much, Ms. Walter. 

Now we will hear from Ms. Wyderko. 

STATEMENT OF SUSAN FERRIS WYDERKO, ACTING DIRECTOR, 

DIVISION OF INVESTMENT MANAGEMENT, U.S. SECURITIES 

AND EXCHANGE COMMISSION (SEC), WASHINGTON, DC 

Ms. WYDERKO. Senator Kohl, on behalf of the Securities and Exchange Commission, thank you for the opportunity to testify today 

about our efforts to protect and educate investors, including our 

Nation’s senior citizens. 

I am the director of the SEC’s Office of Investor Education and 

Assistance. My office is the front door of the commission for individual investors. Nearly every day, my staff fields telephone calls 

and receives letters and e-mails from seniors or from the children 

and caregivers of seniors. 

The subject of your hearing, financial fraud on the elderly, is one 

that our chairman, our commissioners, and I care about deeply. 

Some of the cases that we see are heart-breaking. They involve 

seniors bilked out of all of their savings at a time of their lives 

when they need it most and can’t recover. 

In our experience, the two most common challenges senior investors face involve avoiding outright scams and learning how to fend 

off high-pressure sales pitches for legitimate, but arguably unsuitable products. These include the ‘‘free lunch’’ seminars that encourage seniors to purchase variable annuities and other complex manufactured products with contract riders promising guaranteed 

death benefits. 

So let me tell you what the SEC is doing to protect seniors in 

the enforcement area, in our inspections, and from a consumer education perspective. Over the last 2 years alone, our Division of Enforcement has brought at least 26 enforcement actions aimed specifically at protecting elderly investors. Many of these actions were 

coordinated with State authorities. 

One recent case involved a $144 million Ponzi scheme that lured 

elderly victims in southern California to workshops with the promise of free food. The fraudsters then bilked them out of their retirement money by purporting to sell them safe, guaranteed notes. 

While it is important to catch wrongdoers and bring them to justice, it is always better to prevent wrongdoing. So that is why our 

examination staff, together with the NASD and the State of Florida, will soon be conducting a series of examinations of broker/dealers and advisors that lure seniors to attend sales seminars, many 

times at fancy hotels and restaurants with the promise of a free 

lunch. 

Our examiners will be looking at the firms that sponsor these 

seminars to see whether the sales seminars are supervised, whether the sales people are making wild claims of possible returns on 

an investment, and whether the risks that are inherent in any investment are being appropriately disclosed. 

Now while enforcement and inspection activities are important to 

stopping fraud and misleading sales practices, our best defense 

against fraud is an educated investor. The dominant theme of the 

SEC’s investor education materials is, ‘‘Investigate before you inVerDate 0ct 09 2002 15:49 Jul 25, 2006 Jkt 000000 PO 00000 Frm 00067 Fmt 6633 Sfmt 6633 H:\DOCS\28187.TXT SAGING1 PsN: JOYCE
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vest.’’ We encourage individuals to ask questions and fully understand any investment before purchasing. 

We publish clear and concise explanations of some of the most 

complex products that are sold to a senior, such as variable annuities and equity indexed annuities. We also counsel investors to 

check out the background and credentials of any securities salesperson or financial professional. 

We stress that if a deal sounds too good to be true, it usually is. 

We don’t copyright any of our materials. We make them freely 

available in both Spanish and English. 

Now we know that many seniors and many children and caregivers of seniors are using the Internet to search for information 

on investing. That is why we recently created a page on our Web 

site specifically aimed at senior citizens. This page provides links 

to critical information on investments commonly marketed to seniors. It also warns against the dangers of listening to the sales 

pitches of cold callers. 

Senior citizens who want to know more can ask for a copy of our 

senior care package, which is a collection of our most popular brochures for seniors. 

In closing, I would like to thank this Committee for recognizing 

the importance of the commission’s efforts in helping our Nation’s 

seniors to rest more easily with their investment decisions. I appreciate your inviting me to speak on behalf of the commission, and 

I would be happy to answer any questions you may have. 

[The prepared statement of Ms. Wyderko follows:]

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Senator KOHL. Thank you, Ms. Wyderko. 

Ms. Struck, it seems that, in most cases, by the time your office 

receives a complaint, the senior’s investment money is long gone. 

What type of proactive investigations does your office undertake to 

detect potential scams before they go too far? 

Ms. STRUCK. Thank you, Senator Kohl, for the opportunity to answer these questions. 

We have an exam program that allows our examiners to go into 

the offices of securities professionals, and that is why in my testimony I stressed the importance of including certain products, such 

as variable annuities, as securities under our State laws. 

Because if we don’t have the authority to regulate the people 

selling those products, then we don’t have the ability to look at 

what is going on in their offices and make sure that the sales practices that they are engaging in with investors, including seniors, 

are fair and appropriate. 

In addition, we are engaged in a number of educational efforts. 

One of the newest ones that we are excited about, that Wisconsin 

has just signed on for, is in conjunction with the AARP, and that 

is called the Campaign for Safe and Wise Investing. 

What that will do is to take members of our staff, as well as representatives of the AARP, into local communities throughout the 

State to meet in comfortable surroundings with investors to answer 

their questions and help provide education for them, tips on how 

to protect themselves when they are dealing with a financial professional. 

Senator KOHL. How often do senior victims of investment fraud 

recover the money that they lost? 

Ms. STRUCK. It is very rare, unfortunately, for investors ever to 

recover the money lost in an investment scheme. There are occasions where money has been recovered, but most times by the 

time—as in the situation that Mrs. Mitchell outlined or the case 

that I outlined, Kenneth Hackbarth, the pastor from Wisconsin—

once the money has been spent on a lavish lifestyle of the person 

collecting the money, it is too late, and there is nothing left to gain 

back for investors. 

Senator KOHL. Ms. Walter, disclosure of key information, such as 

fees and penalties, is an important way to protect seniors from unexpected losses. So how can we make it easier for seniors to receive 

the information they need to make informed decisions without 

overwhelming them with the piles of documents and legalese that 

so often——

Ms. WALTER. That is a very important question. The SEC currently has outstanding a proposal specifically with respect to mutual funds and certain other products, including variable annuities, 

to provide point of sale disclosure. That means short, to the point, 

plain English disclosure at the time or right before an investor actually makes a decision to invest that outlines those fees and penalties. 

NASD put together an industry task force of experts in both securities firms and mutual fund firms and has submitted comments 

and a task force report to the SEC strongly supporting that item. 

So that we put together a prototype disclosure document that includes disclosure of fees and expenses, and we also think it is imVerDate 0ct 09 2002 15:49 Jul 25, 2006 Jkt 000000 PO 00000 Frm 00075 Fmt 6633 Sfmt 6633 H:\DOCS\28187.TXT SAGING1 PsN: JOYCE
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portant to include short, to the point, plain English disclosure of 

the main features of an investment. 

I know that proposal is on the SEC’s agenda to move forward 

with this year. 

Senator KOHL. Ms. Walter, as we have learned today, making 

sure an investment is suitable for an investor’s specific situation is 

very important. How does NASD enforce the suitability rules it has 

in place for its member brokers and dealers? 

Ms. WALTER. There are a number of avenues. As you have heard, 

the States have an examination program. We have a national examination program, and it consists of two main parts. First, there 

are routine exams where we go in on a periodic basis and examine 

the firms, and the length of time between those exams is determined by the risk that firm presents based on a number of different factors. 

In addition, as I mentioned in my oral statement, we investigate 

or we review every single customer complaint we receive. So if a 

customer has a complaint, they can be assured that someone at 

NASD will be looking at that. 

We have sweeps, which, in addition to our normal exam program, 

target specific areas where we think that there may be a problem, 

whether there are specific types of conduct, specific lines of business, and specific products. 

When we bring enforcement actions, I certainly agree that it is 

all too rare that people get their money back. But we have made 

it a priority in our enforcement actions where there are specific victims that have been identified, if there is money, to order restitution so that when it is still available and hasn’t been absconded 

with, investors can perhaps get their money back through that vehicle as well. 

Senator KOHL. Thank you. 

Ms. Wyderko, just a few days ago, SEC Chairman Cox said that 

the agency is stepping up its efforts to protect elderly investors 

from fraud. Can you tell us a little bit more about what these efforts are? Aside from looking at sales seminars, what else will 

these new efforts focus on? 

Ms. WYDERKO. Our efforts are going to be focused on a doublebarreled approach. As Patty Struck said, we also believe that aggressive enforcement, coupled with aggressive investor education, 

is the best way to go. 

So our inspections folks will be working with other regulators, 

the NASD and the State securities regulators, to go look at seminars that are targeted to elderly Americans. I think that is a very 

important place to begin. We will also be looking at our enforcement cases and bringing them aggressively where appropriate. 

As Mr. Minkow said, we do see cases of affinity fraud, where 

fraudsters go into a community and bring together people with a 

certain attribute, whether it be a church affiliation or elderly people or some other affiliation, and they try and bilk them out of 

their savings in that fashion. So, we aggressively go after cases of 

Ponzi schemes like that, affinity frauds where we see them. 

We are also working with State securities regulators and others 

to disseminate investor education materials. This is very important 

71

to the extent we can get the word out to elderly Americans that 

it is OK to hang up on cold callers. 

We need to get out the word to empower Americans to ask how 

the securities salesperson is being paid, being compensated for a 

transaction. We need to get the word out that it is not embarrassing or inappropriate to ask questions about an investment opportunity that you don’t understand. 

In this way, we can empower Americans to protect themselves, 

which is really our best defense against fraud. 

Senator KOHL. Mr. Minkow from our first panel stated that investment scam artists aren’t really concerned about being caught 

because they know that regulatory and enforcement agencies are 

not focused on them and don’t have the resources that they need 

to do their jobs. What are your thoughts on the comments that he 

made? 

Ms. WYDERKO. I think we do have a lot of resources that we are 

bringing to this problem, and I will note for the record that he did 

go to prison. 

Senator KOHL. That is pretty definitive. [Laughter.] 

I would like to ask all three of you what is it about people who 

are in their senior years makes them more vulnerable to investment scam or, in fact, are they more vulnerable? Ms. Struck. 

Ms. STRUCK. It does seem that the older people get, the more vulnerable they become. While I am not a physician or a psychologist 

and I don’t understand why that happens, my friends and I talk 

about this all the time. 

I ran into a friend who is an insurance regulator a couple of 

weeks ago, and we were talking about just this question. She said, 

‘‘Patty, I don’t know what it is, but I am just so terrified that it 

is going to happen to my mother.’’ 

So while I can’t explain it, it is something on which all regulators, social scientists, journalists, and all reasonable people seem 

to agree. It happens as people get older. They just become more 

vulnerable. 

Senator KOHL. Hmm. Do you agree with that, Ms. Walter? 

Ms. WALTER. I do. Part of the reason is because older investors 

have gone through their wealth accumulation phase. So they probably have more funds available than they had at any other point 

in their lives. 

We certainly agree that we don’t have all the answers. That is 

one of the reasons that we have funded this WISE Seniors Services 

grant I mentioned earlier. 

They, with AARP, are going to do research to determine that, to 

try to determine if there is a specific fraud vulnerability profile, not 

only just being older, but who in particular do they target among 

the older citizens? So that we can target our educational efforts 

and perhaps our regulatory efforts as well to try to keep this from 

happening. 

Senator KOHL. It is interesting because you think of one of the 

profiles of older people is they become a little bit more cautious, 

more conservative, more careful. Yet you are suggesting that they 

are, Ms. Wyderko, more susceptible? 

Ms. WYDERKO. My theory is that our seniors in America grew up 

in a different culture. They grew up being taught that it was impoVerDate 0ct 09 2002 15:49 Jul 25, 2006 Jkt 000000 PO 00000 Frm 00077 Fmt 6633 Sfmt 6633 H:\DOCS\28187.TXT SAGING1 PsN: JOYCE
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lite to hang up on people. They grew up believing that if someone 

said they were your friend, in fact, they were your friend. 

I believe that they grew up in a more trusting era of our Nation’s 

history, and that as the rules—the culture has moved and the rules 

of the game have changed, that fraudsters are taking advantage of 

our seniors and their trusting, unwillingness to suspend their disbelief. 

Senator KOHL. To each of you, we have heard today about the 

issue of unregistered and unlicensed individuals selling unregistered securities. So what do you all think is the best way to address this problem? Ms. Struck. 

Ms. STRUCK. Just to underscore the most important message that 

we can deliver is this twofold way of addressing the problem. One 

is through aggressive enforcement as the NASD, the SEC, and 

State regulators bring to bear against this problem. We need to aggressively enforce our laws. 

The other way is through the programs that we have described 

today that reach out and actually have an impact on senior investors. 

Senator KOHL. Ms. Walter. 

Ms. WALTER. Come back to the basic point that I think we have 

all emphasized is that you need to know with whom you are dealing. The very first thing someone needs to do when they have located a potential advisor or financial consultant or someone is offering them a deal that may be too good to be true is to check out 

that person. 

You can do that through NASD, and you can do it through your 

State securities regulator. If, in fact, those systems come up 

blank—there is no registration, either at the State level or at the 

Federal level—that itself is a red flag. 

We really, through our educational efforts, have to encourage 

people to be very suspicious if they are dealing with someone who 

isn’t registered with a regulatory authority. 

Senator KOHL. Do you agree with that, Ms. Wyderko? 

Ms. WYDERKO. I do. I would add that we all need to redouble our 

efforts to get out the fundamental message that if an investment 

opportunity sounds too good to be true, it most definitely is too 

good to be true. 

We all need to work together to share enforcement tips and leads 

that we get. I know that we all keep data bases and share complaints from customers, and we need to be aggressive in following 

up on those. 

Senator KOHL. Well, we thank you all very much for being here 

today. Unfortunately, our Chairman, Gordon Smith, is stuck in a 

markup this morning, and he won’t have a chance to make it. 

Much work remains to be done, and I look forward to working 

with you to put an end to seniors losing their hard-earned retirement money to scams. As we have said today, we need to continue 

to educate seniors about the traps and the snares that they are facing. We also plan to work on common sense legislation that will 

tighten the rules regarding who is selling securities and how those 

securities are being sold. 

73

In addition, we will be working to ensure that enforcement and 

regulatory agencies have the resources and the training they need 

to combat investment fraud. 

So thank you so much for coming. I think you have added a lot 

to the discussion, and we look forward to working with you. 

This hearing is closed. 

[Whereupon, at 11:06 a.m., the committee was adjourned.] 

(75)

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Æ


28187.354