Adam Zoll: For Morningstar, I'm Adam Zoll. Financial fraud costs older Americans billions of dollars a year, and even those with financial smarts can become victims. Here to talk with me today via Skype is Doug Shadel. Doug is director of AARP Washington and author of the book, Outsmarting the Scam Artists . Doug, thanks for being here today. Doug Shadel: My pleasure. Zoll: Doug, when most people think of people who might become victimized by a financial scam artist, they probably think of someone who maybe is not terribly financially literate, someone who maybe is even gullible about financial matters, but your research has found that, that's not necessarily the case. Shadel: That's right. We did a study with the FINRA Foundation several years ago, and what we did was we surveyed known victims of investment fraud and compared their responses with just the general public. We had operated on the assumption that victims of fraud would be less financially literate if they would have less money. We found just the opposite to be the case, that actually victims of investment fraud are more financially literate than the general public. They tend to have higher levels of income, more assets, all the things that seem counterintuitive to the victim population. In subsequent studies, we have found that while the victims may be more financially literate, they're less persuasion literate. We can get into that if you want to, but we've done a lot of research on this whole business of how con men persuade. And I think that's part of the secret to why people who you'd think would not fall for it do fall for it. Zoll: Let's talk about that for a moment. When you say "persuasion literate," what exactly do you mean? Shadel: Well, we did a series of studies. The law enforcement gave us 500 undercover fraud tapes of various scam artists. What they do is when an older person in particular gets called by scam artists, if they fall once, they get hundreds of calls. What the investigators would do is have those calls forwarded to the investigator's desk, and when the phone rang the next time the scam artists would call, the investigators would pretend to be the elderly victim and tape record all the calls. Well, they gave us hundreds of these calls, and we transcribed them and coded them to see whether there are common persuasion tactics that are true for all of these different types of investment scams. And we found in fact that they were. The next step was to, say, expose victims to those and see whether they're more interested in them than the nonvictims, and that's what we found. So, for example, one of the persuasion tactics we call "phantom fixation." A phantom is something that you want, but you can't have and this is the most common tactic we found in all the fraud tapes, where they will dangle a 10-to-1 return or 5-to-1 risk-free return. Well, when we use those same statements and expose the victims, people we knew who have lost money to fraud, to those same persuasion tactics--the phantom claim--they show increased interest beyond what the general public would show even after they've been taken. So, this has given rise to us going out and doing a lot of talks where we say, "Here is the persuasion tactics that people use. If you see that coming from a distance, beware." Zoll: When you talk about these phantom persuasion tactics, are there certain types of investments that are particularly popular among scam artists for use? For example, gold has done phenomenally well recently. Is that something that might be subject to this phantom persuasion tactic? Shadel: Yes. I think gold uses fear, which I'll get to in a minute. They use phantom and fear, but the one that comes to my mind is oil and gas. "You can get a 10-to-1 return. We're doing more domestic production than ever." All of which is true. The best scam always has an element of truth to it. I've seen victim lists. When you think about an oil-and-gas scam, and people roll their eyes and say, "Who would fall for that?" So they drill a shallow well, then you give them $50,000, and they never find anything. But when you look at the list of victims of these types of scams, it meets like a Who's Who of American business: presidents of companies, heads of big law firms. And we suspect that part of the reason they fall for this is they're willing to delegate to somebody else, because they're very busy themselves, but they're also sort of really vulnerable to those emotional appeals. When we interviewed con men--one of the big myths, I think is that women are more emotional than men--the con men say just the opposite. Men can get on this big roller coaster, they're insecure, and they fall for greed a lot, which is the phantom fixation thing. And so, believe it or not, [oil and gas] is one that uses phantom the most. The gold coin scam is one that we're particularly worried about with our seniors though right now because any time there is a downturn in the economy, the sale of precious metals is the number-one scam out there, and these past three years have been no exception. You get bad guys who are advertising on radio stations that say, "You can't trust the stock market. What can you trust during periods of economic instability? You can trust precious metals." And then people will call in; sometimes they'll advertise on Christian radio stations. People will call in, and they'll already be in a state of fear, and then the people on the phone will just ramp up that fear by saying "You should invest all your money in gold." The particular genius of the scam, and there's a lot of companies doing this right now, is that you might buy say $10,000 worth of gold coins over the phone. You never see them, but you're in this state of fear, and so you do it anyway. And then you get these coins, and the con men say, "What are you going to do with them? You should put them in a safety deposit box in the bank and forget about them for five years." The problem is that they're marking them up 300%-500%, but you don't really know their value, and so you put these coins away and don't even know you've been taken. You received coins, so you don't think that you've been taken, but that's a huge scam that's out there right now. And the antidote to it, of course, is if you're interested in investing in precious metals, go to a local coin dealer, where you can actually go to a storefront and evaluate these things and touch and feel them. Zoll: You mentioned particular susceptibility of older Americans. What are some of the other factors? Does cognitive decline play a role in their susceptibility for these kinds of scams, as well? Shadel: Yeah. I think cognitive decline does play a role for some people in these scams. There was a recent study out of UCLA by a woman named Shelley Taylor, one of the top health psychologists in the country, in which she showed older and younger people images of trustworthy and untrustworthy faces. And they've done this a lot down there. So they have actual data that shows if you take the general public, this type of face people are going to say is untrustworthy and this type of face is trustworthy. The younger people were able to spot the trustworthy and the untrustworthy consistent with the general population, but the older people were not. They could spot a trustworthy face, but what others thought was untrustworthy, they thought was trustworthy. Then they put these same people into a scanner and tried to identify what was going on in the brain when they made these evaluations, and the part of the brain that is connected or implicated with this trust simply didn't light up in the older people. This is some of the first physiological neural scientific evidence we have that there might be actual physiological factors at play here for why people fall for fraud, which is pretty interesting. Zoll: Doug, let's talk about ways that people can defend themselves from financial fraud and to be on guard for it. Are there certain words, approaches, or techniques that should be an immediate red flag for somebody who is approached about an investment opportunity and maybe is not on the up and up? Shadel: Yes, there absolutely is. The whole premise of our prevention program is if you can see malicious persuasion attempts coming from a distance, you're much better able to defend against it. And because these scammers change the way they operate all the time, that's precisely why we did the tape analysis I was describing earlier where we analyzed what are the tactics that are common for all of these scams. I mentioned phantom fixation, dangling wealth that everybody wants but can't have. But another one is source credibility. So you might get a lot of claims saying," Bill Gates and Warren Buffett are the people who are investing in this the most." They make mention of the names of big banks. Con men want to wrap a cloak of legitimacy around your operation, especially if it's not legitimate, to make it more believable. Another tactic that we found that's common in these scam operations is something called social proof, where you'll have claims that everybody's doing it, that there's a line around the block. Remember the old Charles Ponzi clippings from The Boston Globe , back 80 years ago now, where there was a line around the block. Well that was a Ponzi scheme. That was one the first Ponzi schemes. We have this automatic thing in our head that says, "If everybody's doing something, then it must be good." A lot of these persuasion tactics that we've identified are true in all advertising. So the question becomes, how do you sort out legitimate use of these persuasion tactics from illegitimate use? We've done these partnerships with FINRA, the SEC, and local state regulators, and they all say the same thing: Before you make an investment, regardless of the claim you're hearing, you have to do two things. The first thing you have to do is ask for their registration number. In order to sell investments, in any state, you have to be registered with the state's securities division, and you have to be registered with FINRA. So they have to have a registration number. The second thing you have to make sure of is that the investment that they're selling is also registered. So both the broker calling you and the investment itself have to be registered. And the second piece of advice is you have to check. Don't just take their word for it. I interviewed a con man, who's in the book, Outsmarting the Scam Artists , that we published last year, and he said, "All the time people would say, 'Are you registered with the SEC?' And I would always have the same response, which is of course, 'I'm registered with the SEC and the minute you get off this phone I want you to call the SEC and verify that I'm registered. Here's my full name and everything.'" I said to him, "Well, but you weren't registered because you're a con man." And he says, "98% of the time they're not going to check. They just want to hear me say that I'm registered." People don't check. He had this whole litany of how victims are different than nonvictims. Victims don't ask a lot of questions, they answer a lot of questions. Victims don't look for why the offer is a scam, they look for why it's legitimate, and the most important thing he said was, victims--I guess he called them buyers, that's what he means--victims aren't readers, and readers aren't victims. But what does he mean by that? They don't read the paperwork. They want you to tell them what it says. Well that's another big clue about how you're going to avoid these scams: Be a reader, so that you won't be a victim. Zoll: What about financial fraud that takes place between people who're familiar with each other; maybe close friends, even relatives? How can people be on guard for something like that? That's obviously a very touchy subject. Shadel: Well it really is, and it reminds me of one of the central things that the con men have said in the past, is they want to get people under the ether. They understand that older people in particular are more susceptible. They wear their emotions on their sleeve, more closer to the surface. I think this is why a lot of the scams that involve relatives are so hard to stop because it's embroiled in all of that emotion from a lifetime of growing up together and so forth. You don't want to say, "Gee, you can't trust anyone, you can't even trust your son or daughter who might be trying to steal from you," But it is worth noting that over half of the victimization that goes on in the financial-exploitation arena is done by somebody who has some kind of a fiduciary relationship to you or some kind of a familiar relationship. If you don't have that kind of familiar relationship, the broker will try and get it. I remember working on a case, we did a video about a guy who lost everything he had to his broker, and he had this broker for 25 years. This broker had gone to his daughter's wedding, and her high school graduation. He knew this guy for a long period of time. What had happened is that the recession hit and all of a sudden this broker who had been trustworthy, started selling away. That is, he started selling bogus investments that would pay him a higher commission and the guy didn't check. This brings us back to the prevention tip, right. Yes, your broker is registered, you trust him, but are the investments he's bringing to you also registered? If [this investor had] just done that one step, you wouldn't have been taken. Zoll: In the age of Bernie Madoff, and other scandals that we've seen, maybe people are a little bit more aware of the bad things that can happen even in a trusting relationship these days. Shadel: I think that's right, and in the Bernie Madoff case there were an awful lot of people who invested in that completely blind based on their familiar relationships with others who had invested in it. And all they had to do was really ask one question beyond the registration question, which is: "What are you investing in? It gives you exactly a 12% return every month. What is it you're investing in?" A lot of people couldn't answer that question. So that's another important thing about investing: understanding what you're investing in or having a trusted broker who can explain it to you. Zoll: Well, I think that's good advice for anyone to take. Doug, thanks for taking the time today to talk to us about financial fraud of the elderly. Shadel: My pleasure. Zoll: For Morningstar, I'm Adam Zoll.