Tackling investment fraud against seniors; cracking down on equity-index annuities

Regulators and politicians seem to be paying a lot more attention these days to the problem of investment fraud involving seniors.

Should federal securities law have higher penalties when the those who violate the law prey on older people? That's what U.S. Sens. Herb Kohl and Bob Casey think. Here's a press release about their bill, which would add $50,000 to civil fines when securities law violations involve someone 62 or older. Of course, there has to actually be a federal investigation for that to apply and the perpetrator has to have some money to pay the fine.

The SEC also is looking more closely at one one of the biggest problems: the sale of equity-index annuities. The commission has proposed this rule, which would classify many of these annuities as securities, subject to securities regulation. These annuities are highly complex products with lengthy surrender penalties and are a subject of frequent investor complaints.

Kohl also is concerned about the use of misleading designations that create the appearance of adviser competency even though they involve very little work. He previously introduced the Senior Investor Protection Act (S2794), which involves grants to states to reduce fraudulent and misleading investment marketing to seniors.

It's time to rein in credit card abuses

The Federal Reserve and Congress are finally taking a look at the way credit card issuers abuse consumers, from jacking up interest rates without provocation to questionable billing practices. My column this week is about the reform effort. If you want to read more, see the Federal Reserve proposal and some information about HR 5244.

Here are comments the Federal Reserve has received.

New bills in the bankruptcy court add up to more than $5-million

Lawyers and accountants working on the Lou Pearlman and Trans Continental bankruptcy cases have submitted bills for more than $5-million, including $4.6-million filed yesterday. It covers more than a year's worth of work for some of them, but it's more than the entire $4-million or so that trustee Soneet Kapila has recovered to date. Pearlman has admitted stealing $300-million from banks and investors and been sentenced to 25 years in prison.

"I'm going to propose to the court that we hold back a substantial reserve of cash in the estate and then the balance used to pay the fees on a pro rata basis," Kapila said. "We're not going to pay the entire $5-million."

Kapila said waiting so long (the bankruptcy case started in March 2007) was a conscious decision. "We wanted to make sure that we had done enough work to demonstrate that the work wasn't wasted, it was necessary and we were able to show some results." The bills do not include anything for his own time, he said. As a trustee, he could, with court approval, receive up to 3% of the assets recovered. He said the accountants and lawyers working on the case should be paid something now because they are incurring major epenses for salaries and overhead. "It's a major financing burden to everyone who's working on the case."

Kapila and his team are still working on asset recovery, currently focused on litigation. Lawsuits have been and will be filed against people who received money from Pearlman and his companies. Pearlman himself is also expected to assist in recovery. However, Kapila said his efforts to set up a meeting with Pearlman since the sentencing have not been successful. 

Here's a rundown on the new bills: Akerman Senterfitt, $1.9-million; Kapila & Co., $1-million; Genovese Battista, $707,589; Schultz & Braun (Germany), $519,082; J.H. Cohn, $231,959; Pachulski Stang, $181,461. The banks that launched the bankruptcy case previously filed this request for $539,593 in fees (which has not been paid).

A hearing on the fees will be July 16 (the same day as the restitution hearing).

I have posted a lengthy comment from Lawrence Rifken, chairman of the unsecured creditors' committee.

Friday's St. Petersburg Times story.

How can I legally reduce my income?

Q: My children attend private school on a scholarship based on our family’s low income. I recently got a part-time job making $8,000 a year that will put me $4,000 over the limit if I keep it all year. I need to find a legal way not to count my income. Can you help?
A: You could reduce the adjusted gross income on your tax return by contributing that $4,000 to a deductible IRA. Or, put it into a flexible spending account for medical or child care expenses if your employer offers one (Caution: you would lose any money you had not spent on qualifying expenses during the year.)
But before you do anything, take a close look at the school’s financial aid form. It might require you to add IRA and flexible spending account contributions to your adjusted gross income.

Here's help acing job interviews

Monty Montgomery, who was one of Lou Pearlman's scam victims, has a soft spot in his heart for job seekers. He has put together a detailed 60-page workbook designed to help people prepare for and ace job interviews. He calls it "How to Pass Job Interviews: 7 Essential Skills You Can Use Step-byStep to Succeed at One of Life's Toughest Challenges." He will email it to you for free as an attachment if you send him an email (PassInterviews@yahoo.com). This would be a great workbook to use with a class or support group of job seekers who could encourage each other.

It's the first of several publications Monty plans to offer through a Web site on the "ABCDs of Life".

Best wishes to Monty on this new endeavor.

Criminal investigation shifting focus

Lou Pearlman has been sentenced to 25 years in prison and will be relocating sometime this summer to the new residence the Bureau of Prisons selects for him. Some posters on this blog have expressed the opinion that the criminal investigation is about to wrap up. That is wrong.

"Now we can focus on the others," Roger Handberg told me this week. Often, all co-conspirators will be tried in one large trial. Handberg, chief assistant U.S. attorney in Orlando, said Pearlman's case was handled first so it wouldn't be delayed by issues concerning the other defendants. He said it's too early to say whether Pearlman will be called upon to testify in any of the other cases. Many Pearlman associates, including sales agents, are under scrutiny. In fact, there's an FBI office in suburban Orlando containing open boxes of files with the names of sales agents on them. Does that mean all the agents will face charges? No. But it does mean that it's way too early to include that anybody's off the hook just because no charges have been filed.

Is there a gift tax on real estate I give my children?

Q: Is a real estate transfer to my children while I am still alive subject to gift, estate or inheritance tax?

A: The transfer is subject to gift tax reporting, but probably not to any tax. Here's how it works: Each year you can give up to $12,000 per person ($24,000 for you and your spouse if married) that will be excluded from gift tax calculations. The amount by which gifts exceed the $12,000 is subject to reporting. However, there is no tax until all the gifts reported in your lifetime add up to more than $1-million. These reported gifts reduce your estate tax exclusion when you die. Whether you have any reason to be concerned depends on the overall size of your estate. For example, if you die this year, the exclusion is $2-million. If the property you gave away was worth $100,000, your exclusion would be reduced to $1.9-million. Only the amount above that would be subject to estate tax.

Note: Congress, in its wisdom has chosen to vary the estate tax exclusion from year to year. The estate tax is scheduled to go away in 2010 and return in 2011, but Congress will no doubt do some tinkering before then.

Here's how the restitution order will work

According to Roger Handberg, victims' names and the amount of resitution Lou is to be ordered to pay each of them will be part of the restitution order Judge Sharp will be asked to sign July 16. It is not certain whether this list will be available before the hearing, but I will post it when it is available. Roger said it will not include any personal information about the victims.

Restitution amounts are being determined by reconciling victim statements with the records Trans Continental maintained. Check your EISA statement for cash in and cash out amounts. Restitution will be cash in minus cash out. Some investors (mainly long-time investors) will not be eligible for resitution because over the years they have received more from the program than they put in. Here are a few examples, based on my understanding of how it will work:

You invested $100,000 and over the years, your account grew to $125,000 because of interest, which you did not withdraw. Your account balance was $125,000. Your restitution amount: $100,000.

You invested $100,000 and over the years, you received $25,000 in interest, which was paid out to you. Your account balance was $100,000. Your restitution amount: $75,000.

You invested $100,000, but withdrew $25,000 a few years ago. Then your account grew back to $100,000 with interest. Your restitution amount: $75,000.

You invested $100,000 and over the years you have received interest payments and checks of $100,000 or more, but your account still showed a balance of $25,000. Your restitution amount: 0.

Keep in mind that just because the judge orders restitution does not mean that anyone will receive a dime.

Could your home help finance your retirement?

Reverse mortgages are a hot financial product these days, mainly because mortgage lenders and brokers see them as a way to revive their flagging business. However, they actually are a great financial tool under the right circumstances, as I wrote about today.  Quite simply, they are a way that older homeowners (62 and up) can tap the equity in their homes for living expenses without having to pay the money back so long as they remain in the home. If that sounds like something that interests you, read my story and check out these great pamphlets

Home Made Money from AARP

Money from Home from Fannie Mae

Donor-advised funds can be a great way to give

The fastest-growing forms of philanthropy is the donor-advised fund. These funds grew 25 percent last year, to $23.3-billion, according to a survey by the Chronicle of Philanthropy. The funds serve as conduits between donors and the charities they want to support. Why would you need one? Largely for the tax advantages, particularly if you want to use appreciated real estate, securities or an interest in a business to make your charitable contribution. Say you've got a piece of property you bought for $100,000 and you're going to sell for $500,000 and you'd like to give $100,000 of the proceeds to charity. You can give the donor-advised fund a one-fifth interest in the property before you sell it, avoiding capital gains on that amount. When you sell the property, the fund gets the $100,000 and you get the charitable deduction. The fund then holds the money until you instruct it to parcel it out to the charities of your choice. You could, for example, use it to pay $10,000 a year to your church for the next 10 years. Typically the fund would invest the money and as it grew, you would have even more to give to charity. It's a slick concept.

Tampa Bay donor-advised funds include the Community Foundation of Tampa Bay, Raymond James Charitable Endowment Fund, Pinellas Community Foundation and Christian Legacy Foundation. 

Americans are spending their retirement savings

This shouldn't come as much of a surprise: Rising food and energy costs are crimping Americans' savings for retirement. Overall, 55% of households said they've cut back on retirement savings because of higher prices, according to a survey the brokerage Edward Jones recently released. The percentage was highest among households with less than $50,000 income, women, young adults and African Americans.

What's that restitution hearing about?

Victims recently received notices from the U.S. attorney's office regarding a restitution hearing set for July 16 at 9 a.m. Here's the scoop: When Pearlman was sentenced, prosecutors said they had not yet had time to compile the total amount that Pearlman's victims had lost. Judge Sharp's response was to defer the restitution part of the sentence until July 16 and to keep Pearlman in the Orange County Jail until then. I expect that the amount of restitution ordered will be the investments or loans minus any interest payments received. The U.S. attorney's office will compile the list and Lou and his lawyer will have the opportunity to look it over and challenge anything they think is inaccurate. Then on the 16th, the judge will enter the restitution order. I doubt that the hearing will be particularly interesting, but I could be wrong.

Unfortunately, the judge ordering restitution doesn't make any more money available to actually pay it.

Don't miss out on your stimulus check from the IRS

The IRS says 405,968 Floridians who may be eligible for a $300 or $600 economic stimulus payment still haven't filed for it. That's 29% of the potential filers. Who are those people? Social Security recipients and disabled veterans who don't normally file a tax return.

The IRS announced a new program today to reach out to them. Nationwide, about $5.2-million potential filers are unaccounted for, or about 26% of filers.  Here's a state-by-state breakdown. The potential filers list includes 14,662 in Tampa, 11,605 in St. Petersburg, 4,817 in Clearwater and 3,474 in New Port Richey. Click here for the IRS' complete report on Florida cities. Most of those who did not file have not filed a tax return in for at least the past three years. As a result, the IRS says they may not be aware that they need to file a return to get a stimulus check.

You must file by Oct. 15 to receive a stimulus payment this year. Get a Form 1040A here.

The outreach initiative will partner with state and local governments and gruops such as AARP, National Council on Aging, United Way of America and National Disabilty Institute.

Still looking for your check? Here's the payment schedule for returns that were processed by April 15. The intial wave of direct deposit rebates in May went to people who had a direct deposit REFUND on their tax returns. I've heard from many people who mistakenly thought that just because their Social Security check is direct deposit that their rebate would be in the first wave of those delivered.

Questions? Call the IRS toll-free at 866-234-2942.

Lou Pearlman bling sells for $17,750

Yesterday's auction of Lou Pearlman's watches and other jewelry brought $17,750. However, bankruptcy trustee Soneet Kapila chose to pull many of the personalized items from the auction. He said that after looking over the crowd of bidders, he decided the Lou Pearlman memorabilia would bring more on eBay. Expect to see some of those items listed in the future. The most expensive item sold Monday was a diamond-studded Rolex Oyster watch, which brought $7,200. Here's the complete list.  Note that auctioneer Harry Stampler, who conducted the auction at Church Street Station a year ago was one of the winning bidders.

Worried about identity theft? Read what one reporter did in a data breach

Fellow Gator grad Leslie McFadden was among more than 11,300 University of Florida students (current and former) to have their personal information posted online for several years without password protection. The security breach was recently discovered, although there is no evidence anyone took advantage of it.

McFadden, who writes for Bankrate.com, decided to take steps to protect her credit just in case any thieves might have used the unprotected information (including her Social Security number) to steal her identity. Here she describes what happened and what she did. It makes very interesting reading. I would not have taken the drastic step of freezing my credit without some evidence that someone was using or trying to use my credit. However, anyone who has been the victim of a data breach should become more dilligent about regularly checking his or her credit reports. They're available from each of the three major credit bureaus once a year. You can check one every four months on a rotating basis.

Help! My annuity paid zero interest last year

Q: I went to a seniors seminar on investing and bought an annuity from Alliance, and put it in S&P 500. This year I received no interest on my money. Is there a way that I can get out of this annuity? And should I put my money in another annuity?  I am a single 67 year old woman and other than Social Security, I have no other income.

A: Your annuity contract will describe the rules for getting out of your annuity and the price for doing so. Many annuities have a surrender charge that extends for five or six years or even longer. The charge declines as you get closer to the end of the penalty period. However, you usually can take a certain percentage of your money out each year without penalty. You will have to decide whether getting out is worth paying the penalty.

My opinion: It is NEVER a good idea to put all your money in any one investment, whether it's the Standard & Poor's 500 Index or a jumbo CD and it is NEVER a good idea for a retiree to buy a variable annuity with a surrender charge. An exchange for a better, lower-cost annuity can be appropriate if you don't want to cash out because of a big built-up tax liability. However, it doesn't sound as though that's your situation. If you decide to stick with your annuity, you should diversify your investments so you don't have everything riding on the S&P 500 index. 

The great debate continues: Indexing yes or no?

You can't beat the low costs of index funds, but you can beat their performance....if you're lucky and pick the right funds. Index funds simply aim to replicate the performance of a particular index, such as the Standard & Poor's 500 Index. When the index goes up, so do they. And when it goes down...well, that's the problem. Many investors are convinced they can beat the indexes if they choose the right active money manager, so they keep trying. That's the triumph of hope over experience, Vanguard Funds founder Jack Bogle, the father of index investing, once told me in an interview.

St. Petersburg Times readers include investors on both sides of the fence, avid indexers and proponents of active management. Here's what some of them had to say.

My column today is about a very active approach to investing--trying to pick the hot IPOs (initial public offerings). Scott Sweet of Lutz has been doing it for 25 years and now runs IPO Boutique.

How do I transfer real estate to my kids?

Q: I have property in South Carolina that I would like to do a quick deed to children in New York.  How do I go about doing that?

A: Assuming that you own the property, you should give them a warranty deed, which needs to be recorded with the register of deeds in the appropriate county. Deeds must meet specific legal requirements, which you can read here. I recommend contacting a title company in the county where the property is located to assist you with the transfer. If it has a branch office in the area where you live, that will make the transaction even easier. Your children should get title insurance as part of the transaction to be sure they have a clear title.  A "quitclaim" deed is not recommended in a situation like this.

When you give property to someone else, you also give them your tax basis. If they sell, they will owe capital gains tax on the gain since you bought it. On the other hand, if you leave the property to them at your death, they will get a stepped-up basis in value to the date at your death.

Are debt woes hurting your health?

People who say they are stressed out about debt are more likely to have health problems, according to a new Associated Press-AOL Health Poll. The findings:

*27 percent had ulcers or digestive tract problems.

• 44 percent had migraines or other headaches.

• 29 percent suffered severe anxiety.

• 23 percent had severe depression.

• 51 percent had muscle tension, such as lower back pain.

Here's another reason to to live beneath your means, keep an emergency fund and pay off your credit card bills every month.

He's got a great business plan....or at least that's what investors thought

Rodney James is cooling his heels in the Lee County Jail and investors are once again kicking themselves for trusting a smooth-talking entrepreneur. He was charged last week with grand theft, fraud, money laundering and sale of unregistered securities in connection with nearly $2-million in investments. James talked up a grand plan for opening a chain of restaurants in Arizona, Missouri and Florida. He solicited money and gave investors stock certificates or promissory notes. A few restaurants were actually opened, but are now closed, but land was never bought or leased for most of them. Instead, the sheriff's department says James spent the money funding his own lifestyle. (Read the story in the  Lehigh Acres Citizen.) 

I'm always amazed that people are so willing to hand over money to fund other people's private business ventures. Even legitimate startups have a high failure rate, so making that type of investment is a huge risk. 

[Photo Credit: Lee County Sheriff's Department]

Are you seeing any signs of hope for the economy

Friday was one depressing day for the economy--oil prices up, stock prices down and unemployment getting worse, in large part because people who've been out of the job market are trying to get in. Yet there are a few signs of hope if you look for them. That's what Times readers told me when I asked. Foreclosed houses selling, tourist living it up at Disney World. What's your take?

Chapter 13 spells relief for some

Bankruptcy filings are growing again thanks to the downturn in the economy and greater awareness that the reforms of 2005 didn't actually eliminate bankruptcy. Filings fell off a cliff after the law changed to make bankruptcy more complicated. However, it's still available for many people who need it. My column Sunday delves into one filing option--Chapter 13. That's a repayment plan that can last up to five years and allow you to catch up if you've gotten behind on house or car payments and want to stave off forecosure or repossession. In some circumstances, it can be the best way to handle a bad situation. Here's one place to read more about bankruptcy. 

Lou's good stuff will be up for auction June 16

Lou Pearlman's fancy watch collection, gold and diamond rings and necklaces will be auctioned off June 16 in Fort Lauderdale by bankruptcy trustee Soneet Kapila himself. Here's the list of items  (see Exhbit A at the end of the filing). The goodies include Tag Heuer, Poljot, Cartier and real and fake Rolex watches. There are cuff links and rings with the initials LJP, a couple of Orlando Predators World Champions rings and an Airship International ring with an engraving of a blimp. The bankruptcy judge gave his stamp of approval to the auction today. If you'd like to attend, the auction will be at 9 a.m. June 16 in Room 411 of the federal courthouse at 299 E. Broward Blvd., Fort Lauderdale.

Some other items--the deadline for filing an objection to discharging Lou's debts has again been extended. The judge also approved the settlement involving condos at Sand Pearl resort. Kapila is continuing a legal fight with Ultimate Motor Works over a 1984 Rolls and a $25,000 deposit Lou put down on a new Rolls. However, he has given up trying to sell a condo at Enclave at Orlando. He says he's had it on the market for a year and hasn't gotten any offers. In addition to a $53,504 mortage, the property is burndened by liens for unpaid homeowners association assessments and taxes.

How should I handle a 401(k) withdrawal?

Q: My job was eliminated several months ago. My family and I have managed to make ends meet since then, but I am now considering a request for my 401(k) funds (about $17,000). Should I request a direct distribution to me for the full amount to utilize for my family’s day-to-day expenses if required or should I process a rollover that would require me to place the funds within an IRA account within 60 days? Chances are good I will have full-time employment within the next 30 days, but I’m not totally sure.

A: Usually the best approach is to open an IRA with a mutual fund company or brokerage firm and arrange for a direct trustee-to-trustee transfer of the money. If you ask for a check, the 401(k) custodian will withhold 20% for taxes, which creates problems if you want to do a rollover.

However, you might want to leave the 401(k) money right where it is if the plan allows it and if you are between 55 and 59 1/2. There’s no 10 percent penalty on a 401(k) withdrawal if you were at least 55 when you left the company. For an IRA, the penalty is eliminated at 59 1/2.

Was there a sweet deal for ousted Wachovia CEO?

Q: As a former Wachovia shareholder who voted against the Golden West acquisition when it was presented to the bank’s investors, I’ve been very interested in seeing Mr. Thompson get what he deserves for engineering such a stupid blunder. What I haven’t seen though is any discussion of what he takes with him when he leaves. Do you have any idea what Mr. Thompson’s total severance package will amount to?

A: According to the Wall Street Journal, Ken Thompson is getting $1.45-million in severance, $50,000 to pay his legal bills and accelerated vesting of $7.25-million in restricted stock. Post retirement benefits include an office and an assistant for three years. The Journal calls the package "modest by recent Wall Street standards."

Of course it is not modest to those of us who aren't Wall Street CEOs and who did not cost our companies billions of dollars. 

Better hope you don't need long-term care

The cost of nursing home care is rising faster in the Tampa Bay area than it is in the rest of nation, according to a study released Monday by Genworth Financial, which sells long- term care insurance along with other financial products. Over the past five years, the cost of a private room in a nursing home has risen 24 percent in the Tampa Bay area, compared to 17 percent nationally. Costs are highest in Miami.

Here's what you'll pay per year in the Tampa Bay area: $77,212 for a private room in a nursing home, $33,124 for a private one-bedroom unit in an assisted living facility or $44,959 ($19.65 per hour for 44 hours a week) for a licensed home health aide.