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Ed and Ruthann Wolfe just wanted a safe place for their retirement savings. During his 32 years at the Rubbermaid plant in Wooster, Ohio, Ed had amassed more than $320,000 in his 401(k), all of it invested in low-risk Fidelity mutual funds.
After Newell bought Rubbermaid in 1999, early-retirement offers were made to more than 180 plant employees, including Ed, then 55. Around the same time, many of his colleagues began attending investing seminars hosted by a Merrill Lynch broker, who was telling investors they could earn more money if they retired than if they stayed on the job.
"There was a buzz going around the shop about how good this could be," Ed recalls. "We thought we couldn't afford not to do it."
The Wolfes turned over their entire $320,000 in retirement savings to the broker, with instructions to keep their money in low-risk investments because they needed to start making withdrawals right away. So they weren't concerned when the stock market tumbled in 2001.
Then they began hearing from friends whose investments had declined in value. Ruthann called the broker and was shocked to find out that they'd have to stop withdrawing money or would go broke. Their retirement stash, which the broker had invested in high-risk Internet and tech companies, had plunged to less than $100,000.
"I felt it could be the end of the world," says Ed, who went back to work driving trucks for two and a half years.
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Cases similar to that of Rubbermaid's retirees have been cropping up across the country. "In the past two years, we've had about 100 formal disciplinary actions involving seniors," says Mary Schapiro, the chief executive of the Financial Industry Regulatory Authority, or FINRA, which oversees U.S. securities firms.
In one high-profile case settled last summer, the National Association of Securities Dealers (FINRA's predecessor) fined Citigroup Global Markets $3 million and ordered the company to pay $12.2 million to more than 200 former employees of BellSouth. The regulators said Citigroup had failed to adequately supervise brokers based in Charlotte, N.C., who used misleading sales materials -- promising 12% annual returns -- during dozens of seminars for BellSouth employees from 1994 to 2002. Instead, more than $12 million in former employees' accounts evaporated during the 2000-02 bear market.
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"These are people who were persuaded to take retirement early -- who didn't have to and probably shouldn't have -- based on these misrepresentations," says James Shorris of FINRA's enforcement division. Citigroup says it is "working on all fronts to prevent a similar situation from occurring again."
Baby boomers nearing retirement, and their parents, make irresistible targets for this kind of scam. "When you're looking at $16 trillion in retirement accounts changing hands in the next 15 to 20 years, that's a big market share for anybody," says Alabama Securities Commission Director Joseph Borg. In a sweep of "free lunch" financial seminars, the Securities and Exchange Commission found unethical business practices in nearly half. In addition to promises of over-the-top investment returns, the most common scams include Ponzi schemes and sales of unsuitable annuities.
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Retirees are vulnerable because they're looking for ways to stretch their income. Plus, many seniors are hesitant to ask questions, consult with their children or complain to regulators.
"A lot of people think they'll lose their independence if they admit they were taken advantage of," says Barry Lanier, the chief of the bureau of investigations for the Florida Department of Financial Services. When FINRA surveyed senior investors last year, only 56% of the victims who admitted being defrauded said they had reported the incident.
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