Investment fraud perpetrated against seniors is a persistent problem. In its 2015 Enforcement Report, the North American Securities Administrators Association (NASAA) reported that affinity fraud and unregistered securities scams disproportionately affect seniors.

The report, which includes responses from 49 jurisdictions in the United States, indicated that seniors were targeted in one-quarter of the enforcement actions taken in 2014 by states that track victims by age. Since 2008, when NASAA began collecting data from state securities agencies that track victims by age, one-third of all enforcement actions taken by state securities regulators involved senior victims.

Scams, schemes, or unsuitable investments that are often pitched to seniors include:

Affinity Fraud. Churches, community organizations, retirement communities – all are fertile ground for affinity fraud, where a con artist exploits an affiliation with a group as a way to win an investor’s confidence. A fraudulent investment scheme often spreads quickly among members of the group. Besides ensnaring members of the group, an affinity fraud can extend to trusting family members and friends.

Affinity fraud can turn into a Ponzi scheme, where early investors may – but not always – received their promised returns with the money coming from later investors in the fraud. The fraudster may be a member of the group or may just pretend to be. Rather than trusting a person or company due to a common affiliation, investors should seek further information about the investment from an unbiased, independent source and review both the promises and risks.

Promissory Notes and High-Yield Investment Programs. Low yields on safe and secure products such as certificates of deposit and money market accounts have prompted some investors to look at alternative sources of income. A promissory note is basically an IOU from a company or individual. The notes are sold to fund everything from property development to oil and gas exploration, or as a way to buy interests in a business partnership.

Sophisticated investors and corporations are likely to have the resources and expertise to evaluate the terms and conditions of promissory notes. Individual investors may not have the skill to evaluate the creditworthiness or prospects of a project that is supposed to generate enough revenue to pay the promised return on the notes.

Life Settlement Contracts are complex financial arrangements in which a company sells a third-party’s life insurance policy to an investor. The investor receives an interest in the death benefits, and the benefits are paid to the investor when the third party dies. Risks abound:

  • You will not have access to your principal or any returns until after the insured person dies.
  • Returns can’t be guaranteed because there’s no way to reliably predict when a person will die.
  • Investors face steep fees and costs, including commissions to salespeople.
  • Policy premiums must continue to be paid on the policy until the insured individual dies. An investor may have to pay more in premiums than expected. If the premiums aren’t paid, an investor risks losing some, or all, of the principal.

Before you invest in a life settlement, it is critical that you understand the risks involved:

  • A life settlement is not a liquid investment. You will have zero access to your invested principal or earned gains until after the insured person dies.
  • It’s impossible for a broker to guarantee you a certain return on a life settlement because there’s no way to reliably predict an individual’s actual life span. In fact, improved medical treatments further increase the difficulty of making an accurate prediction.
  • Policy premiums must continue to be paid on the policy until the insured individual dies. Before you invest, determine who will be responsible for paying these premiums, what guarantees are in place, and whether there is a possibility you’ll have to invest more money. If the premiums are prepaid, find out who will be responsible for making the premium payments if the insured person lives beyond his or her life expectancy. If policy premiums are not paid, you risk losing some, or all, of your investment.
  • The life insurance policy may still be in the “contestable” period. A policy that is in the contestable period is less than two years old. Insurance companies may refuse to pay death benefits related to policies in the contestable period for various reasons.
  • If the policy in question is a term life policy, an insurance company will not pay the death benefit if the insured outlives the term period of the policy.

Private Placement Offerings are used to raise capital without having to comply with the registration requirements of securities laws. The exemption from registration allows companies to raise an unlimited amount of money, but only from investors who meet the definition of "accredited" -- net worth of $1 million, excluding the value of the primary residence, or annual income of $200,000 or more. Companies raising money through private placements often have a limited operating history, however, and the investments themselves generally lack transparency.

In a report by NASAA's Enforcement Division, state regulators said private placements were among the most common products or schemes leading to enforcement actions.

Changes in federal law have lifted the ban on general solicitation of investors in private offerings. The offerings can now be advertised on the Internet, in publications, and through free dinner seminars, telemarketing, cold-calling – you name it. The offerings can still only accept funds from accredited individuals, but investors should be careful they’re not putting money into an unlawful private placement or dealing with a promoter who isn’t verifying the accredited status of investors.