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The Hidden Dangers in IRAs
Wall Street Journal - May 2010
Is there a Ponzi scheme lurking in your IRA?
That may sound like a bizarre question. But in recent years, a number of well-off professionals and their families have been ensnared in frauds that prey on individual retirement accounts, according to securities lawyers and firms that manage these accounts.
The vehicle typically targeted by such schemes is a self-directed IRA—a type of retirement account that enables the owner to pursue a variety of investments outside the scope of stocks, bonds and mutual funds. Self-directed IRAs are often used to hold hard assets like land, and alternative investments such as hedge funds and so-called private placements. (Private placements are securities sold without a public offering, typically to a small group of investors.) Essentially, you are allowed to invest in anything except life insurance or collectibles.
Self-directed IRAs, which make up a minuscule share of the overall IRA market, are perfectly legitimate vehicles, and the rules governing them are basically the same as for traditional IRAs. But few large investment companies or banks will set up such accounts because of their complexity. Instead, you'll need to find one of the custodial or administrative firms that specialize in handling self-directed IRAs, such as Entrust Group in Reno, Nev., which says it blocks investments that it knows are under investigation by securities regulators.
Costs typically include an annual custodial fee and transaction fees, ranging from $50 to a few thousand dollars a year, depending on assets and activity. Some lawyers, accountants and consultants will set up and maintain self-directed IRAs as well, often charging higher fees. Some bank trust departments, particularly those at community banks, also handle the accounts.
Yet self-directed IRAs can be much trickier to handle than plain-vanilla retirement accounts, accountants and tax lawyers say. One of the most-common traps is "self dealing." Investors aren't supposed to benefit from the investment before they start making withdrawals in retirement. That means any profits they make from an IRA investment must go to the IRA and not another account—a stipulation that often trips people up and could disqualify the entire IRA. Also, if you use an IRA asset to buy an asset you currently use, such as a vacation home or a condo for a child in college, it could be a tax-law violation.
Given that self-directed IRAs can hold almost any type of asset, they can also make it easier for ordinary investors to get burned. Faye Albert, a 67-year-old actuary in Miami, says she moved two IRAs and a pension account to self-directed IRAs at a Connecticut bank at the urging of a colleague and fellow actuary. Ms. Albert says the actuary pooled Ms. Albert's savings—which eventually totaled some $1 million—with other assets to invest in what proved to be the Ponzi scheme run by Bernard Madoff.
Ms. Albert says that she thought the bank, Connecticut Community Bank in Westport, Conn., was holding her Madoff-invested assets in her account since it was charging her custodial fees. She learned in late 2008 that it wasn't. "I thought my money was doing well, so I wasn't really following the details," she says.
Ms. Albert filed a lawsuit last November against the bank in U.S. District Court in New Haven, Conn., accusing it of negligence, breaching its fiduciary duty, and aiding and abetting fraud, among other allegations. The bank has denied the allegations in a court filing, and its attorney declined to comment further. In April, Connecticut's attorney general filed a suit against the bank, saying it had "aided and abetted" Mr. Madoff's Ponzi scheme and failed to verify Mr. Madoff's investments. The bank denies the allegations and says it will "vigorously defend the lawsuit."
In cases of fraud that start with self-directed IRAs, there are typically no real investments backing the private placement, so the scheme eventually falls apart, says Pat Huddleston, a former Securities and Exchange Commission attorney in Atlanta who serves as a court-appointed receiver in such cases.
Hugh Bromma, chief executive of Entrust Group, says this happened recently to his own 78-year-old mother-in-law. She recently lost $40,000 in an IRA investment that turned out to be a Ponzi scheme. She thought she had placed the money in a certificate of deposit, but the paperwork turned out to be "a copy of a certificate you could buy at the drugstore," Mr. Bromma says. "It said it was an FDIC-insured deposit at NationsBank, which hasn't existed for years, of course." The fraud came to light only after the alleged perpetrator died in January.
He recommends that investors concentrate on learning about the underlying investment, rather than focusing on the promised return. "Find out if it's a security or not, and if not, why not," Mr. Bromma says. "Find out what you're actually investing in. Can I touch it? Is there a physical address? Where can I find out more about it?"
After learning of the fraud, he says he has tried, with limited success, to analyze his mother-in-law's other investments. "It's like pulling teeth," Mr. Bromma says. "She says she trusted this guy for 20 years with her assets and doesn't want her children knowing her business." He says she bought an annuity through the same adviser—but instead of paying interest only, as she thought, it is returning interest and principal each year, which means it will be worthless at the end of its term.
Mr. Huddleston, who has started a sideline business that performs background checks on investment advisers, recommends starting the conversation about investments with your parents by asking them if they would tell you if they thought someone was trying to take advantage of you.
"Of course they'll say yes," he says, "because they don't want you to get hurt. So then you can say you appreciate that, and it gives you a chance to ask if you can do the same for them."
Out of Retreat: Private Equity Investors To Boost Real Estate Allocations in 2010
National Real Estate Investor, February 8, 2010
By: Ben Johnson
What did private equity investors, including huge institutional players such as pension funds, learn most from the recent collapse in commercial real estate values? They want more of the asset class.
A new study of 90 global private equity real estate investors by London-based researcher Preqin confirms that instead of fleeing to the hills, institutional investors intend to commit more capital to private equity real estate funds in 2010 than they did in 2009. And surprisingly, none of the participants in the survey conducted in the fourth quarter of 2009 has abandoned commercial real estate.
In fact, 41% of investors plan to increase their investment in the sector, while 29% expect to invest less than last year. Another 15% say that they will maintain their allocations, and the remaining 15% are unsure as they await the bottom of the market and recalibrate their strategies accordingly.